How to budget when self-employed

How to budget when self-employed

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If you’re self-employed, budgeting can be a difficult process as your paydays don’t necessarily come at the same time every month. Added to this, there may be some months where you’re living off your savings rather than new wages. For this reason, it’s really important to budget your money well, and here we run through how to do this when you’re self-employed.

How to budget if you are self-employed

Try to work out your average monthly income based on past or predicted earnings. From there, work out how much you owe each month on bills and put away money towards these bills from every paycheck. Additionally, make sure to save some money for a rainy day.

How to budget if you are self-employed

Try to work out your average monthly income based on past or predicted earnings. From there, work out how much you owe each month on bills and put away money towards these bills from every paycheck. Additionally, make sure to save some money for a rainy day.

Cost up your outgoings

Your first job will be to work out how much you’re spending each month. You can do it by week if that works better for you, which may be the case depending on how often you get paid. However, working out your outgoings over a whole month will mean that all of your bills are accounted for.

You might want to make a note at this stage of any expenses you’d like to change and come back to this at a later point. For example, if while you’re going through your bank account you notice you’re spending a lot on your internet bill compared to others, you might want to give yourself a reminder to check around to see if you could get a better deal further down the line.

To get started with your budget, download our budgeting spreadsheet.

Plan to cover regular bills

Once you have an idea of what you’ll be spending on bills, you’ll need to put together a plan to pay them off. If you’re paid monthly, this could be as simple as setting up a direct debit or moving money to a bills account. However, if your pay comes in slightly less predictably and in differing amounts, you might need to take more time to figure out what you should be putting away.

The best way to do this is to start by figuring out your annual income. If you’ve been self-employed for less than a year, just go back as far as you can and keep in mind how long you’ve been doing it for. Next, work out how much you’ve spent on each bill over the course of the year. Finally, calculate each annual bill as a percentage of your income.

For example, say you earned £20,000 last year, and your electricity bills totalled £1,000. In this scenario, your electricity bills would have been 5% of your income, so in order to cover your electricity bills moving forward, you should put away 5% of each paycheck.

If you need a hand working out percentages, try this handy tool:

Percentage Calculator

Keep in mind that your average annual income and your bills are subject to change, so you may need to keep an eye on how much you’re putting away and add more if needs be. It might be the case that you want to predict what you’ll be earning in the months ahead, but be very careful working it out like this unless you’re sure of being paid.

So to recap that method, to work out how much you should put away for your bills if your income changes from month-to-month, you should:

  • Work out last year’s annual income
  • Add up how much you spent on each bill
  • Calculate each bill as a percentage of your annual income
  • Apply those percentages to all future paycheck
  • Put away the money to cover your bills

Set out a budget for the worst case

As touched on in the previous point, being self-employed often means that there are no guarantees with regards to future income. With this in mind, you should always have a plan for if the worst happens. What this situation looks like will differ from person to person. For some, it might just mean a drop in monthly income, but for others, it could mean going without pay for a long time.

To work out how much this might need to be, try looking at your outgoings and add up the absolute essentials (e.g. food shop, bills, rent etc.). Then try to think how long such a worst case scenario might go on for. This could be tricky as it could be completely unknown, but if you happen to know that work in your industry can go quiet for two or months, consider this when making your plan.

Finally, figure out how long you’ll need to save and how much you’ll want to put away each month towards your rainy day funds. You might also want to save money for a situation like this continually without a target in mind.

Have a set paycheck

Budgeting is a whole lot easier if you’ve got a set amount each month in mind. So even if your income changes throughout the year, it’s easiest to plan if you work out an average monthly “paycheck” and put together your budget based on this amount.

Starting with a monthly average based on your pay over the last year is a good place to start. If you anticipate that you’ll be getting more or less than this due to a change in hours or an additional contract, you can try to factor this into your plan, but we’d recommend erring on the side of caution. You can always adjust your budget later on if you find that you’ve got lots of money left over at the end of each month.

Check your subscriptions

Working for yourself rather than as part of a company can mean that you end up footing the bill for plenty of subscriptions. Some of these will be essential as they’ll be part of a licence you need to practice your trade. However, some won’t be as relevant, and it’s very easy to keep paying for these subscriptions when you don’t actually need them.

Keep an eye on your subscriptions by including all of these payments in your monthly budget. When starting afresh for the next month’s budget, have a glance at everything you’re subscribed to and weigh up whether you really need them. As a good rule of thumb, if you’ve not used something in the past six months, you can probably unsubscribe for now.

If you do decide to cancel any of your subscriptions, check that there aren’t any penalties for leaving early, and also look out for any deals that companies might offer you to try and change your mind.

Create priorities and goals

Saving is a heck of a lot easier if you’ve got a goal in mind. Not only will it help keep you focused as you try to stick to your budget, but it will help rationalise the money you’re putting away rather than it just being a random amount. When putting together your budget, think about what you’d like to save for and how quickly you think you can save for it.

If you want to take this a step further, have a go at prioritising your spends when doing your budget. This way, if you ever feel the pinch a little more in one month, you’ll have a clear idea of which things you can skip and which need to be paid. For example, if one of your savings targets to get out of credit card debt and the other is to go on a holiday to the USA, you might decide to prioritise the debt over the holiday and make this payment first.

What financial aid is available for people who are self-employed?

For more information on the financial help available for self-employed people during the coronavirus pandemic, see our blog.

If you’re self-employed, you can claim Universal Credit to help cover costs such as:

  • Income support
  • Childcare
  • Rent

To find out if you’re eligible for Universal Credit, take a look at entitledto’s benefits calculator. Bear in mind that your benefits payments will be based on your monthly income, so if it changes, you might see a change in your benefits too. For more information on applying for Universal Credit, have a read through our blog.

Want to make managing your bills a whole lot easier? Sign up for a thinkmoney Current Account today and let us take care of all the hard work!