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Self-employed: budgeting on a fluctuating income

Dealing with fluctuating pay isn’t easy and any self-employed individual or couple working with an irregular income knows how hard it can be sometimes to budget your money. So how do you balance the books when one income is fixed and the other isn’t? What do you do when both are self-employed?

Years ago, my wife decided to leave her full-time job and do just that – pursue a home-based business as a graphic designer. It proved to be well worth it. Not only for some of the tax deductions and incentives, increased work-time flexibility, and the near disappearance of her commute, but now that we have a child, it has allowed her to stay at home to raise our little one. Although my wife’s business has slowed down considerably since we’ve first had our daughter a little over 2 years ago, in our case, the non-financial benefits far outweighed the financial sacrifices.

That’s not to say that the finances are not important. Au contraire! In fact, budgeting is probably even more important for the self-employed. Because on top of all the visible day-to-day expenses, you need to have money set aside for the slower periods and other expenses like tax installments, that can become easily forgotten. And again, you’re dealing with a fluctuating revenue stream. Tough, but manageable. Here’s how we’re doing it and some tips that you can apply to your own situations:

Fixing a fluctuating income

Don’t mix business and personal expenses. It’s important to separate the two. All of our personal expenses (like household expenses, etc.) are debited out of our joint checking account and any expenses that related ‘solely’ to her business (such as office supplies and computer equipment), comes directly out of her own business account. Sometimes the lines of what is a business expense vs. a personal expense can be blurred, but we usually pay for most household expenses in our joint checking account, because I find it makes it a lot easier to track our spending in our household budget. And because she has a home office, she writes off a small portion of applicable home expenses.

Our accountant gave us some simple advice: keep your business checking account for business expenses only and have a credit card that you only use for business expenses. It makes it much easier to track.

If you find it hard to budget with a fluctuating income, make it fixed. We looked at my wife’s past couple of years and what she was bringing in. We decided on an amount, based on her lowest paying months, that she could afford to pay fixed every month into our checking account. And since the business has slowed down since our daughter was born, we adjusted how much she was putting into the account accordingly. And especially when you’re first starting out, as we found out, the pay can fluctuate quite a bit – it’s a feast or famine. But it’s all about how much you’re able to afford.

ALWAYS set aside a portion for savings. Yes, you may have a business account and a joint checking account, but it’s a good idea to set up a business savings account as well, to cover your taxes and unexpected expenses to grow and maintain your business. It’s sometimes difficult to estimate what the income tax portion will be. But here in Canada, it’s usually a lot! And it can be a real shock if at the end of the year you don’t have enough set aside to pay your taxes. So my wife usually estimates about a third of every project that she bills. You can estimate twenty-five percent or whatever is more reasonable in your tax jurisdiction. But if you have the wiggle room, it’s always good to over-estimate, because you never know what can happen.

And as quickly as you can, it’s important to get your business account up to a point to cover a couple of months of expenses to help you better deal with those ‘famine’ months.

Now, while we only have one income that’s fluctuating, I think many of the same rules can be applied if both are self-employed. Keep your business and personal accounts separate. Find an amount that you can agree to pay fixed every month into your joint checking account every month to help pay for your household and other personal expenses. And always set aside a portion for your savings, to cover your taxes and those unexpected expenses that can arise.

If you’re self-employed, how do you budget? I’m interested in hearing any other ideas.

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