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The ups and downs of self employment: self employed income

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Self employed income

Savings

Being self-employed, you can find yourself with volatile income. This may be because you are still trying to find new clients, work in a seasonal or unpredictable industry or suffer due to late payments from unreliable clients. Well, you are not alone in this situation, many contract workers and service industry personnel, who rely heavily on tips, endure the same unsteady income flow.

With inconsistent income, you need to take some actions in order to be sure you’ll make it through the year. It helps to create a buffer account, where a part of your income goes into an account, which is kept separately from the account you usually use to pay bills.

Don’t get too excited by a big fat pay check during one particular month; you may be tempted to spend it straight away, but you are at risk of receiving a much smaller pay check the following month and may not end up with enough cash to pay your bills. By continuing to save into your buffer account during the successful months, you will be able to overcome the more difficult months by using the money in that account.

Even if your checks are getting consistently larger, try to keep the same lifestyle for a while, continue saving during the good months. This means being consistent; low-fixed expenses have the possibility to raise your lifestyle, while the opposite is harder. Fixed expenses include rent, car and loan repayments, phone and health insurance bills and employee salaries if you have a small business. So don’t upgrade your office to an expensive part of town just yet!

Try to anticipate your revenue based on past income and on how well your business is going, how many clients you have, how many contracts are coming in over the next few months, etc.

If you are experiencing large income swings, there is a danger to adopt the monthly mentality; you need to think long term, at least 12 months ahead. Can you be sure you will be earning the same amount over that time? According to Laura Rowley, specialist in personal finance and values, monthly mentality is “the mind-set in which people make major purchases based solely upon their ability to swing the monthly payment” You really need to schedule your monthly payments and to stick to your schedule!

Also see Savings; how to provide yourself financial help, for complementary information.