Clients with Volatile Income Must Plan for Downtimes
This time we hear from Jeff Fishman, founder of JSF Financial in Los Angeles. Fishman, whose client base includes people in the entertainment industry, describes an early career lesson that taught him how to best advise clients with volatile incomes.
Early in my career I had as a client a young actor who was on a television show and was doing very well financially. As with many people who experience some success, he never felt the need to take a step back and think about the possibility he might not do as well in the future.
There were a lot of things he wanted to spend money on and he went ahead and spent it — probably more money than he should have. Then his show was canceled and suddenly he went from being on a major network program to being out of work. His career options at that point were slim. He told me, “Well, I could do a guest spot here or an independent movie there,” but these jobs would have earned him much less than what he’d become accustomed to.
My client hadn’t anticipated the possibility of his show’s cancelation and hadn’t built the savings he needed to supplement these lower-paying roles. Ultimately he ended up working with his family's business and sidelining his acting career.
As I watched the situation unfold I realized my client had needed help preparing for the possibility of the show being canceled before it happened. As his advisor, it became clear my job was to help my clients use the good times to prepare for the possibility of bad times.
I work with many people in the entertainment industry, and that means I work with many clients who deal with volatile incomes. I tell these clients the first thing they need to put in place is an adequate emergency fund. For W2 employees, I define that as setting aside three to six months’ worth of expenses. For clients who work independently, I recommend putting one to two years of expenses aside in a low risk account that will be there in the event their income dries up.
We approach the subject by presenting what-if scenarios. I ask “What if your career takes a turn for the worse? What if your show isn’t renewed or you don’t sell that script? How will you pay your mortgage? Health insurance?” We approach these issues with a very serious tone that is usually appreciated by the client. These questions may not be what they want to hear but they seem to resonate. Clients have told me they come to appreciate a straightforward talk about these issues. Some actually end up setting aside even more funds than I recommend for emergency purposes.
After we’ve got the emergency fund set up, the next step is to take that fund and invest in assets that generate a certain amount of income. These funds need to be liquid and still generate income; in case the client stops working or their income changes, they have something coming in to supplement their lower earnings.
We really have a responsibility to help these kinds of clients make sound decisions, which continues to be a huge challenge. I still have clients that want to do things that don’t make financial sense, like buy a house. My work helps prepare them for an uncertain future. That’s why I love what I do. At the end of the day, my job is helping people make the right decisions to protect their futures.