But the first year was rough. I alternated between two modes of thinking about my self-employment earnings. In my euphoric mode, I couldn’t believe how easy it was to be successful and how many good-size checks showed up in my mailbox. I felt lucky and rich, or at least richer than I had been when I drew a regular paycheck. (This all took place when I was still confusing gross pay with net earnings.
My other mode was panic and desperation, when there were no checks in the mail. I thought I had sold my last article and would never make another dime or mortgage payment.
Four years later, I’ve calmed down some. I no longer think every check is my last, nor am I profligate with my big checks as soon as I get them. But my income–I’m paid by the article–can still vary by thousands of dollars from month to month, depending on what I’ve written and how quickly I’m paid. I’ve had to learn a few budgeting tricks for handling what I call roller-coaster income–a necessary evil for the self-employed.
Managing income through the ups and the downs is tough, both financially and emotionally. When income fluctuates, you have to learn a whole new method of cash management to make sure that, during the flush periods, you provide for the lean times.
Emotionally, the money you make is a measure of the success of your business, and irregular income can translate into cycles of exhilaration and self-doubt. Unless you learn to control those cycles, bad budgeting and self-defeating thoughts can jeopardize not only your solid credit rating but the growth prospects of your business.
KEEPING YOUR FISCAL BALANCE
Here are 11 ideas for handling irregular income:
Find one bread-and-butter client. Easier said than done, I know, but if you have even one client who will put you on retainer, give you regular work, and send you a check like clockwork, it makes self-employment much easier in all ways. So much so that it’s worth lowering your fees.
Be religious about your billing, urges Elaine Bedel, a fee-only financial planner who works out of her home in Indianapolis. “Even though I don’t like messing with the details of billing, I’ve set up a regular billing schedule and send out bills at least once a month or when the project ends,” she says. Many clients have their own internal schemes for handling invoices, so the earlier you can get the process going the sooner you will get paid. And since too many clients put single entrepreneurs at the bottom of their checks-to-write list, be good about sending late notices until you get paid.
Remember estimated taxes. Many experts recommend that you automatically deposit one-third to one-half of every check you receive into a separate business account to make sure you have enough for your quarterly estimated taxes. This is a sound path to self-imposed discipline, but it still doesn’t smooth out the rest of your income and expenses. However, it does prevent spring surprises, when you find you owe a few thousand dollars that you don’t have in taxes.
Pay yourself a regular salary. When Ross Levin, a Minneapolis financial planner, started his business, he put away a portion of every check for taxes and took what he needed for expenses from the remainder. But he felt uncomfortable with the income fluctuations. So after six months he started putting all of his earnings into one bank account and giving himself a regular paycheck, taking care to leave enough for tax payments.
Capitalize your newborn business with a savings reserve and a line of credit, suggests Robert Oberst, a Red Bank, New Jersey, certified financial planner, who borrowed $1,000 and drew it down $100 a week when he started his own business 20 years ago. Use that reserve for necessary business expenses and a regular salary. Even if you have to go into your credit line to keep your salary steady, do it, say both Levin and Oberst–though they caution that you should keep your salary to a minimum while you are building your business. Your willingness to capitalize your business with savings and borrow against it underscores your commitment to success. Says Oberst, “Without that [commitment], you might as well forget it.”
Use your computer. You can keep your business accounts in programs like Quicken and Managing Your Money (available for both MS-DOS and Macintosh systems), or you can tailor your own spreadsheets to do simple planning and cash-flow analysis. Use your computer to send out regular bills, to estimate how much you’ll need for taxes, and to plan a budget, so you’ll know how much you need to earn. Once you’ve kept figures on your computer for a while, you’ll be able to discern payment cycles. That can help you plan your expenses to coincide with your income.
Set monetary goals for yourself. Karen Maury, a Silver Spring, Maryland, real-estate agent, has been supporting her family for 14 years on commissions alone. She admits that while she ignores most of the sound budgeting techniques listed elsewhere in this article, she is firm about her financial goals. She keeps a calendar on her desk that has nothing on it but completed transactions. And she knows she has to have four sales a month to pay her bills. “It’s a kooky, silly trick, but it works for me,” she says. “When I have four marks on the calendar, I know I’ll make it. If I don’t, I work harder.”
Maury’s saving grace is that she’s careful about credit. She’s renovating her house a bit at a time, and she doesn’t borrow ahead to do what she needs. When she has a six-transaction month, she’ll use the extra money to fix another wall or replace a gutter. When she has a rare three-transaction month, she’ll put off any unnecessary expenses until her next transaction.
Turn down low-paying work. Avoid the urge to take too many low-paying fill-in jobs. Fill-in work is tricky. Sometimes it’s worth taking a lower-paying job for a period when you don’t have any other work. But if the job pays too little, or if you’re doing too much fill-in work, you might be wasting time that would be better spent marketing for higher-paying clients.
Financial planner Elaine Bedel recommends that you figure out exactly what you need to earn hourly to meet your overhead and provide you with a reasonable salary. “Consider the type of work you’re taking on and whether you’re taking the best advantage of your time,” she advises.
Take advantage of credit-card grace periods. Most financial planners would not endorse this tip, but it works in the real world. One professional writer knows the date when her bank cuts off charges for the monthly bill. So she can charge an expense, take advantage of the 25-day grace period until the charge is posted, and then pay it off in full without paying interest. Caution: Use this step as a last resort; it works only if you know you have money coming in that you haven’t seen yet. Charging when you have a check in the mail is “cash-flow management.” Charging when you don’t have the next client lined up is folly.
Market when you are busy. In my first year of freelancing, I sent out proposals when I didn’t have any assignments. Then I would get a flurry of assignments due all at once, and a few months later a flurry of checks. Then nothing, and I would market again. Now I’ve learned to smooth out the cycle by sending out the proposals when I’m in the middle of working on articles. I’ll take one day in a busy week to market. That way I always have proposals out, assignments in, and checks due.
Be good to yourself, in ways that don’t cost money. The seesaw income of the self-employed “is very destabilizing and stress-producing,” says Olivia Mellan, a Washington, D.C., psychotherapist who specializes in money conflicts for individuals and couples. “Be as stable as possible to offset that by setting up a regular work schedule, exercising regularly, taking walks, or paying yourself a salary.”
Says Mellan, “Try to separate your concept of self-worth from the money you make. And be very good to yourself, nurturing but not self-indulgent.”