Budgeting: a Money Issue for the Self-employed

It's like a dream come true! You can set your own hours and perhaps work from home. Goodbye, office politics. Hello, more opportunities to increase your income and spend more time with the family. You are entitled to these "rewards" when you are self-employed!

However, there are important financial planning aspects to consider. Income streams are potentially more but are irregular and dependant on the jobs obtained or whether your clients ay on time. There is no organization to pay for your healthcare needs and contribute to your retirement fund. Looking after these needs yourself can be quite a drain on your income. Once you get absorbed with the nitty-gritty of developing your business, you could neglect your personal finances. But remember that you won't be able to work forever, and without a real financial plan in place, you risk facing a financial disaster, whether near or long term.

Budgeting

Whether you are in employment or self-employed, there are certain expenses that you will incur in your daily living. But if you are on your own, your cash flow will be less certain, with possible extreme highs and lows. How do you keep your creditors at bay and live within your means? First, plan your basic monthly commitments. For most people, the list would probably start with necessities like groceries and utility and medical bills, followed by high-priority items like savings and debt reduction.

In order to live within your means, it may be necessary to minimize expenses. And while everyone needs an emergency fund, it is even more crucial for the self-employed. You should also be able to check your cash flow and debt-servicing ratio, which is the total monthly loan repayment divided by the total monthly take-home pay. A general rule for debt-servicing ratio for an individual is that it should not exceed 35%. If your debt-servicing ratio is high, you should make a commitment to settle the loan. When extra income comes in, settling the loan should be your first concern.

You need to ensure that you have a buffer fund of six months' to a year's salary when you are self-employed. This amount could have been saved while you were employed previously or you can build it when you have extra income from your business. The good news however is that with your own business, you can make much more than in employment. In such cases, it is wise to save extras.

Also have a plan for the what-ifs. One avenue of support for many new entrepreneurs is borrowing from family and friends. When income comes in, make sure they are at the top of the list of repayments.

If margins from the business are highly uncertain, one spouse can stay employed. In this situation, if there were a month in which the business is not generating income, at least that spouse salary would be able to cover the basic necessities.

One way to cushion potential income shortages is to find ways to generate passive income. Another is to stand by with bank facilities like overdrafts. This is where you would be paying the bank interest once you utilize the facility. It is crucial, especially during economic turndowns. However, bear in mind that taking out a personal loan is very risky as the interest charges are very high.