If you are among the millions of people in this country who don’t really know how or when they will see another paycheck, chances are you’re either unemployed or self-employed—which now that I think about it, being self-employed can be a lot like being unemployed except for an unemployment check.
It’s a rollercoaster, baby!
If you are a freelancer, a consultant, work in commission sales, the arts, or some other form of self-employment and don’t know when, how, or how much you’ll get paid from month to month, the word rollercoaster may bring more to mind than something in an amusement park.
Some months you work yourself nearly to death but produce absolutely no income. Then a deal closes or you have a pretty good month, and it takes nearly all of that money to pay last month’s bills.
You made it … ?!
Then miracle of miracles, you have a $10,000 month and suddenly in your mind, you’re making $120,000 a year. Time to call the travel agent and book a European vacation!
Does any of this sound familiar?
Here’s the problem
People who live with what I call “mystery means,” typically believe they can’t live according to a budget because they never know how much money they’ll have to live on from one month to the next.
If you have any hope of becoming successfully self-employed, you need to change the way you think about your income. Now more than any other time in your life you must live according to a strict budget. Here’s the secret for how to do that.
You wear two hats
You must assume the role of both employee and employer—and you must be able to move easily between those two roles.
You the Employee
First, as the employee, you need to honestly determine the lowest reasonable amount you can accept from yourself the employer as monthly compensation—an amount that after taxes, will allow you and your family to eat and keep all the bills paid. Let’s say, for example, you determine the amount is $4,000 a month.
You the Employer
You the employer needs to take a long hard look and then ask if the business can afford to hire You the Employee at a rate of $4,000 a month—every month,
If not, you may be looking at more of a hobby than a business, in which case you may need to keep your day job while getting your business financially healthy so it can hire You.
Let’s say that conversation goes well, and you hire You.
A new separate bank account
You the Employer/business owner must open a bank account. As the business generates revenue, no matter how large or small, every amount of money coming into the business must be deposited into this “business account” (not your back pocket, not your household bank account) from which you will pay the bills of the business, including a monthly paycheck of $4,000—no more, no less—to You the Employee. As an employer, you have to be stern and immovable when it comes to paying yourself.
Hands off the business account
You the Employee may not write checks for groceries and daycare from the business account and you certainly cannot expect a raise every month. Your salary is $4,000 (or the amount you have previously negotiated) on payday and that’s it. Consider this your “steady income.” The only way you’ll survive is to create a budget for how you will live within that amount and then stick to it.
MORE: How to Budget on a Rollercoaster Income
Grow a reserve
If you are careful and work harder than you’ve ever worked in your life, your business account will begin to show a healthy balance—a nice reserve—which will be there to cover You the Employee’s paychecks even during months when business is very slow.
Negotiate any raise
As things go well and the business is consistently bringing in more than is going out, you might consider sitting down with yourself to negotiate a raise but weigh the pros and cons. Move back and forth between being a prudent business person and a needy employee, erring on the side of keeping the business financially viable.
The bright side
As one who has been self-employed for many years, I can tell you there is little in life that is more fulfilling, personally satisfying, and at the same time challenging than being both one’s employer and employee.
It’s all a matter of buckling up, holding on tight and determining that no matter what, you will enjoy the ride!