Inconsistent income can make budgeting extremely stressful for the self-employed worker. Because of this, many people who run their own businesses think it's impossible to create an effective personal budget. In reality, budgeting may be even more important for the self-employed than for the salaried employee, because with good budgeting skills, self-employed workers may find themselves unable to survive. In this article, we provide tips on how to survive - and thrive - on an irregular income.
Budgeting for Fixed Expenses
When it comes to making a budget, the first place to start is with fixed expenses. Every month, there are going to be mandatory expenses, regardless of whether you earn $5,000 that month, or nothing at all. First and foremost, the rent or mortgage has to be taken care of; it will be considerably harder to run a successful business if you're homeless. Health insurance premiums, internet service bills and any medications are other examples of essential expenses, and likely have consistent amounts due from month to month. The core budget should include all of these figures as fixed expenses.
Budgeting for Variable Fixed Expenses
The next category of expenses is made up of costs that occur every month, but may vary in amount. These expenses are usually thought of as being uncontrollable, but you may have more influence over them than you think. An air conditioning bill, for example, is not a mandatory expense except in conditions of extreme heat. Many of us use the air conditioner much more liberally than we really need to, and could cut down on our air conditioning bills by using fans more often, taking cold showers every once in a while or working at the library instead of at home.
Another example of a variable fixed expense is the grocery bill. A single person can easily spend $300 a month on food (if not more), but that expense can be trimmed down drastically if necessary. Substituting foods and avoiding brand names can make a larger positive impact than expected.
Preparation is the key when dealing with variable fixed expenses. Anticipate the highest amount you're likely to spend, so that you can live in the manner you prefer, but be ready to cut back if needed. For example, budget $150 for your electric bill and $300 for your groceries. Understand that, in the worst-case scenario, you have the option to knock the electric bill down to $50 and the grocery bill down to $75. Hope for the best but prepare for the worst.
Budgeting for Nonrequired Expenses
There are also the expenses that are completely within your control. You don't have to go out to eat, buy new clothes or buy books to read for fun. These are all things that you may like to spend money on and should treat yourself to when you can afford to, but if you don't have the money, your expenses in all of these categories can be zero. Because these are not required expenses, you may not want to plan for them at all in your basic budget. Instead, add them only in the months when you can afford them. This way, it won't look like you're in the red just because you can't afford sushi.
Your Revenue Stream
Now your budget shows what you need to make every month in order to meet your most basic expenses comfortably. Without two steady paychecks a month though, it can be difficult to plan to pay those expenses on time. Without steady income, vacations, items for the home or luxuries are pipe dreams.
Many people who are self-employed know that their clients often pay sporadically. Invoices may not be addressed for weeks - even months. If this describes your situation, this can be a blessing in disguise. When you don't get paid promptly, planning your budget is essential. By mid-August, you should have a good idea of what your September income will look like.
However, it is possible that your line of work may not lend itself to this sort of payment structure. To plan for this situation, estimate your income for the month - and estimate low. Rather than basing your estimate on an average of your monthly income, which is bound to include some particularly prosperous months, base optimistic - yet realistic - estimates on the lowest amount you are likely to bring in for the months to come.
When the Expenses Don't Fit the Income
When your clients don't pay on time or you don't earn enough to meet your monthly minimum, the best way to handle these shortfalls is to rely on your savings to tide you over. Having a well-cushioned savings account is perhaps even more important for the self-employed worker. When your income comes up short, make a temporary loan to yourself from savings to cover the gap in income.
To avoid depleting your savings, make sure to repay yourself as soon as your income improves. Further, when you have a particularly good month, stash away as much of the excess as you can and avoid the temptation to spend too much of it on luxury items. There's nothing wrong with rewarding yourself, but you don't want to reward yourself out of business.
Try to come up with some things you can do to make short-term money if you need to. Having a stockpile of items to auction on eBay or finding an ongoing contract that allows you to make some quick money with a short turnaround time may be options to consider. These activities can provide supplemental income during the difficult months, if needed, and help balance out the highs and lows in your income.
