I have been self-employed for almost 4 years now, and let me tell you – budgeting can be very difficult when your income is sporadic at best! Some months I make more than others and some I get paid right on time, so budgeting during those times is easy as there is money coming in the door. But other times, payments are late and you have slow months, which means you have to have money nearby you can access quickly. After all, just because you had a slow month doesn’t mean that rent isn’t due or you don’t need to eat.
Since this is a topic near and dear to my daily existence and I haven’t covered it before, I figured it was time to take a look at how I budget on an irregular pay schedule. My quick-start guide to budgeting when self-employed involves the following that I would advise you to do immediately:
- Figure out how much money you need to bring home each month and divide it by 4. That’s your weekly paycheck.
- Direct ALL your income to a central location to keep track of it easier.
- From the central income location, pay yourself, your taxes, your investments, and your savings. Nothing more. Anything left over each month just gets rolled over to the next to help out during slow months – and there will be some.
- Charge any and all business expenses to a single credit card so you can easily track your spending, and have an easy-to-read synopsis at the end of the year.
Sounds simple enough, right? To expand on those 4 tips, here is how I budget for myself…
– First of all, I have as much of my income as I can directed to a single bank account. One of my ING Direct sub-accounts is labeled “Work Income” and receives almost all of the payments from ad sales, direct deposits, and other online ventures. Anyone who cannot send money directly to an actual bank account either sends a check to me by snail mail or sends money via PayPal. Many people who freelance open separate “business” bank accounts, but I have found that my system works fine for me right now. I barely have any monthly expenses directly related to my work, so just having a sub-account works great. I keep a healthy balance in this account, as I actually give myself a paycheck every week from it.
– Re: the weekly paycheck – Every week, I automatically transfer X amount of dollars to my main checking account that I use on a daily basis. This is my “pay”, times 4 weeks, that I have decided was how much I wanted to “bring home” each month. After looking at my expenses, I pretty much know what my monthly requirement of money is to keep me afloat, so that’s how much I pay myself. This money pays my rent, car payment, utilities, groceries, etc.
– Also out of that “Work Income” sub-account I move money into a “Taxes” account. When you are self-employed, no one takes taxes out of your paychecks for you, so you have to remember to do it all year while paying estimated quarterly taxes. And while I do pay my estimated taxes by credit card every quarter in order to get the rewards, I use the money in my taxes account to pay that balance off immediately. Of every penny I receive in income throughout the year, no matter how big or small, I immediately move about 30% of it into this taxes account. That way I always have enough to pay the tax man! Here is what to do if you missed the tax deadline.
– All my investments come out of this “Work Income” account as well, going towards my funds and Roth IRA over at T.Rowe Price. I keep meaning to open and fund a SEP-IRA for myself, but this year isn’t going to be the year. So for now, I will continue my monthly investments in my funds.
– 5-10% of all dollars earned goes into yet another sub-account at ING called “Emergency”. This is my short term savings account that I consider to be paying myself first as so many advisers suggest.
Budgeting on irregular income can be very difficult, and if you don’t pay close attention you may end up without enough money to pay the bills. For example, in the course of 4 years being self-employed, I have had months where I have made 1/3 of what I made the month before. That can be quite scary if you aren’t ready for the ups and downs that are inherent with being your own boss. But by preparing well in advance for those dips, you can be ready for any drastic income variations. The ability to work your own hours, on projects you wish to work on, is well worth the extra effort of tracking your own income!
Are you own your own business or freelance for others? If so, do you have any tips/advice to add about your own budgeting habits? Would love to hear about them!
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