How to set up a montly spending budget as self-employed?
August 30, 2010 12:12 AM   Subscribe

Self-employed types with variable monthly incomes: how do you set up and stick to a monthly spending budget?

My wife and I are both successfully self-employed. We know, roughly, how much we're going to make each year. But our month-to-month income is a total crapshoot.

Due to the vagaries of our workloads, either of us could not get paid for a month or two, then get four checks in the next week. Payment can be quite unpredictable.

So we often end up having to put things on the credit card until someone gets paid next. We're living within our means year-to-year, just not always on a month-to-month basis.

So how do we go about setting up a monthly spending budget? Even our yearly income varies somewhat, so it's not quite as simple as dividing by 12 and using the credit card in the gaps. Should we do a quarterly budget instead?
posted by El Curioso to Work & Money (7 answers total) 15 users marked this as a favorite
Some tips here.
posted by gakiko at 1:03 AM on August 30, 2010

Make sure your recurring monthly expenses are as low as possible. I'm a contractor myself & I'm constantly looking to pare down my bills. Is that mediocre computer in your pocket really necessary? Maybe you could make do instead with a basic phone on a prepaid calling plan (available for $30 per month or less)? How about getting rid of that TV? Eating out less often? It might mean making some sacrifices, but I've found it's almost always possible to live quite comfortably with considerably fewer amenities than what I may have gotten used to at any given moment. I'm not saying you have to be a total ascetic, but for me at least, luxury spending always seems to keep creeping up. Taking a moment to figure out what you really need can be pretty profitable!
posted by DigitalMindShadow at 1:30 AM on August 30, 2010

- Build up your savings so you can spend from that instead of using credit cards! A full year's expenses is a good number to shoot for. Don't waste money paying credit card interest. Think of your cards as charge cards -- due immediately --, not as credit. Credit interest is an expensive drain on your resources. If you can't pay for it it now, don't buy it now: put yourself in a position where you can live to that rule.

- Put money aside early for your quarterly tax estimates. Make sure it will be there when the payment is due.

- Spend less than you earn. You probably have pretty good idea of what your annual earnings will be. Budget e.g., 75% of that as your pre-tax available income. Pick the percentage according to your confidence in your income estimate -- less, if it's as variable or unreliable as you implied. Can you cut that number to 50%? Less? The longer term benefit doing of that is enormous.

- Don't eat your paycheck! The money you receive today isn't all for spending today - it has to cover you for the days you don't receive any, too. Ignore the fat number on the check and only spend to your budget. When it's coming in fast and furious, it's easy to feel flush and forget the times - surely coming - when none will be coming in.

- Know your expenses. Itemize them. Prioritize them - where can you back when times are lean? If you know that in advance and do it before you have to, you'll panic less when you're in it.

- ATMs make it easy to blow a budget. Are you disciplined about your cash expenditures? If not, would a system of budget envelopes, refilled monthly, help you avoid un-budgeted drains on your cash?
posted by TruncatedTiller at 1:58 AM on August 30, 2010 [1 favorite]

I have a very variable pay situation. I worked out roughly what I make monthly on average, and I make sure that I always have two or three times that stashed away to draw on in dry spots.

Also, what the above posters said as well.
posted by nevercalm at 2:04 AM on August 30, 2010

I would have at least 2 bank accounts - one to get paid in, and one to transfer in your monthly spending allotment. I'd figure out the monthly transfer as (yearly income - taxes - savings)/12. The most important part here is to be making more than you spend, so that you have a built up cushion of 2-3 months in the "getting paid" account - which should be separate from your emergency fund (which as self-employed people, you probably need more than most of us). Using credit cards in the gaps is a bad, bad, idea, and will really bite you in the butt if work slows down for longer than you anticipated.
posted by fermezporte at 4:50 AM on August 30, 2010

I was going to write out a long response, but I realized I've already posted this info on the internet twice before. You can read my advice for how to budget for a variable income at my site. This is the method that works for me and many other folks I know.
posted by jdroth at 6:16 AM on August 30, 2010

What worked for me is to create a 6 month cushion first. For me, this meant living bare bones for a while, but then being able to breathe a little and properly budget for a fairly frugal lifestyle. Then I averaged my bills, and added 20% and used that as my line item budget. This meant that I was continually adding to my cushion. Budgeting in entertainment and misc expenses is huge, if you fail to do this you will never keep to your budget and you will stop using it (if you're anything like me, that is).

Being self employed it can be easy to postpone tax payments and payments into retirement. I would suggest that after the mortgage and electric/gas/water that these be the next bills to be paid.
posted by Nickel Pickle at 6:23 AM on August 30, 2010

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