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It's one thing to budget and manage your money on a regular income-as you do when you receive a salary. It's quite another when your income fluctuates.
But having a fluctuating income is a basic part of the self-employment reality.
Managing money in such circumstances is unfamiliar and, for most of us, uncomfortable.
These are some tips I developed from my experience of 10+ years of self-employment.
. KEEP GOOD RECORDS
When I first got started, an old CPA friend of mine had three words to say. "Keep good records."
Maintaining good records of your money transactions helps you in several ways.
It helps you track your income and spending so you can create a realistic budget.
Your financial records become a management tool for your business. If your records are accurate and up to date, you can track changes in income and spending - and take appropriate action, when necessary.
There's gold in those records. As a self-employed person you can deduct all kinds of business expenses. But you have to be able to substantiate them with evidence (receipts, invoices, credit card slips, mileage logs, etc.)
Lastly, keeping good financial records keeps the authorities happy when they come calling. The IRS audit rate of self-employed people is higher than almost any other group.
. OPEN SEPARATE CHECKING AND SAVINGS ACCOUNTS FOR YOUR BUSINESS.
Having separate bank accounts in your business's name does a great deal to prove to snoopy tax authorities that you are really running a business and not a hobby.
But more important, it helps you to keep your records straight.
Money you generate and spend in the process of conducting your business goes through your business account, all other money goes into your personal account.
TIP: If you are a sole-proprietor, don't intend to have employees, and don't anticipate a need for business loans, your account can be a separate personal checking account. All that is necessary is that your account be in the name of your business.
If your bank insists that you open a higher cost 'business acccount,' consider going to a credit union, where rates and terms are more favorable than those of commercial banks.
. THE BANE OF FLUCTUATING CASH FLOW
Managing fluctuating income is one of the biggest challenges of self-employment.
The most difficult part of having a fluctuating cash flow is dealing with the anxiety that arises when cash flow is tight.
Most people who have been self-employed for a considerable amount of time develop a simple faith that money will flow again. But it gets uncomfortable for us, too, when the downturn is severe or prolonged.
Here are some tips on coping.
Have a marketing plan and stick to it.
Shift your spending to mimic your cash flow. In other words, spend more when money comes in, cut back when it is not. And put away some cash for a rainy day.
Keep your obligatory monthly payments as low as possible. These are the necessities that are billed monthly such as telephone and other utilities, car payments, etc.
If you must put a purchase on a monthly installment, as, say, most people do when they buy a car, opt for the longest-term loan possible.
A longer loan term lowers your required monthly payment. This makes it easier to fulfill your obligations during lean months. Pay more than is required during fat months to pay down these loans (this will reduce your total interest payments and pay off the loan more quickly).
Rather than paying for web hosting and other services on a monthly basis, opt for an annual installment that comes due during a fatter month. Not only do many web hosts give you a discount for choosing the annual option, you eliminate one payment you must come up with during a lean period.
Continued in Part Two.
About the Author
Ellen Zucker has been successfully self-employed for over 10 years.
Self-Employment 101: It's about making a living and creating a life! ... Observations, information and resources for those of us who are self employed or just thinking about it. http://www.selfemployment101.com
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