Budgeting Tips for Business Owners on an Irregular Income

Budgeting Tips for Business Owners on an Irregular Income

Last weekend, I spoke with a friend that has owned his own business for five years. I know that he makes a six-figure income, because I helped him with his taxes last year. However, he said that he couldn’t afford to go to the movies for a couple of weeks until he got a couple of invoices paid. He said that he fell behind on taxes and only had $200 in the bank account.

How could a self-employed professional making so much money and up so broke? Frankly, he just didn’t manage his money well. Like far too many self-employed people, he never came up with a budget.

If you want to be successfully self-employed, you must plan your finances even more carefully than people with a steady job. Unfortunately, too many business owners feel that there isn’t any point setting a budget, because they have an irregular income.

This is entirely the wrong way to look at things. If you have an irregular income, coming up with a sound budget is more important than ever. You need to save money carefully in case you have any setbacks.

Here are some important budgeting guidelines every self-employed professional must follow.

Don’t Expect Big Pay Days to Last Forever

Charles Ngo, a online entrepreneur and millionaire, discussed one of the biggest mistakes new online business owners make after having a few very successful campaigns. Ngo said that they often find a great system and start making $500 a day in profit. Their mistake is that they expect that income to be steady, so they spend every penny they earn.

Unfortunately, the money doesn’t always last. Many of their profitable campaigns will eventually burn out, which leaves them back at square one. Ngo says business owners must live frugally, even after hitting a big payday. He lived in a small apartment that cost $600 a month and drove his old car, even when he was making $20,000 a month.

Tort lawyers often run into the same problem. They may hit a massive windfall after winning a multi-million-dollar case. They feel like hotshots and expect to hit another fortune in the next year. The problem is that they may never make that much money again. They may blow through their fortune in less than a year and end up penniless.

Every business owner is going to experience fluctuations in their income. It’s not the end of the world, as long as you plan accordingly. Give yourself a reasonable allowance and invest the rest of the money back into your business or set it aside for a rainy day. You will be glad you did when the gravy train ends.

Pay Your Taxes Every Quarter

If you are self-employed, you are supposed to pay estimated taxes owed every quarter. However, as long as you file taxes on time, the penalty for paying late isn’t very high. Therefore, many self-employed professionals plan on paying all their taxes on April, when they file.

If you have the money, this isn’t a big deal. However, your income may slip before the end of the year. It can be easy to fall behind on your taxes and end up with a tax bill that you just can’t pay. The last thing that you want to do is take out a personal loan to pay it off.

The best thing that you can do is budget for your taxes every month. Set aside the money you need to make your quarterly payment, so you don’t get behind.

Evaluate and Minimize Recurring Expenses

In 1732, Benjamin Franklin wrote that “a penny saved is a penny earned.” Nearly 300 years later, these are words of wisdom every self-employed professional should live by.

Making financial sacrifices to live within your means is important. However, it’s also important to make sure you aren’t overpaying for no reason. Some people buy lousy insurance policies, an overpriced apartment or shop at a very expensive store and have nothing to show for it. Being a smart shopper is just as important as being frugal.

There are going to be months when your income is lower than you anticipated. If you aren’t keeping your expenses as low as possible, you are going to be out of luck.

First of all, you need to know what your monthly expenses are. If you are just blindly paying your bills every month, then you won’t notice if you are overpaying. Start by making a list of all your monthly expenses. Then you need to do some research to see if you can cut costs, such as:

• Research different insurance policies. If you have been with your existing insurer for two or more years, they may have given you a nice loyalty discount, so you don’t want to change policies until you are sure you can get a better discount later.
• Evaluate your living accommodations and see whether you can find a better deal elsewhere. When I was living in Northern California, I was able to save $900 a month by moving from a one bedroom apartment that cost $1,500 a month into a home that I shared with roommates. That savings was a huge lifesaver for me.
• See if you can cut your student loans. You may be able to save $200 or more a month by switching to an income based repayment plan.

Finding ways to save money is very important, especially if you don’t have a regular income.