5 budget tips for the self-employed

Calculator on paper with interest rates

If you're self-employed, you've probably realized that some of the budgeting advice offered by personal finance experts, if enacted, could destroy your checking account.

After all, your salaried friends have a predictable schedule on which they're paid, and so budgeting can be a pretty straightforward affair.

Tell someone to automate their bills, and a salaried person will nod and think, "That's reasonable."

A freelance or contract worker with an income that fluctuates monthly, might think, "I can't do that."

If you're self-employed -- and there are more than 10 million of you out there -- use these 5 steps to build a better budget.

Step 1. Save not for a rainy day, but a typhoon. Everyone -- salaried or not – should have an emergency savings account.


"Because you never know when you're going to be in a dry spell," says Gene Zaino, CEO of MBO Partners, a service company that handles taxes and invoicing for self-employed workers. "The general rule we tell people is for 90 days because usually, for anyone who is self-employable, they can usually figure out a way to get something going in 90 days."

But aim for even more savings, suggests Michael Goodman, who owns Wealthstream Advisors, a financial investment firm in Manhattan and is a member of the National CPA Financial Literacy Commission.

"Of course, the hardest part of this is getting the reserves in place," Goodman says. "But don't be intimidated by 'six months.' Just do what you can, squirrel away what you're able here and there."

Step 2. Put money aside for taxes. "A lot of freelancers get killed here," says Goodman. "Ideally, every check you get, you'll transfer some of the money, probably at least a third, into another account just for taxes. Without fail. And then you don't touch it. You really have to be disciplined about that."

There are companies that will do this for you.

MBO Partners, which works solely with contract workers, structures it so that a freelancer's payments all go into a special account. The freelancer can immediately access his money and transfer it to his account, minus taxes, which MBO takes out and disperses to the IRS.

Or, you can do it yourself.

The federal government doesn't charge you to pay online, but you have to be willing to give out your checking account information.

Go to the Electronic Federal Tax Payment System at https://www.eftps.gov/eftps/. There you'll find that you can send quarterly payments, installment payments and anything else you owe to the IRS -- without paying a surcharge.

Step 3. Constantly update your monthly budget. Once a year isn't enough. Twice a year probably isn't either.

While everyone has a rough idea of what they need to make to get by every month, our situations change.

We buy a cat, and suddenly, every month, we're paying for cat food and cat litter and, periodically, vet bills. Or we impulsively upgrade our cell phones or sign up our kids for swimming lessons.

One cat and some swimming lessons may not hurt much, but if you have a couple lean months, you'll notice how you have more bills than ever.

That's why it's crucial to take stock every time your monthly budget changes -- or to at least build in a cushion for occasional changes.

The swimming lessons may only last a few weeks. Your cat is more or less a permanent addition to your budget.

Use our budget calculator to get started.

If you feel like you're on the brink of financial doom if you have a bad month -- or bad week -- you should update your budget every month. If things are pretty stable, then three to four times a year is prudent.

"You have to understand what your expenses are," says Chris Hogan, director of the financial coach and counseling division of the Lampo Group, the company owned by personal finance guru Dave Ramsey.

Hogan says what he hears most from self-employed people is their general lack of awareness when it comes to how much money they actually need to have a month.

Step 4. Understand your profits. Sometimes it's tough to know if you're making money or losing money.

"It's really important to have a system in place, whether your own little system or whether you have someone who does the accounting for you," Zaino says. "Or you can go to an online system, of which there are dozens."

After all, you may get by, but you need to be aware if you're underbidding or spending too much time on a project and thus making far less than you actually should be.

Otherwise, you're making it much harder to budget in those day-to-day living expenses, and you're going to rob yourself of the money you could be putting in your rainy day fund, your IRA or your 401(k).

Step 5. Analyze your cash flow. The up-and-down nature of your income might be stressful, but you can at least predict what's coming if do a lot of record keeping.

"Look for patterns," advises Kevin Gallegos the vice president of Phoenix operations in Freedom Debt Relief, LLC, a debt relief firm based in Tempe, Arizona.

He says self-employed people can usually see a pattern in their cash flow after just a few months.

"Maybe a slump around the holidays or an especially busy time at the beginning of the year," Gallegos says, adding that it can be a lot easier to budget, spend and save money if you recognize, for instance, that every November your income tends to drop off.