When it comes to financial planning for the self employed, it is important to set a realistic budget in order to avoid debt and a number of other issues! At The Kelvin Partnership we know that setting and sticking to a realistic budget can be challenging, which is why we have put together these helpful hints and tips on how to set a realistic budget if you are self employed. TKP, your Glasgow accountant is more than happy and ready to help!
The first step in setting a realistic budget is considering how much you are currently spending each month. There are a number of ways you can calculate this, but you must ensure that you are accurate when adding up the likes of bills as this can really affect your monthly outgoings if you have not considered any large expenses.
To calculate how much money you are spending each month, you can track your spending over a month by writing down everything that you buy, whether that be on your phone, computer or in a note pad. By taking a note of everything you are spending it should help you to consider the smaller costs – such as a daily coffee – which you otherwise might have missed.
You may also consider calculating your average monthly outgoings by looking at your expenses across a year or a six-month period. By finding an average you will be able to include the likes of insurance which may not be paid each month, but is still an expense that you need to pay. This is particularly important to consider if your income varies from month to month, by calculating an average your budget will be easier to stick to in the long run. You can find and calculate this by looking at your bank statements, receipts and financial files.
Determine Your Income
Once you have found how much you are spending each month you need to look at how much you are earning. Financial planning for self employed people is very important! When calculating your income, you should think about your actual salary, but you should also consider any other money that you are bringing in. This may include the likes of benefits from the government, cash gifts you receive, dividends from shares etc. This will ensure that you create a full picture of how much money you are actually bringing in each month.
You may also wish to consider setting yourself a wage, this will help to regulate your income and reduce how much your earnings vary from month to month. This will also allow you to save any money you make above and beyond your wage – and having savings is always a good idea.
Are You Spending More Than You Earn?
By knowing exactly how much you earn and spend each month you will be able to determine whether you are overspending or living within your means. If your expenses exceed your earnings, then you will need to consider what cutbacks you can make from your spending.
It is very easy to spend money when you are working from home or you self employed! There are many cutbacks that can be made which will have a huge impact on your annual spending, for example, no longer buying a coffee each morning – a couple of pounds each day can very quickly add up. You should try and make these cutbacks until you reach the point where your spending no longer exceeds your earnings. You may also be able to make substitutions so that you can still provide the same quality of goods and services without breaking the bank. If you are unable to make any more cutbacks, you may need to consider how realistic it is for you to remain self employed.
By setting goals, both personal and for your business, you give your self something to aim for. When you reach these goals you will feel motivated to save more money and you will feel more satisfied with your budget. These goals may be to save a certain amount of money by a set point in time – this may be for a holiday, better equipment, or it may simply be saved for a rainy day. You may also want to consider your debts and set a goal for paying them off, at this stage you may also want to consider any debt solutions that may aid you in achieving these goals.
Budgeting & Financial Planning for the Self Employed
In terms of financial planning, self employed people need to try and stick to their budget. The key to this is aiming for your goals and keeping a close eye on your budget. By closely monitoring your spending and writing down everything you buy you will be less likely to splurge on items that you don’t actually need. Another way to stay on track is to use cash rather than a credit or debit card. To determine and stick to your budget why not look at our post about creating successful business plans? Crucial for the longevity of a company!
Ultimately, you do need to be realistic, and this means that sometimes you will overspend, and that’s ok – as long as you get back on track the following month. However, if you have been truly realistic in setting your budget then you should be able to make it through each month without breaking the bank. Financial planning for the self employed is a difficult task to manage, especially when you are working for yourself with no other help. This is whether help from The Kelvin Partnership can come in!
At The Kelvin Partnership we want to help you set and stick to a realistic budget to help keep your business on track. If you are looking for financial advice or if you are interested in any of our accounting services, then do not hesitate to get in touch!