Get Rich Slowly has a great post on How to budget for an irregular income; it’s definitely worth a read on your coffee break. Two of J.D.’s tips that I particularly agree with are:
- Use separate business and personal accounts and pay yourself from the business account as if you were an employee. I started doing this about three years ago and it made a huge difference in my financial life. I pay myself equal amounts on the 5th, the 15th and the 25th of each month regardless of how much I’m earning. I’m not really given to overspending, but sometimes when I have a large “windfall” project, I give myself 10% of the money to spend on something I want but don’t really need. Otherwise I stick with the “salary” that I’ve set for myself and at the end of the year, I evaluate what amount I should pay myself for the upcoming year. If I have a big surplus in my business account, I take it as corporate profit (because I have an S-corporation) and pay that month’s personal credit card bill with it (and as we talked about in last winter’s post on Freelance frugality, I think that the number one principle of personal finance is to never, ever carry a credit card balance).
- If you have a spouse/partner, live off one income. The Thoughts on Translation household lives off one income and banks the other, which gives us a great deal of financial flexibility. If I have a very slow month, instead of putting the groceries on credit we just don’t save as much of my husband’s salary as we otherwise would have. I feel that an additional benefit of this strategy is that I can avoid taking low-paying work out of desperation, and inevitably the higher-paying work comes back. Granted, in order to do this we have made some choices that other people probably can’t or don’t want to make. One car (used, paid for in cash), prepaid cell phone, no cable TV, no household service providers (lawn, cleaning, child care etc.), maybe one meal out per month, virtually all clothing and household items purchased used or on mega-sale, lots of homegrown food, etc. However, all of these steps have allowed us to live pretty comfortably on one (sometimes irregular!) income.
Hi Corinne,
The principle of paying yourself a salary is a good one. I don’t adopt that exact approach, though the principle of what I do is the same.
Here in France, the amount of social security contributions you will be required to pay in any one year is almost impossibly hard to calculate (believe me, I’ve spent hours trying). You can make some monthly payments throughout the year, but inevitably face several large bills at the end of the year as the various organisations calculate how much you owe them based on actual income rather than the default income levels they use for their projections. My solution is simply to put 50% of all taxable income away in a savings account. The only time I access this account is when I have social security payments to make. Assuming my social security payments, in time, average out at less than 50% of taxable income, at some point in the future I’ll be able to decide what to do with the surplus.
For now, living on only half an income means being somewhat frugal at times, but it’s a great discipline to get into, and at least it means I don’t have to worry about how on earth I’m going to pay those social security bills at the end of the year.
Hi Corinne,
You are correct. However, it is not always possible to live on one income. We have 2 very young kids who need daycare, which is very expensive in Boston area. Add the mortgage payments on top of that and we end up needing both incomes. The situation should improve in 2012 when the oldest goes to kindergarten. It is odd that people always complain about college costs but seldom about daycare expenses.
Tapani
Great advice. I pay myself a salary on an as-needed basis, but my CPA is adovacating more regular payroll, and he suggested going through a payroll service, which I think is overkill (I also have an S-Corp). Once the end of the year comes around (my second with the S-Corp) I will talk to him about how to handle that detail. Excellent payroll strategy, and fantastic job on living on one income. Plus, you guys still do so much traveling — my hat is off to you! With that, let me put on my really cool gym clothes that I bought at the Salvation Army! 🙂