It’s Thursday and I’m Crafting my Life! June’s theme is money. Which is hard, but important. In the past couple of weeks I explored my money issues and the ins and outs of sharing finances. This week I’m talking about handling an unpredictable cash flow.
One of the biggest perks of working at a traditional job is having a predictable cash flow. Every two weeks, as if by magic, money just shows up in your bank account. The amount is pretty much always the same, and you know exactly how much it will be. You can plan for it. It makes it easy to set up things like automated bill payments and scheduled savings.
The benefits of a predictable, stable income extend beyond planning. When you apply for a mortgage or a car loan, it’s much easier to get accepted if you have a traditional job. Loan officers and creditors like stability as much as anyone, and maybe even a little more. When Jon was running his own business and I was working as an engineer, we put our mortgage and our car loan in my name. It was just easier that way.
Now that I’m setting out on this journey of crafting my life, I don’t have the same kind of stability and predictability. My husband has been self-employed in various capacities and at various levels pretty much his whole adult life, and so I know how it goes. Running your own business is a very feast or famine thing. You can make a lot of money in a short amount of time, but then you might not make anything more for ages. If you’re going to make sure that your bills get paid, you need some sort of system to handle the fluctuations.
I am not a financial expert. And I only have experience with Canada, and even then only one province, so my advice should definitely not substitute for a good lawyer and a good accountant. All the same, I have been down this road once or twice. Here are my hints for dealing with an unpredictable income:
- Consider incorporating. In most places, corporations pay less tax than people do. Which is possibly unfair, but it can work to your advantage in this case. If you make enough money, the savings from incorporating can cover the legal expenses of setting up your own company. And you will be able to write off your business expenses (possibly including a portion of your personal expenses to run a home office), to boot.
- Set up a separate business bank account for your business-related income and expenses. It makes everything much easier when you can easily separate your personal cash flow from your business cash flow. Especially taxes.
- Determine how much money you need every month to run your business and how much money you need every month to keep food on your table. Ideally, your annual income should be at least the same as your annual expenses, although that might not be the case in the beginning. All the same, knowing what you’re working with helps you understand the viability of your business.
- When money comes into your business, save it. You will need it later when money isn’t coming in and your kid needs braces or your car breaks.
- Set up a monthly draw from your business to your personal account in the amount of your monthly personal expenses. Since you hopefully are making enough over the course of a year to cover this, you shouldn’t have to put your business into overdraft. This gives you assurance that you will be able to pay for your basic living expenses regardless of whether your business is in ebb or flow.
- Insurance is your friend. When you have a job, you are usually covered by health, disability and even life insurance. When you’re self-employed, you need to figure this out on your own, and it’s even more critical because if you don’t work, you don’t get paid. Good insurance can avert disaster later.
- Be prepared for every financial transaction to be a total pain in the butt. There are all sorts of rules governing business bank accounts, and all sorts of paperwork to go along with it. If you know this, it can cut down on your frustration when it happens.
What about you? Do you have any methods for handling an unpredictable cash flow? I’d love to hear them!
June’s Crafting my Life series is about money. On the last Thursday of the month, which just happens to be the 24th, I will include a link up. To participate, write a post on this month’s theme anytime in June, or track down a post you’ve written on the subject sometime in the past, and add yourself to the list. Then read everyone else’s ideas and thoughts and be inspired! Check out the link-ups from January, February and March to get a feel for how it works.
I’m not the money person in our family, Mike is. I let him make most of the savings decisions because frankly, it all makes my head hurt…of course, this could come back to bite me if he gets hit by a bus.
I’m sure I could handle most of the planning if needed but I’m glad that I don’t!
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We have often thought about Tom transitioning to a job in which he could stay at home, but of course with that decision will most likely come an unstable income. I think one thing that we have going for us (related to your #4) is that we don’t spend beyond our means. We don’t buy all the latest toys/technology, he doesn’t eat out every day for lunch (from work), we don’t travel to exotic places, etc. etc. Our credit card is used for things like gas and groceries and is paid off monthly. (If I had my way, we wouldn’t use it, but Tom likes using it for the cash back perks.)
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great insights, Amber and from someone who’s living it too! thanks
i’m dabbling in the business world (cough – tiny dabbling, tiny business) with the security of the stable income, benefits etc. provided by my husband so as far as the business expense thing goes everything’s covered (mainly cos i don’t pay myself). it has been A Good Thing for me to manage ‘my own money’ since I’ve had to become familiar with another country’s banking and business legal system, so I’m not completely expat wife clueless.
