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Does Your Income Fluctuate?

January 29, 2011

Years ago my sister (Jody) asked me, in a round about way, how do I plan on going on vacation or buy a house when my income (as a self-employed person) is like a roller coaster; some months high, other months low. I used to tell her that I first decide what I want (say a vacation that cost $2000.), and then needed to figure out how many new clients I needed to pay for it…then I would just work real hard!  The reality is that “working real hard” is not always the way to go. Developing a budget, that is realistic, to obtain the things you want, is the beginning.

The key is to give yourself a regular paycheck. First project your personal income for the upcoming year. Traditionally, a small business owner with variable income might build a budget based on average income earned during the previous 12 months. But as the Great Recession has demonstrated, revenues can decline, which wreaks havoc with the “average-income” method. A more guarded approach projects future income based on the last amount earned during the previous year. For example, maybe your average income in 2010 was $6,000 per month, but you earned only $4,800 in June. To be safe, tighten your belt and allow yourself only $4,800 per month in 2011. Once you’ve established a monthly salary, it’s time to draw a paycheck – and save the rest of your cash for the future. To make this work, use two different bank accounts:

  1. A designated savings account owned by your business. This holding account should stand apart from your other business accounts.
  2. Your personal savings account.

After paying business expenses each month, write yourself a paycheck on the salary you calculated. Move any remaining cash into your savings account, where it will accumulate during the year. At the end of each year, do three things. Reset your salary based on the previous year’s income. If needed, use the money pooled in your business savings account to pay taxes. Finally, if there’s money left after paying taxes, pull it to your personal account as a year-end bonus.

This system may seem complex, but it’s simple in practice. Best of all effective. Drawing a salary based on your minimum monthly income creates a safety buffer – and that brings peace of mind, which allows you to focus on more important things, like your business. Let GAI (www.gunwel.com) help you with your budgeting. We are here for you for all of your financial needs. Give us a call at 212-979-6830 or stop by for a visit. I guess it is time to tell Jody the truth about my budget!

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