Following a budget is a crucial element associated with managing your money and working towards achieving your financial aspirations. Having a well-structured budget is even more important if you are self-employed.
The upside of being a salaried employee is having a steady pay check that you can rely on receiving every few weeks. When you’re self-employed, your income can vary, and sometimes, your payment schedule can be less than steady.
Although there are a lot of benefits associated with being self-employed, from a financial standpoint, it can be a tricky adjustment especially in the beginning. Here are some valuable tips to help you tackle your budget if you’re newly self-employed.
Assume the Worst When It Comes to Your Income
You might not have a great understanding of what your monthly income might be as a self-employed worker. But you may have predicted a range.
When you are setting up your budget, it is probably in your best interests to be pessimistic about your earnings potential. In other words, base your expenses on the lowest monthly income you think you are going to earn. That way, if it takes a while for your earnings to ramp up, you’ll be prepared from a budgeting standpoint.
Order Your Expenses by Priority and Necessity
Being self-employed might you have to take a pay cut, you there might need to spend more judiciously, at least in the beginning of your self-employment journey. When setting up your budget, make sure to list your expenses in order of priority and necessity to ensure that you’re able to cover your basics.
You may, for example, have a line item in your budget for savings. Ideally, that should go at the top of the stack. Then, you’ll want to prioritize expenses like housing, food, and utility costs before you allocate to spend on entertainment and other leisure activities.
Keep in mind that you may have to spend money on certain expenses to get your job done. If you’ll be working as an independent IT consultant, your fuel costs might climb if you’ll be driving all over the place to set clients up. Be sure to factor necessary expenses like that into your budget, as well.
Plan to Re-Evaluate Your Budget Every Few Months
As your life situation and your income changes it is important to re-evaluate your budget on a regular basis. Your budget isn’t something you should set up and then forget about. If you’re new to being self-employed, it’s an especially good idea to review your budget every few months and see if it’s accurate.
It might take a long time for you to get a sense of what your monthly income realistically looks like. This means that it is important to make sure your expenses are reasonable given the amount you’re earning. You may also find that you’re able to increase your spending in certain categories once your income starts coming in higher than you initially anticipated.
An example of this might be, you might start out by allocating just $100 a month toward leisure until you have a better sense of what your income will look like. However, if, after a few months, you notice that you’re earning $500 more a month than what your budget allows for, it’ll give you some leeway to ramp up your spending on leisure activities.