Following a budget is an essential part of managing your money and working toward your financial goals. And if you’ve recently made the leap to self-employment, it’s especially important.
The upside of being a salaried employee is having a steady paycheck to look forward to every few weeks. When you’re self-employed, your income can vary, and sometimes, your payment schedule can be less than steady. Here’s how to tackle your budget if you’re newly self-employed.
1. Assume the worst when it comes to your income
You may not have a great sense of what your monthly income will look like as a self-employed worker. But you may have guessed at a range.
When setting up your budget, it pays to be pessimistic about your earnings potential. In other words, base your expenses on the lowest monthly income you think you’re in line for. That way, if it takes a while for your earnings to ramp up, you’ll be prepared from a budgeting standpoint.
2. Order your expenses by priority and necessity
Being self-employed could mean taking a pay cut, so you may need to spend more judiciously, at least initially. 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 allocating money to things like cable and entertainment.
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, too.
3. Plan to revisit your budget every few months
As a general rule, your budget isn’t something you should set up and then forget about. But 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 while for you to get a sense of what your monthly income realistically looks like. And so it’s 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.
For example, 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. But if, after a few months, you realize that you’re earning $500 more a month than what your budget allows for, it’ll give you some leeway to ramp up your leisure spending — and enjoy life a bit more.
Though there are many benefits to being self-employed, from a financial standpoint, it can be a tricky adjustment — especially in the beginning. Follow these three budgeting tips to get your finances on track as you navigate this exciting career change.
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Original source: The Motley Fool