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Maintain a Monthly Budget When You're Self-Employed

Tiffany Aliche

Do you find it hard to budget while self-employed? Don't worry, you're not alone.

Many new and seasoned entrepreneurs have trouble managing their personal finances while running a business.

Now that the days of the steady paycheck are gone, you have to revise your budgeting strategy to accommodate income that varies from month to month.

[See: 10 Money Leaks to Shut Down Now.]

The good news is that after some trial and error, you can find a budgeting method that you can count on. Here's how it works.

1. Write down where your money goes each month. First, calculate your financial baseline, which is all of your needs without the frills. Write down your essential expenses, excluding anything extra, such as your unused magazine subscription or premium cable TV plan.

[See: 12 Ways to Be a More Mindful Spender.]

Cutting out all excess spending while self-employed is the key to squirreling away enough cash to keep a roof over your head and food in the fridge during slow business months.

2. Calculate the categories of your budget as a percentage. Here's where this budget is a little different from the traditional method. It's easy to allocate a specific amount of money to each line item of a budget when you have a steady source of income. After all, you know exactly how much money you'll earn each month.

That's not the case with an irregular income. You can get a huge check one day and not receive another one for several weeks. To manage your budget, think in percentages. Take a look at where your money goes each month and assign a percentage to each one of your budget line item categories.

For example, something like this might work as a sample budget, broken out by percentages:

-- Taxes: 20 percent

-- Expenses: (bills, groceries, etc.): 45 percent

-- Retirement: 20 percent

-- Donations: 10 percent

-- Travel: 5 percent

This is strictly an example, so the money you set aside for taxes and other expenses will be different. If you're just starting out, you may not have enough in savings to allocate money to different areas, such as donations and travel. If you don't have about three to six months of expenses in savings, building up an emergency fund should take top priority.

3. Get organized. The third step is one of the most important steps. Depositing all of your income from clients and other business activities into your personal checking account is a big mistake.

When it's time to report your business income and expenses at the end of the year, the paper trail will be much harder to follow. Keep a separate business account and pay yourself from it.

[See: 8 Personal Finance Myths Money Experts Want to See Disappear.]

It's also helpful to keep more than one personal account. For example, keep a personal deposit account, bills account and multiple savings accounts for various goals.

4. Allocate each payment you receive. Now, this is where the magic happens. Each time you get paid, allocate money according to the percentages of your budget. Say you're a freelance photographer and you receive a $2,000 check for a wedding shoot. The money should first go to your business account. After that, you can allocate money to each category of your budget.

Using the budget example from above, you would keep $400, or 20 percent, for taxes in your business account. Next, you would allocate $900 for bills, $400 for retirement, $200 for donations, and $100 for travel.

Why does this work? Whenever you receive a payment, this strategy helps you distribute the right amount of cash to all areas of your budget. Using this method, you can also avoid spending too much money in one place when large checks come in.

It's common to go through financial growing pains while self-employed, but it's also possible to take control of your budget. If you're still in the planning stages before taking the leap into self-employment, it's smart to save several months' worth of expenses as a security net to fall back on to avoid money stress while growing your business.

For an extra savings push, tools, such as Qapital and Digit, can help you save automatically without significantly changing your money habits.

Tiffany "The Budgetnista" Aliche is a financial educator, bestselling author and founder of TheBudgetnista.com. Through her LIVE RICHER Challenge movement, she's helped thousands of women worldwide begin to take control of their finances.

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