It may or may not be the first job you have after you graduate, but there’s a very good chance you’ll have an irregular paycheck at some point in your career.
For instance, if you work on commission, or run a successful side business, it can be tricky to determine what you’ll be making every month. According to Statistics Canada, there were 2.76 million self-employed workers in 2015 and that number continues to grow. Self-employment comes with a lot of freedom. You can pick how much or how little work you want to take on and set your own hours. But the biggest con of being self-employed is that you’re earning irregular income.
Here are our top tips for ways to budget when you don’t know how much money you’ll be bringing in each month.
1. Set aside money for tax season
Owing the government money every spring is probably the least fun part of being self-employed, but it’s part of the job. Since you don’t have an employer or payroll system to take taxes and other deductions off for you, you need to do it yourself and we suggest making it the first thing you do whenever you receive a payment. A good rule of thumb is to save at least 30% of your income for tax season. You’ll probably end up owing less, especially if you have any expenses to write off, but we’re sure you’d rather have too much money saved than be scrambling to figure out how to pay what you owe. You can keep the money in a high-interest savings account or short-term GIC, earn a little interest on it and feel good about knowing you’re ready for tax season all year.
2. Know the minimum amount you need and pay yourself a salary
When you work for yourself, no two months will look exactly the same. One month you could make $6,000 and the next month you might only earn $3,000. This is exactly why it’s called irregular income. For this reason, it’s extremely important to know the minimum amount of money you need to earn each month in order to live, pay your bills, and save. Knowing the minimum amount you need alleviates the stress of the unknowns that come with earning irregular income. As long as you get paid a certain amount, you know you’ll be fine. Once you know this amount, get into a routine of paying yourself a salary. Paying yourself is as simple as transferring money from your business account to your personal chequing account.
3. Set up an emergency savings fund
On top of paying yourself a salary, the best way to remove the stress of earning irregular income is to have three to six months of the minimum amount you need in savings at all times. Some people call this an emergency fund, others just call it savings. You can choose what to name your account but the purpose of it is always the same: to help you sleep at night. You shouldn’t invest this money in the stock market as you might need it at some point in the near future. Instead, keep it in a high-interest savings account that you can easily access if/when you need to.
4. Prepare for a worst-case scenario (and have a plan in place)
Finally, no one likes to think about the worst-case scenario but it’s good to know what yours could be and plan for what you’d do if you were in that situation. For some people who work for themselves, the worst-case scenario is using up all their savings and going into debt. And for others, it could be having a certain number of months in a row where they only earn the minimum amount they need. Whatever your worst-case scenario is, you need a plan to change it. For example, you could use up no more than half of your savings before looking for a formal job. Or you could downsize to lower your monthly costs. Whatever it is, being prepared will help you make the decision when the time is right.
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