Being self employed is both a fun-filled and challenging endeavour and to find success it is essential to keep personal finances and business finances separate. The tendency to merge both finances is more common in the initial stages of the entrepreneurial journey.
While budgeting for your personal finance, keep all business related expenses including traveling on business meetings, phone and internet bills out. This can become somewhat complicated if you're mostly working from home. Nevertheless it will be worthwhile to make a distinction between the two. Not only will this help you keep your personal life separate from professional life but also make it easier in tax filing.
Budgeting is at the heart of financial life. It may not be easy, but it's a necessary ingredient to make a hassle free life. Did you know that most people can cut 10% of their spending in 10 minutes by budgeting?!
Identify how you're spending money now. Not everyone is good at storing information accurately for long periods so others could use an excel sheet for a budget sheet or do it with a paper and pen. List out details of your income from all sources and make a list of your projected monthly expenses under various heads such as house rent, electricity, phone, groceries, traveling, children's expenses (school fees, toys, etc), insurance, loans, savings, taxes, leisure and so on. Make sure that all your expenses are put down under some category. List the planned spending amounts in the beginning of the month and actual amounts spent on each item. Initially you may find a great difference between the two but you will gradually learn to narrow the difference.
Some of you will be surprised to learn the actual amount spent on groceries, eating out an on other entertainment is twice or thrice more than what you'd expected. Many single people tend to spend beyond their means and admit that eating out and mobile phone bills are some of the culprits that put a severe strain on their budget.
Evaluate your current spending and set goals that take into account your long-term financial objectives. Your current spending habits and life style must not come in the way of achieving your future financial goals. You probably want to buy a new vehicle in two years or purchase a home in four years. When you have a goal you can begin saving to work toward your aspiration.
It is important to distinguish between needs and wants. It a useful habit you need to cultivate to have a balanced financial life in the long term. Needs are the basic necessities you can't do without. When you have identified your needs like rent, telephone, utilities you will know how much you have left to spend on wants. Wants are basically desires you'd like to spend on. If you want to succeed in living happily within your means don't dress up your wants as needs.
It is not wrong to satisfy your wants but just remember not to do it at the cost of your needs or the consequence is obvious - you will fall in debt.
For a self employed person income streams can be pretty irregular. Here are additional tips that can help make budgeting easier.
- Determine timing of expenses
Planning the order in which expenses are to paid will help relieve some stress. Have a priority list of expenses which if not paid on time will lead to penalties or disgrace such as electricity and phone bills, house rent, children's school fees and EMIs.
- Set a Cap
Every month set a cap for your personal spending or wants, which should include any money not dedicated to necessities like bills, rent, saving, insurance, etc. Don't forget that in a certain month you may incur additional expenses like on bike/car repairs and doctor's appointments. Setting a cap allows you to place limits on spending.
- Try to avoid loans
Wait to purchase that new refrigerator, washing machine, LCD TV or a vehicle. Learn to budget your needs and wants. The disadvantage of buying on EMIs is that you end up paying much more than you would have to pay at one go, which is a waste. So if you intend to purchase something, save for it and then buy it.
- Put Away the Cards
When out on shopping spree use cash instead of carrying your credit card along. When going on an outing with leave the card at home if you don't trust you can limit your spending. If you do trust yourself, keep the card and only use it for emergencies.
- Set priorities together
Your preferences can be different from that of your spouse's. You may prefer to use funds to go on a family holiday while the spouse may think it important to save to purchase a vehicle. Try to find ways to amicably settle on preferences. At times you may have to compromise on wants but peace has to be paid for. Make huge financial decisions together after discussions.