Navigating the Waters of Irregular Cash Flow: A Guide for Attorneys
- September 20, 2023
- By: MARCOS A. SEGRERA
Managing finances can be complex for anyone, but many attorneys face the unique challenge of irregular cash flow throughout the year. Unlike salaried employees who can depend on a steady income, attorneys may experience significant income fluctuations due to the varying nature of legal cases, distribution payments, and other financial structures in place.
While this topic unquestionably requires personalized planning, below, we will explore a few ideas to help navigate your financial year, even when your income is less predictable. From tailored investment options to managing expenditures and tax obligations, there's plenty to explore.
1. Emergency Funds (aka your safety margin): The Financial Shock Absorber
Your emergency fund should be your first line of defense against cash flow irregularities. Having 3-12 months of living expenses is invaluable when waiting for a large settlement or navigating quieter periods. Should it be closer to 3 or 12 months? That’s where personalization comes in, so speak to a professional. A reasonable place to start is whether your household has one, two or more sources of income.
2. Income Smoothing: Budget Planning and Implementation
Create a budget (don’t let perfect be the enemy of good) that accommodates fluctuations. This is crucial for your business and household. Averages can be misleading; it can be helpful to base your budget on the lower end of your income spectrum and then have a predetermined cash flow policy on deploying/investing any surplus. Setting up a separate high-yield savings account for higher-income months can also act as a buffer, providing extra funds when needed.
3. Tax Planning: Don't Let April (or your quarterly tax payments) Surprise You
Many attorneys with irregular income often face higher tax obligations, especially if they operate as independent contractors or own their firms. Structuring your investments to include tax-deferred options like 401(k)s or IRAs can significantly offset your annual tax liabilities. It is essential to have your advisor and CPA coordinate efforts. For example, having your advisor provide a mid-year tax report to your CPA can help you and your CPA get a better handle on quarterly tax payments.
4. Diversification: Not Just for Your Portfolio
While a diversified investment portfolio is essential, think about diversifying your balance sheet as well. How much of your balance sheet is tied up in your business? Diversifying your balance sheet offers a multi-faceted shield against financial volatility, enabling you to weather market downturns and capitalize on growth opportunities. By spreading your assets across various investment classes—such as equities, bonds, real estate, and cash equivalents—you reduce your exposure to any single point of failure, mitigating risk.
Furthermore, a well-diversified balance sheet can provide multiple income streams, enhancing your financial resilience during periods of irregular cash flow. In essence, a diversified balance sheet is akin to a well-balanced portfolio, offering both protective and growth-oriented advantages that contribute to long-term financial stability and wealth accumulation.
5. Liquidity: Flexibility and cash accumulation
How did you determine how much cash you should keep on your balance sheet, both personal and business? As mentioned above, a reasonable starting point is 3-12 months of non-discretionary expenses, but you don’t need to stop there. Consider how much cash you may accumulate over 12 months. The answer to this question can help you determine if investing cash or remodeling the kitchen is prudent or if it is better to wait.
Liquidity will provide you the flexibility of immediate access to funds without the need to withdraw from long-term investments, which can result in penalties, taxes and loss of potential growth.
6. Leverage Technology: Own your time
Let tools and people make your life easier. If you are someone that defines wealth as being in control of your time, invest in tools and people to buy back your time. You can also automate savings and investment contributions. You can electronically link bank accounts to investment accounts, etc. These tools will help you and your advisor understand your current financial situation and enable you to project future scenarios.
7. Consult the Professionals (just like folks consult you): Delegate
Finally, consulting with a seasoned wealth manager offers invaluable insight, irrespective of your legal expertise and understanding of financial matters. A wealth manager can help you strategize based on a thorough understanding of your financial situation and tailor a plan to fit your needs. If you don’t have the time, that usually means you need to spend the time to delegate this responsibility to a professional, just like people delegate legal responsibilities to you.
Don’t let ‘perfect’ be the enemy of ‘good enough.’ Planning is an ongoing process, not a one-time deal. With a reasonable amount of forethought, you can not only survive the ups and downs but also thrive and grow your wealth substantially.
Your financial well-being directly correlates with the focus and commitment you can offer your clients and family. Therefore, it is in your best interest to take proactive steps today to ensure you’re on the path to long-term financial stability and prosperity.
For personalized financial strategies, consider scheduling a consultation with our team. We specialize in assisting attorneys navigate your profession's complexities, including irregular income streams.
Happy planning and happy investing,