Managing 401k Contributions with Variable Income Challenges

Increasing 401k contributions can work even with variable income by adjusting savings and utilizing emergency funds wisely.

### Navigating 401k Contributions with Variable Income: Strategies for Financial Success
* 💼  Increasing your 401k contributions can be beneficial, but it may pose challenges during lean months, especially for those with **variable incomes**.
* 🔄  Most 401k plans allow you to **adjust your contribution rates** per pay period, month, or quarter, so **understanding when you can make changes** is crucial.
* 💰  If you find yourself in a tight spot after increasing contributions, it’s acceptable to **reduce your 401k percentage temporarily** and use your **emergency fund to cover expenses**.
* 📊  Following the financial order of operations, having a **fully funded emergency reserve (3 to 6 months of living expenses)** allows for flexibility in managing your contributions.
* 💵  For those with fixed and variable income components, it’s advisable to set a **conservative savings rate** based on fixed income while allocating a **larger portion of bonuses towards savings**.
* 📈  Practicing forced scarcity by challenging yourself to **increase your savings rate** whenever your income rises can significantly enhance your **wealth-building journey**.
* 🌟  Many individuals have achieved millionaire status by gradually increasing their savings rates, demonstrating the **long-term benefits of consistent saving and investing**.
* 💪  Ultimately, establishing a financial plan that reflects your **unique income situation** and encourages **regular savings** will lead to **greater financial independence** in the future.

[Music] Next question is from three pilot. It says, Increasing the 401k contribution sounds nice until you have a lean month and don't have a good way of getting that money back, especially when my pay varies. How do you deal with that? Yeah, because we love the 401K, but sounds like he has a little bit of a unique situation. Um, I'll give you the very quick answer, and Brian, I'm sure you'll elaborate on it. Uh, the way that the financial order of operations is BR when you hold the thing up. We have that Financial if you go to money.com resources. You can download your free copy. The way that it's structured is to factor in this exact thought process. Most 401K plans will allow you to change your deferral elections per pay period, or if not per pay period, per month or per quarter. So, you need to understand when you can change yours. But let's assume for the moment your payroll person will hate you for that though. Okay, you don't want to change it a lot.

but you can't run payroll, so let's say that you do this and you're like, Okay, I want to increase my 401k. I heard the guy say that sounds like a great idea. I want to be saving more. Okay, great. I'm going to change it. But then I have a lean month, or maybe I have a few lean months. I'm like, Man, you know what? I really need to decrease that. If you've been following the financial order of operations and you are increasing your 401k contributions because you are in Step six of the financial order of operations, one of the things that tells me is that you have a fully funded emergency reserve. You have a step four that has 3 to 6 months of living expenses in there. Well, if you have overcommitted to the 401k and it's causing you to be a little lean, there's nothing wrong with dropping your 401k percentage back down and then in the interim using your emergency fund to begin subsidizing. So, I would not let

that be a crutch to prevent me from continuing to save. That's why the emergency fund is there. And then if you stay lean, you drop your 401k contribution back down, you build up your emergency fund again, and then you're back to the same place that you started. I would rather you do that than say, Okay, I'm not going to increase, I'm not going to increase, I'm not going to increase, I'm not going to increase. Because what happens when we approach our finances that way is six months go by, and then a year, and then two years, and three, and all of a sudden we get three or four years in the future, and we never actually increase our 401k contribution. So I would rather, if you're following the Foo, I would rather see you stretch it, and you just may surprise yourself that, Oh wow, I did it. I was able to make it work. I don't even miss that money anymore. And your future self will be better off because of that. Well, I immediately in my

head. I saw a visual of two different things. I saw a traditional employee who gets paid the same compensation and maybe gets a year-end bonus or something like that for those people. I do want you to squeeze on how much you're putting into your 401k and then the catch-all kind of like what you shared is your emergency reserves because you have a month where maybe your property taxes were due or your Christmas was a bigger season this year on gifts for family members that kind of put you in a bond. That's where the emergency reserves is hopefully going to be that bridge account. But based upon the way you ask the question three pilot is that you might be in a variable income structure too and it's not uncommon if you are like say like you're on commissions or you have bonuses that are multiple times a year that really make up over half of your income. That is a different element altogether and that's why I always tell people when you're structuring you have two

components of your income. You have your fixed income, and then you have your variable component, those bonuses. Maybe set your savings rate on the fixed component on something that's a kind of a conservative assumption that you can make and still pay your bills, even in those tough months. But then, a larger portion of those bonuses, the variable comp that comes in, is going to get allocated towards saving and investment. That's still dollar-cost averaging, that's still, you know, always be buying, even if it's not on a monthly basis, because if it's happening quarterly or annually, that's still systematic. And here's what I, and this is why I know this system works and it's available, is like most of your 401k providers, they allow you to break your income into those two different components. You have your normal salary component, then you have your bonuses and so forth. You can put different savings rates on those different elements of your compensation, so that way you don't get yourself in this squeeze of a pickle because you have some variability in

your compensation. It's just to create a plan that actually reflects your life. But then, I do want you to practice forced scarcity. And every time you get pay raises or you have big things happen in your life, squeeze yourself a little bit, challenge yourself. One of the most fulfilling things I have as a financial planner is the number of millionaires I feel like I've helped create because they had their savings rate set up at like 6, 8, 10%. And I was like, Hey, things felt like last year when I reviewed your tax return. Things are a little bit better. Your income was up. Why don't we increase that automatic investment just a little bit more so that you just don't put all of that into the consumption of lifestyle or increasing your lifestyle? And a lot of times, the clients will be like, Yeah, I could probably do $300 more a month. And when they do that, you look back 10 years later and you go, Man, that was the extra Secret Sauce that kind of nudged them and really amped up

their wealth-building journey. Do that for yourself, you know, challenge yourself so that you are always on that walk up the mountain and building wealth more and more. And so, it actually, at some point in the future, will get big enough, hit critical mass, the boiling point, if you will, so you actually don't have to work as hard with your brain, your back, your hands, because your money will actually be doing all the heavy lifting.

How Do I Increase My 401(k) Contributions With a Varied Income?

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Managing 401k Contributions with Variable Income

Increasing 401k contributions can be challenging with a variable income.

Most 401k plans allow changes to deferral elections per pay period, month, or quarter.

If you overcommit and face a lean month, it's okay to decrease your contribution and use your emergency fund to subsidize in the meantime.

Balancing 401k Contributions and Emergency Funds

It's important to stretch your 401k contributions, even if it feels challenging, to avoid falling into a pattern of never increasing them.

Building up an emergency fund is crucial for unexpected expenses, and it can serve as a bridge during financial fluctuations.

For those with variable income structures, such as commissions or bonuses, a different approach to financial planning may be necessary.

Managing Income and Savings for Financial Success

Income can be divided into fixed and variable components, with a conservative savings rate set for the fixed part and a larger portion of bonuses allocated for saving and investment.

401k providers often allow for different savings rates on these income components, helping to manage variability in compensation.

Practicing forced scarcity and regularly increasing automatic investments can lead to significant long-term financial growth.

The Importance of Challenging Yourself in Wealth-Building

Challenging yourself is key to continuously building wealth.

Over time, your efforts can reach a critical mass, making wealth accumulation easier.

Eventually, your money will do the heavy lifting, reducing the need for constant hard work.