Personal budgeting on variable incomes for small business owners with variable incomes can be challenging but is essential for financial stability. With the start of the new financial year underway and cost of living expenses continuing to rise, many small business owners and sole traders are starting to think about how to manage their personal finances over the next twelve months (and if they are not thinking about it, they should be!).
Step-by-Step Guide to Personal Financial Budgeting on Variable Incomes
Determine Your Essential Expenses
- List Fixed Monthly Expenses: Include mortgage/rent, utilities, insurance, loan repayments, and other non-negotiable bills. Now is also a good time to review expenses to ensure you are getting the best deal on insurances, utilities etc. and to make sure you have adequate cover.
- List Variable Monthly Expenses: Groceries, transportation, entertainment, and discretionary spending.
- Average Out Annual Costs: For expenses like car registration, insurance premiums, and holidays, calculate the annual cost and divide by 12 to get a monthly estimate.
Calculate Your Average Income
- Review Past Income: Look at your income from the past year to determine an average monthly income. Use bank statements, accounting software, or bookkeeping records.
- Consider Seasonal Variations: Account for any seasonal fluctuations in your business and plan for low-income periods.
Build an Emergency Fund
- Set a Savings Goal: Aim to save at least three to six months’ worth of essential expenses to cover any income shortfalls.
- Automate Savings: Set up automatic transfers to a separate savings account to build your emergency fund consistently.
Prioritise Savings and Investments
- Retirement Savings: Contribute regularly to your superannuation fund or other retirement savings plan. If you have multiple superannuation accounts, consider consolidating into one to maximise returns.
- Short-Term Goals: Save for planned expenses like holidays or large purchases.
- Invest Wisely: Speak to your financial advisor to discuss investment options that provide steady returns, suitable for unpredictable incomes.
Create a Flexible Budget
- Use the 50/30/20 Rule: Allocate 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment. Adjust these percentages based on your financial situation.
- Adjust Monthly: Review and adjust your budget monthly to reflect your actual income and expenses.
Track Your Spending
- Use Budgeting Tools: Utilise budgeting apps or software to monitor your expenses and income in real-time.
- Review Regularly: Analyse your spending habits regularly and adjust as necessary.
Plan for Taxes
- Set Aside Tax Money: Estimate your tax liability and set aside a portion of your income each month to avoid financial stress at tax time.
- Consult a Tax Professional: Work with your accountant and bookkeeper to ensure you are taking advantage of any deductions and credits available to you as a small business owner.
Manage Debt Wisely
- Prioritise High-Interest Debt: Focus on paying off high-interest debt first to reduce overall interest costs.
- Consolidate Debt: Consider debt consolidation options to lower interest rates and simplify repayments.
Additional Tips
- Maintain Financial Records: Keep thorough records of all income and expenses to make budgeting and tax preparation easier.
- Communicate with Family: Ensure your family understands the variability of your income and the importance of sticking to the budget.
- Seek Professional Advice: Regularly consult with your accountant and/or financial advisor to optimise your budgeting and investment strategies.
By following these steps, small business owners can create a personal financial budget that accommodates their variable income. One that ensures financial stability, promotes savings, and helps manage debt effectively.