As a business owner or someone who considers themselves a freelancer or contract worker, it can be difficult to properly budget and pay your bills when your income varies every month.
However, the longer you work with variable income, the better you are at estimating when you’ll be busy throughout the year, especially if you have long-term, recurring clients that give you the same amount of money per month.
Even though your income varies, it doesn’t have to be stressful. Here are some of the best strategies for properly budgeting if you are self employed and have a variable income.
Find Out Base Income
Whether you’re just starting out in business or have been self-employed for many years, make sure that you have a budget spreadsheet where you can keep track of your recurring expenses (you can also use online services like Mint, QuickBooks, or You Need a Budget). This spreadsheet should track all your sources of income, as well as your recurring business and personal expenses. Make sure to also include areas/line items for taxes and other expenses that come out throughout the year.
If you’re not sure what your recurring expenses are, go through the last three months of your bank account or credit card statements to see what charges are being run through and how much you spend on average on groceries and other regular expenses.
Even though this is just an exercise to figure out how much money you need per month, it’s also a good way to see where you need to cut back. Looking over your last 3 months of expenses can help you realize if you need to eat out less or start spending less money on other types of non-urgent expenses. This will help decrease the stress of a variable income as well.
Related: Free Project Budget Template
Once you have your required base income figured out, then you can work backward to see how much money you need to be bringing in at a gross/total level. This means the total amount of money you need to make, which includes taxes and money for business expenses, such as business insurance or your co-working membership.
This gives you a starting off point to figure out how much money you need to make on average per month. Once you know your monthly minimum, anything over this can be put into a savings account to plan for months that you aren’t making your bare minimum required.
Open Savings Accounts
This leads into our second tip: as a self-employed professional, you need a personal and business savings account. Both are going to help you make sure that you’re not constantly worrying about money during the months or seasons where you’re not as busy. For instance, a wedding planner likely isn’t as busy in the winter, so planning can help make sure that their variable income isn’t as big of a deal.
It’s important to separate business and personal savings if you have a lot of business-related expenses. For instance, if you have office rent or a business vehicle, or you work with a lot of freelancers and contractors, a business account is a good idea because it helps you segment expenses and where the money is going when you must use it.
A lot of local banks and credit unions offer business savings accounts. Do your research and choose one with a high interest rate so you can earn interest on your money, even though you’re not spending it.
How much money you should have in your personal and business savings depends on what your monthly budget is, but usually having enough for one to three months of expenses is a good idea. If that seems overwhelming, just try saving up $1,000 in each account as a starting point. This is what financial expert Dave Ramsey recommends as the first step toward debt-free living.
Change How You Pay Yourself
Besides budgeting and setting up savings accounts, you may find it easier to budget a variable income if you pay yourself differently. Some people with full-time employees on payroll decide it’s worth it to set themselves up as a paid employee as well, depending on how their businesses is formed (LLC, S-Corp, etc.). Consulting with an accountant is best for this decision, but sometimes having a paycheck at a set amount every month is the easiest way you can budget your personal expenses.
Another strategy is to always pay yourself the same percentage of your business gross income each month, no matter what the income is. If you know your minimum required, anything additional you make within this percentage could be used for whatever you wish, like additional savings or debt repayment.
The book Profit First does a great job of explaining this in easy-to-understand terms, but the basics of Profit First include figuring out your TAP (target allocation percentages). These are based on income (see page 4 of this PDF).
For example, businesses who make up to $250k gross per year should be allocating 5 percent to a profit account (this concept is explained in the book), 50 percent to owners pay, 15 percent to taxes and 30 percent to operating expenses. Of course, this may vary depending on your state and business, so read the book and consult a tax professional for your ideal TAPs.
Constantly Audit Subscriptions
If you have a lot of business expenses, it’s easy to forget small subscriptions that you’re used to seeing go through your bank account or credit card every month. Set up reminders every quarter, or at least once a year, to audit these recurring expenses and see where you can save money.
For instance, if you had a social media scheduling tool that was on the business subscription level because you had ten social media clients, and now you only have five, it may make sense to decrease the level of your plan since you have fewer accounts to manage and aren’t utilizing all the features of the higher-tier account.
You should also be auditing your insurance and office expenses, like internet, to see where you can be getting a good deal. Auditing expenses is a good idea for budgeting on a variable income because any way you can save money on recurring charges takes the pressure off when your income has dips throughout the year.
Related: How to Do a Project Management Audit
Save For Known Expenses
After you’ve been in business for a few months or a year, you have a better idea at what your occasional expenses are. Some states require annual business license renewals, and these have set payment amounts every year that don’t usually change. Instead of stressing out about covering the cost in the specific month that they’re due, plan for these expenses. Slowly put the correct amounts into a savings account, so you have the money available when it’s time for them to be paid.
As an example, if your state business renewal license is $120 every year, simply save $10 a month to make sure you have the money available when it’s due. As part of the audit process mentioned above, you can also calculate averages for variable bills such as utilities or gas and come up with an average monthly minimum.
From there you can save money in your business savings for the months that are extremely expensive from the cheaper months (e.g., if your average is $85, but April was only $50, put that remaining $35 into your savings for a $120 month).
Having a minimum budget, tracking expenses in an Excel spreadsheet and planning for upcoming expenses with personal and business savings accounts can help you properly plan for variable income changes and help you be prepared for the dips throughout the year. Having a variable income when you’re self employed doesn’t have to be stressful if you know how to properly budget and stay on top of your expenses.
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