Monthly Budgeting on a Self-Employment Income

Budgeting money is a fact of life. Even if you don’t have a set, written budget, you still likely have a bill paying pattern and a mental budget to get a rough idea of how much extra money you have each month. This fairly straightforward concept becomes much more difficult when you don’t know the primary variable that a budget is based on – your income.

If you work a salaried position, you know exactly how much you’ll receive with each paycheck. Most hourly paid employees still have a rough idea of how many hours they’ll work each week and how much they’ll take home based on those numbers. When you’re self-employed, you can have a wildly fluctuating salary that looks a lot like a roller coaster if you plot it on a weekly income graph. Some self-employment jobs or business will have fairly steady income numbers and others can be quite extreme with changes.

Many people avoid monthly budgets and just “wing it”. If you make a decent amount of possible, this is possible to do without disastrous results. Otherwise, you need to have a budgeting plan to follow religiously or at least to use as a rough guide to avoid running into big financial problems.

My goal with this post is to help you make some sense of your monthly budget as a self-employed worker to help you be at ease with this different world of getting paid. Even though this post is geared towards business owners and those earning irregular pay, you’ll still likely gain helpful information here, especially if you are considering creating your own business.

Rough Payment Timeframe

For anyone that doesn’t have a steady paycheck, I highly recommend plotting your past income on a graph. This is best done on a monthly basis but could be yearly depending on how frequently you’ve made money in the past – an author that publishes every few years would have a much longer timescale to graph. You should notice some patterns emerge on the graph that will give you a rough estimate of your self-employment pay period.

You may earn roughly the same each month or you may earn drastically different amounts from month to month. Maybe you have a big pay day every 3 months or 6 months and earn little or nothing in between. These situations can become quite tricky to budget. However, it’s still possible to do when you’re aware of your real income fluctuations.

Once you can see your monthly earnings, if they are the same each month, you can treat that number as your budget income. However, if your earnings fluctuate wildly, figure out a timeframe when earnings become similar. For example, let’s say you earn $1k in January and then $2k and $13k the following two months. Your $15k total for those three months would average $5k per month. If you noticed that same pattern repeating every three months, you could use the $5k per month average on a three month pay period as your budget income.

Monthly Expenses

Now that you have a rough idea of your monthly budget income, you need to know how much you spend. Go back through the last couple of months and trace all of your money to figure out exactly what you’re spending on average each month. Pull up your bank records or start tracking future paychecks to get this information.

Some expenses will be the same each month, like your house or car payment. For expenses that vary each month, find an average over a few months or even a year. Be sure to note the maximum amount you’ve spent in a month. Some expenses should be grouped together into categories – gas, food and entertainment will be common for most but you may have others.

Once you know where your money has gone each month, you can create a budget from that information. However, this can also be a great time to identify areas where you spend too much money to give you more expendable cash each month if you change your habits. It’s easy to jot down rough budget numbers. To actually do it from your real spending data is the only way to truly see your budget and where to improve it.

Money Cushion

Knowing your income, monthly expenses and your self-employment pay period, you can finally pull all of that information together to figure out a long-term budgeting plan. When your monthly income changes drastically, knowing how long it takes to until you get a big pay day will allow you to appropriately plan ahead.

In my example above, I used a theoretical $5k average monthly income on a three month pay period. In this example, there’s a big windfall of cash every three months and two months of low earnings. If you treat the windfall month like extra month, you’ll fall short on the low earnings months. To alleviate this problem, you need a money cushion. When you make $13k one month, use the normal $5k for your monthly expenses. Then set aside the rest to use to cover the shortfall the other months.

Without that habit of creating a money cushion, you can easily find yourself scrambling to figure out how to keep the bills paid during lean months. This pressure can also lead to poor business decisions to try to speed up income.

Trying to budget your money while being self-employed isn’t ultimately much different from a normal job. However, you may need to get on longer timescales than a normal monthly budget. Once you can understand this concept and make the habit to avoid touching your money cushion, this type of budgeting can easily become second nature instead of being stressful.