The Bottom Line
Budgeting when you're self-employed and your income is irregular isn't impossible, and it's key to keeping yourself in business. Know your bottom line and plan accordingly.
When it comes to making a budget, the first place to start is with fixed expenses. Every month, there are going to be mandatory expenses, regardless of whether you earn $5,000 that month, or nothing at all. First and foremost, the rent or mortgage has to be taken care of; it will be considerably harder to run a successful business if you're homeless. Health insurance premiums, internet service bills and any medications are other examples of essential expenses, and likely have consistent amounts due from month to month. The core budget should include all of these figures as fixed expenses.
Budgeting for Variable Fixed Expenses
The next category of expenses is made up of costs that occur every month, but may vary in amount. These expenses are usually thought of as being uncontrollable, but you may have more influence over them than you think. An air conditioning bill, for example, is not a mandatory expense except in conditions of extreme heat. Many of us use the air conditioner much more liberally than we really need to, and could cut down on our air conditioning bills by using fans more often, taking cold showers every once in a while or working at the library instead of at home.
Another example of a variable fixed expense is the grocery bill. A single person can easily spend $300 a month on food (if not more), but that expense can be trimmed down drastically if necessary. Substituting foods and avoiding brand names can make a larger positive impact than expected.
Preparation is the key when dealing with variable fixed expenses. Anticipate the highest amount you're likely to spend, so that you can live in the manner you prefer, but be ready to cut back if needed. For example, budget $150 for your electric bill and $300 for your groceries. Understand that, in the worst-case scenario, you have the option to knock the electric bill down to $50 and the grocery bill down to $75. Hope for the best but prepare for the worst.
Budgeting for Nonrequired Expenses
There are also the expenses that are completely within your control. You don't have to go out to eat, buy new clothes or buy books to read for fun. These are all things that you may like to spend money on and should treat yourself to when you can afford to, but if you don't have the money, your expenses in all of these categories can be zero. Because these are not required expenses, you may not want to plan for them at all in your basic budget. Instead, add them only in the months when you can afford them. This way, it won't look like you're in the red just because you can't afford sushi.
Your Revenue Stream
Now your budget shows what you need to make every month in order to meet your most basic expenses comfortably. Without two steady paychecks a month though, it can be difficult to plan to pay those expenses on time. Without steady income, vacations, items for the home or luxuries are pipe dreams.
Many people who are self-employed know that their clients often pay sporadically. Invoices may not be addressed for weeks - even months. If this describes your situation, this can be a blessing in disguise. When you don't get paid promptly, planning your budget is essential. By mid-August, you should have a good idea of what your September income will look like.
However, it is possible that your line of work may not lend itself to this sort of payment structure. To plan for this situation, estimate your income for the month - and estimate low. Rather than basing your estimate on an average of your monthly income, which is bound to include some particularly prosperous months, base optimistic - yet realistic - estimates on the lowest amount you are likely to bring in for the months to come.
When the Expenses Don't Fit the Income
When your clients don't pay on time or you don't earn enough to meet your monthly minimum, the best way to handle these shortfalls is to rely on your savings to tide you over. Having a well-cushioned savings account is perhaps even more important for the self-employed worker. When your income comes up short, make a temporary loan to yourself from savings to cover the gap in income.
To avoid depleting your savings, make sure to repay yourself as soon as your income improves. Further, when you have a particularly good month, stash away as much of the excess as you can and avoid the temptation to spend too much of it on luxury items. There's nothing wrong with rewarding yourself, but you don't want to reward yourself out of business.
Try to come up with some things you can do to make short-term money if you need to. Having a stockpile of items to auction on eBay or finding an ongoing contract that allows you to make some quick money with a short turnaround time may be options to consider. These activities can provide supplemental income during the difficult months, if needed, and help balance out the highs and lows in your income.
The Bottom Line
Budgeting when you're self-employed and your income is irregular isn't impossible, and it's key to keeping yourself in business. Know your bottom line and plan accordingly.
