Creating a budget when you’re self-employed is a challenge. Operating on an irregular income means it can be a challenge to create and maintain a budget.
To further compound matters, approximately 66% of small business owners claim they are struggling with cash flow. You need to balance keeping your business afloat and paying yourself to cover your household expenses.
Let’s examine what you need to do to create a budget when you’re self-employed.
The first step is to protect your own affairs against disaster. Firstly, incorporate your company to provide yourself with personal liability protection. Setting up an LLC over a sole proprietorship, or even opting for a C-Corp or S-Corp, will defend your personal assets if your business gets sued.
The next step is to defend against the unlikely event that you suffer a major health emergency. Unfortunately, finding high-quality healthcare can be challenging when you’re self-employed.
Examining different self-employed insurance options will enable you to find the policy you can afford and the policy that gives you comprehensive coverage.
On a side note, review your current coverage each year to ensure there isn’t a better deal to be found elsewhere.
Now you’re ready to begin formulating a budget. Start by getting organized by grabbing copies of all your recent bills, such as rent/mortgage, gas, electricity, water, and any insurance policies you hold. Include everything, no matter how minor, such as Netflix subscription fees.
Use a program like Microsoft Excel to begin putting together a list of your expenses. You can opt for a weekly budget, but most people prefer to stick to the monthly option.
Make sure you create a system for filing various pieces of documentation every month. It’s imperative come tax time, when you may be taking different credits and deductions to save on your tax bill.
Keeping your invoices organized will allow you to refer back to them easily as and when required.
Gathering a list of expenses together will give you an idea of everything that leaves your account per month. Add every number together to give yourself a ballpark figure for the minimum number of dollars you require to survive.
Ideally, you should also be saving at least 10% of your income to build up a six-month emergency fund. Saving is crucial should your small business fail and you find yourself searching for another job all over again.
Small business owners must strike a balance between reinvesting in their business for growth and paying themselves. Don’t underestimate the risk associated with going broke. One study found that 30% of all millionaires will end up declaring bankruptcy at some point in time.
Discovering your monthly income can be difficult, depending on the system you use. Some entrepreneurs prefer to pay themselves a small minimum monthly salary. Others, such as freelancers, may simply live on whatever they get paid for the month.
If your income fluctuates heavily, the best option is to go back over the previous year and log your monthly income. Find an average for the year.
It’s always best to underestimate your income, as opposed to overestimating. Your business will experience down periods that may impact your overall income for the month.
The majority of small business owners will be operating as a sole proprietorship or an LLC. These two types of companies are what are known as pass-through entities. In other words, the company is not classified as a separate taxpayer in the same way as a corporation.
You won’t need to pay self-employment taxes by operating as a pass-through entity, but you will need to cover self-employment taxes and personal income taxes.
Any profits or losses will be passed onto your personal taxes, so you may find yourself in a higher tax bracket if you have a bumper year.
Make sure you’re putting aside enough for your taxes. Project your income for the year and adjust every quarter based on current performance. Keep updating your projections appropriately, so you know you’re saving enough.
Plenty of otherwise successful business owners have struggled because they didn’t put aside enough for the IRS.
Managing your budget for your personal and business taxes is confusing. Hiring a tax accountant who specializes in small businesses rather than worrying about being left without sufficient cash flow.
These professionals will be able to go over your numbers and ensure you’re taking every tax credit and deduction available. Moreover, you’ll be able to make sure anything you do claim will allow you to remain in tax compliance.
Shop around to ensure you’re working with the right professional. You need somebody who understands your needs and has the experience necessary to save you the most money possible.
The difficulty is not in creating a budget. A budget is no more than listing your incomings and outgoings while making sure that one side is larger than the other. The difficulty is in adjusting your budget according to your current circumstances.
Anyone who’s self-employed is aware that their circumstances can and will change at any point in time. Accommodating these changes requires you to stay vigilant over your finances, including making cuts to your personal expenses when necessary.
Moreover, you should have a policy for how much you’re willing to draw from your personal finances to put into your business. Sinking too much of your own money into your venture could leave you in choppy financial waters.
Budgets are the cornerstone of household and business financial affairs. Therefore, you need to create and maintain two separate budgets for your personal needs and your business venture.
The key is always to be aware of your numbers and pivot as and when necessary. You may even want to hire a financial advisor if there’s space in your budget.
What’s your biggest challenge in managing your finances?