So far (touches wood frantically) cash flow has been mostly predictable apart from a couple of hiccups. The only spanner in the works is having a joint account masquerading as the family account – when my husband buys anything it completely mucks up my budgeting despite me dropping hints about setting up his own separate ‘frivolities’ account. Grrr.
and PS: ladies, no matter how boring finances are, I strongly urge you to at least become familiar with your family’s money matters, or better still, involved.
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We are in the second year of running our own business. Neither of us has a solid secure income outside of the business. This is both liberating and terrifying.
I highly recommend making a business budget or at the very least, setting income goals for each month. This has a huge motivational factor. Especially if you are periodically checking your progress so that you can kick it into high gear when necessary. Psychologically having specific goals is very important.
I also agree that being involved with your finances is really important even if you have a bookkeeper. It’s vital to your success to have an accurate idea of where your money is coming from and where its going. (That, and most of us should still have bookkeepers).
Also Amber you can claim business-use-of-home expenses even as a sole proprietor – you don’t have to be incorporated for that.
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One of the most brutal parts about leaving my job last year was letting go of the money that magically appeared in my bank account twice a month. I couldn’t even imagine it not showing up anymore. To get by, we emptied my 401k, took out more money in student loans, and put every penny of our tax refund in savings. That’s helped us pay bills until now.
Luckily my little blog has brought in some cash recently, so I have started to consider myself “self-employed”. It’s not a lot, but getting my entire BlogHer trip paid for was a HUGE HUGE help, and every so often I get an order for ad space, which helps buy some groceries that week. Then, a couple of times a month I get paid to write an article, and get paid quarterly to write for Savvy Source. I have no advice on “managing” the flow because we just take it one day at a time. I don’t feel like I’m making enough to have a separate account, though I will need one soon when I start teaching my CBE classes. I’m terrible at money-management though. I’ll have to let my husband handle all that for me.
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My accountant also recommended writing yourself a cheque from your business account to your personal account – instead of using bank transfer. A regular transfer from your bus to personal account could link these 2 accounts in the eyes of the gov’t. Which means if you get audited they might audit your personal account too.
It is a pain in the butt to have to go to the bank and deposit a cheque. But could save hassle later on.
This is excellent, Amber! I can relate to every single thing – and love all your tips. My husband runs his own business, and he is incorporated. For the most part he has had steady work (he mostly does contracts for the federal government here in Ottawa), and the only downside for us is the agency who placed him usually takes a cut of his salary. Still, we have done this for a while now and the uncertainty has gotten the better of us, so I am returning to work full time in September after 6.5 years staying home with my three kids. As a teacher I will have wonderful benefits and insurance, a solid and decent income, and a pension. That being said, I’m terrified and really not looking forward to it, but I still feel strongly that it is the right thing to do for us for now.
Benefits were the hardest thing for us – we never went with third party coverage (life insurance, yes) b/c TOUCH WOOD we are all healthy and outside of regular dentist appointments we have thankfully not needed the use of our benefits. But it’s the little things – I need new orthotics badly for a foot condition – not something I consider urgent but definitely necessary at some point. Having benefits will be a big help for us.
Yes, every financial transaction is a pain in the butt!! ACK! The people at our bank know me very well, and are always ready when I walk in with three kids – handing out suckers and ready to deal with me
For years they held our cheques and all sort of crap like that, finally we have it down to a pretty good system. We move a certain amount over from the business account to the personal account every month, and usually we are good with that, occasionally we need a little extra for things we didn’t account for in our budget.
A good accountant has been paramount for us. She is amazing, has saved us what I can only guess is thousands of dollars b/c she knows all the ins and outs of paying business tax. She is worth every penny we pay her. And she likes us b/c we keep good files and records and give her detailed end-of-year statements.
Thanks for the great post – glad to know I am not living this alone
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we are both self-employed and wonder when the next check will be coming in. I make sure to pay the most important things first. I have everything written on a big blotter as to know what is most important and what can wait a week to be paid.
I’ve done this for 9 years. The stress can be too much but the freedom outweighs the bad – most of the time.
Great post Amber! Incorporating definitely has its advantages but many small businesses (in Canada) don’t need to worry about this until their net gross (aka after expenses) is $100,000 K, unless you want to income-split or need insurance to protect your personal assets from any business “failures”.
I would highly recommend the Boss of You book and blog to anyone starting out or mid-way through their business learning curve. These ladies are smart, smart, smart and are happy to share their wealth of knowledge (I am not affiliated with them, I just love their book and their business acumen) http://www.laurenandemira.com; http://www.facebook.com/bossofyoubook ; http://www.bcbusinessonline.ca/bossladies
Unpredictable money flow is our family surname at the moment!
