Make a budget with a variable income

2012-04-14 12:21

One of the many questions I am often asked by self-employed people is how to do a budget.

Most of them tend to live in a world of feast or famine. When times are tough, they skimp, beg and borrow, but when times are good, they spend like the good times will never end.

Their largesse knows no end and they will have a party to thank those who helped them out during the tough times. They will upgrade their car or take the family on a big holiday – all in celebration of having survived the tough months.

The problem with this strategy is that one starts to live a boom-or-bust lifestyle, which is not only unsettling for the household but leaves one financially vulnerable.

All business owners or self-employed people know that there are certain months of the year that are tougher than others and occasionally those tough months go on to being a tough year. One needs to plan for those tough times by saving during the good ones.

The best way to manage a variable income is to have a basic household budget that covers your basic day-to-day expenses. This is the amount of money you need to live on; it does not include luxuries.

Your aim is to minimise this budget so that it can be covered by your income in any given month.

Then, like a squirrel preparing for winter, when you earn money over and above that budgeted amount, you save it and build up an emergency fund worth several months of income. This is income you can draw on in difficult months.

The best strategy is to keep this in a notice account or fixed deposit so that you are not tempted to dip into the money unnecessarily. And only once that emergency fund has been built up are you really in a position to start spending on luxuries.

Riana Grobler, a business consultant at Old Mutual, says she always advises people to have a saving milestone in their mind. And once they have reached that milestone, then they can start to look at their “wants” list.

House and car repayments are also difficult to manage on a variable income if you have over-extended yourself.

Before buying a home or car, you need to make sure you can cover the payments in your basic budget, not the income you earn in the “good” months.

Even if you have landed a new contract and are feeling positive about it, in the world of business, things change very quickly so don’t use it to justify going into debt. Rather save the additional money to put down a larger deposit or even buy the car with cash.

According to Grobler, tax and value-added tax are responsible for the biggest financial disasters for self-employed people because they often forget to keep it aside.

The golden rule for self-employed people is to keep tax and value-added tax money separate and never spend it.

As soon as you receive the income, put the value-added tax and tax into a separate bank account.

The South African Revenue Service is a first-in-line creditor, which means that you have to pay the Receiver before you pay your bond.


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