MDUDUZI LUTHULI: Self-employed? Four tips to survive on an irregular income
It will pay you to mimic a regular income schedule as much as possible
When you're a self-employed entrepreneur, or someone who depends heavily on commission or seasonal income, you might be tired of hearing everyone telling you that a budget will make managing money easier.
When you have irregular income or depend on lump sums to carry you through several months of expenses, creating a budget can be extremely difficult.
The trick is that while your income fluctuates, with some careful planning, your spending doesn't have to. Practise these four key steps to survive on an irregular income.
Pay yourself a regular salary
The key to dealing with irregular income as a business owner is to mimic a regular income schedule as much as possible. Like a traditional job, that pays you every Friday, or in the middle or at the end of each month, you should make frequent, and regular, transfers from your business bank account into your personal account. Set yourself up like an employee of your business (even if you’re a sole-proprietor), for the purposes of accounting.
Pay yourself the bare minimum
Naturally, the next question would be, how much do I pay myself? A good guideline for determining your regular salary amount is to try and create a budget. The budget should be based on the bare minimum expenses you’ll need to cover on a monthly basis.
For most people, this budget is comprised of expenses related to the absolute essentials — housing, utility bills, transportation, groceries and childcare. When following this plan, it’s crucial to know what you absolutely need to earn to pay your bills and get by. While fixed expenses, such as your rent, are easy to figure, you may need to estimate ongoing expenses that fluctuate such as utility bills, petrol and groceries.
Don’t forget to include savings, investments and debt repayments in your bare-bones budget. These bills may not be essential to your current survival, but they are essential to the survival of your future self.
Once you’ve figured out your bare-bones budget, pay your salary based on that number.
Set aside bonuses and raises
This is a smart tip for a regular employee, but it’s also a great strategy as an entrepreneur. When you raise your prices, land a big client, have a large month of sales, or receive a bonus, put this extra money into a separate supplementary savings account.
Don’t mix it with your regular savings goals or savings accounts, but instead use the extra funds as a cushion to tide you over in the months you have an increase in expenses (holidays), or when you have a month with less income. This savings buffer will allow you to still invest in your business and make smart choices for growth, without being too stressed about where you’re going to make up the income from a slow month.
Risks to navigate
Be aware of your risks. Primary among them is to take the convenient option of ignoring the need for an emergency fund, retirement investments and insurance policies, and rather believing that the funds are better utilised in the business.
During an emergency, this error is compounded as people typically resort to their credit card. The ballooning debt and interest costs put a strain on the already fragile finances.
What happens if you’re diagnosed with a severe illness or a serious accident leaves you permanently disabled? Would you still be able to work and generate an income?
You might run your own business but that doesn’t mean you intend to work until you die. Retirement and investing sufficiently towards it is still a priority. Open a retirement annuity (RA) and start contributing to it as early as you can. An RA allows for both regular and ad hoc contributions and you should try to save whatever you can towards your retirement goal. Set up a rule that you will save a certain percentage of your income, no matter the amount. Meet annually with an investment manager to track your progress.
It’s difficult, but not impossible to take the time to plan and ensure you’re able to execute your responsibilities. You must ensure that an irregular income doesn’t mean you’re unable to pay your taxes or maintain your credit score. Review and monitor your financial situation periodically so that you can make suitable updates to your expectations and actions.
These personal finance tips will help you remain solvent while building the business of your dreams. Remember, success is all about striking a balance with your finances. Be smart, be frugal and put money into things that will grow, and you will be well on your way to success.
• Luthuli is an independent financial adviser and founder of Luthuli Capital.