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[AD] Making the switch to self-employed life was one of the best moves I have ever made, both financially and on a personal level. But it is not without its challenges and budgeting is a big one.
In this article, I address the challenges of budgeting for the self-employed and offer some tips from my personal experience.
Keep good records
Even if you have an accountant, this is still important. You need to know what money is your “business money” and what is yours to spend on your personal finances. Keeping good records can really help here.
If you don’t have a seperate bank account for your business, then this might be a fab idea. It will help you find the line between the two more easily. You can then pay yourself a wage each month and use that to form the basis of your budgeting.
It is also useful not to blur the lines where expenses are concerned too. If something is for your business, then pay it out of your business account. Everything else should come out of your personal accounts.
A simple spreadsheet can go a long way too. Log the income and expenses as they appear and you won’t go far wrong.
Have an emergency fund
The perks of employment is that you get holidays, sick pay and a regular income (normally), but most of that is unavailable to those in self-employment. Therefore having a good emergency fund is a must.
An emergency fund is an amount of money stored in savings that can be used for those moments that catch you off guard. This could be a period when you are unable to work, or a global pandemic for example.
Guide amounts suggest that between 3-6 months worth of expenses is good. But depending on the volatility in your industry it might be worth increasing this to 9-12 months. It is also important to factor in your underlying business expenses too as these will need to be covered.
Work a month behind
This is a great trick that I use to help me manage my money. I plan my budget on the income that I made in the previous month. So I spend the month collecting up the money, then spend it in the following month.
It can be tricky the first month that you do this, but once you get into the system of it the process becomes much easier to manage. You are then working with actual numbers rather than relying on invoices being paid on time and general speculation.
You have to be strict about putting your earnings aside each month and not spending it as it comes in too.
Calculate your minimums
This is a super helpful task that can give you a bit of peace of mind around your finances. Calculate your minimum earnings from your work over the past 12 months (or any time period of your choice) and work out your absolute minimum expenses.
It helps to take this to the extremes. What would you left with if you cut out Amazon Prime and Netflix? This forms a great basis for your budget. You will then have figures to work with around minimum income and minimum expenses. Anything on top of that can be budgeted separately or not at all.
If you need some help with this, then check out my video: How to create a disaster budget
Get a flexible pension
Research in 2018 showed that just 16% of the self-employed were paying into a pension. By comparison, 80% of employees had a pension that they contributed to regularly (thanks to auto-enrolment), potentially leaving the self-employed in a far worse position in their retirement years.
But paying into a pension when your income varies from month to month can be hard. Luckily, we are seeing an increase in specialist self-employed pensions into the market, such as those offered by PensionBee.
PensionBee allows you to open a brand new pension with them with no minimum deposits. Furthermore, they are flexible. Meaning that you can change the amount that you pay as your income changes. Making it easier than ever to pay into a pension and stay on a budget. Plus, you can make contributions from your personal bank account, as a sole trader, or from your business bank account, as a limited company. Remember though: capital at risk.
What are your budgeting tips for the self-employed?
If you are self-employed, or have been in the past, then I would love for you to share your budgeting tips. Leave a comment below or send me a DM on Instagram.