We’ve been self-employed before and enjoyed quite a few years of successfully navigating dry and abundant work seasons. We would always pay it forward. We had a monthly budget: we knew exactly how much $$ we needed a month to get live and on the first of the month I would organize it all so that the appropriate funds were in the checking for bills paid out and we kept the other money in cash in envelopes at home. There was an envelope for food, weekly allowances, gas money etc. It felt so nice to have the whole month paid for up front without the ability to over spend (and if we did we knew about it). Then as we made money we put it in a separate account and let it build up so we always knew how many months ahead we were. This was so helpful and we were able to make it through two dry seasons without stress. Dh was also able to take a lot of time off when I had ds2.
Then dh went to work for someone else and we got a little cozy with getting regular paychecks. Now we’re back on our own, but *just* at the beginning and since we’re in a new town (relatively speaking) it’s slow going as we build our business name. So lots of deep breathing and money coming in “just in the nick of time.”
Did I mention we do a lot of deep breathing? lol.
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Great tips. My husband and are going from two full-time jobs to him working 3 days a week and me most likely working part-time freelance (self-employed). We need all the help we can get!
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Good work Amber! Couldn’t have said it better myself! Want to become a Money Coach??
Yes Yes Yes!
I did not go through the expense of incorporating because I am a sole proprietor with no bricks and mortar address and no employees nor stock nor supplies — just me my computer and the internet making graphic design for the print industry.
But the other points are BANG ON! I could never figure out my income, expenses or profits (let alone do my year end or taxes) if I tried to work from a personal checking account!
I do tend to keep my business on a “float” that covers my expenses (and taxes) and pay myself a set amount to cover my home expenses… anything above that (on the good months) goes to a Savings account to earn better interest and be farther away from temptation! Somehow it hurts more for me to pull it out of Savings than it does pulling it from Chequing — go figure!
Thankfully my husband is still employed in the traditional way and has SOME insurance. However we have our own life insurance and get to pay for our own BC medical basic for the family (woohoo). My husband knows that he would not do well self-employed, the stress would KILL him and he has no time for PR – even for suppliers let alone potential clients!
It’s a tough gig being self employed. Too many bosses, lots of unknown elements, no chance of sick pay or overtime or vacation pay, or employment insurance…. at least not in the way the regular-paycheck-folks are used to. Oh ya, and the clients that decide not to pay, the suppliers that mess up and the fun and games of drumming up business…. not all roses, but I wouldn’t go back to the office anytime soon! I love what I do and the terms that I do it for!
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Good advice Amber. We also had to make significant changes to our lifestyle to be able to live with the “unpredictable pay check”, and it’s all becoming more difficult now that our kids and their needs have grown bigger.
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My husband works on commission. A couple of years ago the economy rocked and the money flowed. Now the economy sucks the big suck and the only place the money is flowing is away from us. It’s frankly quite sh**y and scares the poop out of me from time to time. I used to be militant about our budget but the money income is so sporadic that it actually became very difficult to maintain my spreadsheet. I’ve since bailed on it and I pay the bills when there’s money and don’t when there isn’t. It’s all very unlike my usual way of functioning.
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We have a pretty predictable cash flow, but the expense of living here in California is daunting. I must admit day dreaming about chucking the jobs and getting a little cabin somewhere rural. Where I’d probably last about five minutes with an internet connection.
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I just quit the highest paying job I’ve ever had after only 1 month. There are a few reasons, but the main one is it just wasn’t a good fit. Keep in mind that I’ve been out of work for a few months and we were living on E.I payments, so that makes it even more frightening.
The point is, no matter how sporadic the money flow is, I’m confident I can always turn on the tap again when needed. Money is very, very important, but you need to be comforable doing whatever it is your doing in exchange for it.
Like Shakespeare said, “to thine own self be true”
#7, in spades! We were audited by the state, and what a supreme hassle even though we ended up not losing any money from it. Keep records as well as you can — and then know the government will want you to have kept umpteen more that you never even thought of. Sigh.
We’ve been self-employed for about 6 years now, and it’s still really hard for me to keep track of cash flow, except when doing our taxes every year. I look at the numbers then and go, “Oh, so that‘s how well we did this year.” It’s challenging to keep up the finances when you’d rather be working on the business itself, and when you’re too poor to hire an accountant.
In the U.S., of course, we self-employed people have to consider buying our own health insurance, so there’s another expense to consider when making the leap to being your own boss.
With all the hassle and uncertainty, though, I wouldn’t go back. We love our freedom!
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