Self-Employed Budgeting Tips

tips-to-considerSamuel Peery over at the Getting Finances Done wrote a great post last week with some excellent tips on “Budgeting on a self-employed or irregular income.” The info he outlines is some of the best advice I’ve seen for those working from home or looking to make a go at it:

Use cash for out-of-control categories – Since you may not know when your next paycheck will be, it’s more important than ever to keep a tight grip on variable expenses that tend to get out-of-control.

Build up a short-term emergency fund (STEF) equivalent to four weeks of expenses – A STEF will help smooth out the bumps inherent in an irregular income

Determine the timing and priority of expenses ahead of time – Planning the order in which expenses must be paid and allocated will relieve a ton of stress. You’ll know exactly where your income needs to go before you even get it.

Create a sample budget as a reality check and baseline – A sample budget helps to ensure you are not only living within your means but also achieving your high-level, long-term financial goals.

There’s a lot of valuable advice and good planning tips. Well worth a read.

Invest in the Nest: Bootstrapping Your Home Business

Though much has been written about bootstrapping a business, I’m often surprised that many people I talk to about starting a home-based business don’t understand the concept. The term refers to “pulling oneself up by one’s bootstraps” meaning to rely on your own effort and your own financing. According to Investopedia, bootstrapping is:

A situation in which an entrepreneur starts a company with little capital. An individual is said to be boot strapping when he or she attempts to found and build a company from personal finances or from the operating revenues of the new company.

I love the self-reliant nature of bootstrapping, particularly when starting and running a home-based business. There’s a big misconception that starting any business is expensive, and requires business plans, investment strategies, and business loans. The idea behind bootstrapping is that you forgo all that and use your own know-how, creativity, hard work, and money (and as little money as possible) to get up and running.

bootstrapper

One of the biggest benefits of a nest-based company is low overhead. You’ll find many articles like this one citing “Small-business owners spend about $10,000 to start their companies, mostly out of their own pockets…” I’m so glad I didn’t have any of this info available to me when I started, otherwise I would have thought “there’s no way I can afford to start a business.” I always remind people that these types of startup costs are not typical of a home-based business.

It’s hard to know where to look for good bootstrapping advice. There are tons of resources on the inter-web on the best way to bootstrap your business, some good, some bad, and some just plain wrong. But two that I consistently recommend are Seth Godin’s The Bootstrapper’s Bible (download in PDF format), and Guy Kawasaki’s The Art of Bootstrapping (a companion post to the excellent book The Art of the Start).

Starting a business, any business, is hard work. The most important lesson that I’ve learned is to find something you enjoy, that utilizes your talents and passions, and to get started quickly and as cheaply as possible. If you love it, the work doesn’t seem as hard. And by working from home and being self-reliant, you keep expenses down, making profits so much easier to achieve.

Lets Jump Right In: Quitting Your Day Job

I thought I’d forgo the requisite “Hello World” first post and just jump right in. To learn more about me and this site, take a look at the About page.

bored guyOne of the more common questions I receive about working from home is “when should I quit my day job.” This can be one of the hardest decisions when it comes to launching a home-based venture. Sometimes, the answer is “never,” especially if your goal is simply to keep your business as a hobby, there for the soul purpose of just exploring an interest. If you don’t intend to make your unique talents and passion the fuel for your livelihood, then it only makes sense to stay put.

It’s when you plan to make your living from home, and build a business (or at least an additional income source) from your nest, that you have to decide how far you’re willing to go.

If you are the only breadwinner in your family, the decision becomes harder. The stability of a traditional job often isn’t painful enough to drive you to set out on your own. If you love your job, chances are you’re already using you unique talents and skills on a regular basis. The yearning comes from missing time with your family, the lack of purpose, and grinding away at a job where you can’t use those skills you know you are great at. But is that yearning strong enough to allow you to put your faith in your talents, your dedication, and your luck, and make the leap?

Here’s where a good mix of right-brain and left-brain really come into play. First, listen to your intuition. What’s your gut telling you to do? Do you see signs, little “coincidences” that point to your answer? What about your dreams? Often we work though these major life decisions in our sleep, but just don’t remember it. Make a conscious decision to take a look at your dreams, and maybe even ask yourself to send you some guidance in your sleep. Sometimes it’ll just come as an impression, and other times as a full blown dream movie pointing you towards the right answer. If you’re the kind of person who has learned to trust their gut, and listen to their intuition for guidance, this is an easy first step.

Once you’ve gotten a good feel as to what your heart’s telling you to do, take the logical left-brain approach to making the decision. Get a good handle on how much money you need to live. Most people never sit down and hash out what their true living expenses are. If you use something like Quicken, Microsoft Money, or Liquid Ledger, it’s much easier to do. If you use a paper register and statements, don’t let that stop you. You’ll just have to do more up-front work you get the numbers.

You’ll be amazed at what you actually spend each month. The first time I did this, I used Quicken to make up some reports. I actually had a chart and report for how much we spend on pizza each month. At one point Quicken asked if I wanted to make Tony’s Pizza (no relation) a regular automatic payment. That’s when it’s time to reassess living expenses.

Once you know how much you actually need to survive and what can be cut out, take a hard look at your proposed venture. Can you realistically make what you need each month? Doing some research on budgeting, personal finance, and your money values can go a long way to helping determine where you are and where you need to be.

If you’re a 2 income household, and one of you is looking at running a home-based business to be home with your kids, you might find it’s actually cheaper to stay home than work. This seems counter-intuitive, but when you add commuting cost, dry cleaning, parking, food away from home, day care, and the other expenses necessary for the working person, you may be surprise how much you’re actually netting each month.

Granted this is just a starting point, but these are the first exercises I recommend folks go through when they reach the point that they’re ready to the make the leap. Once you have a good framework, you’ll be more comfortable with your decision.