How to Successfully Manage an Irregular Income
Starting your own business and becoming your own boss can be an exciting and daunting process. Being self-employed brings with it a lot of benefits, but it also often means you are now relying on an irregular income. However, there a few great ways in which you can manage your money which will help lay the groundwork for a more financially secure future.
Make Realistic Financial Projections
Part of being an entrepreneur involves being able to predict what the future holds for your business. A strong business plan will set you in good stead for creating realistic financial projections for the next year, two years or even 5 years. It is unlikely these projections will be 100% accurate, but they should help you gauge your current progress and whether you are on track. Remember to include all your outgoings and expenses in your financial plans to avoid being unable to pay any bills you overlooked in your planning. Having a relatively accurate idea of what your income will be over the coming year – no matter how irregular it may seem - will help you to calculate your potential tax bill and save accordingly. Many start-ups fail not because their business idea wasn’t a good one, but because they have failed to properly manage their finances.
Keep Track of Your Expenses
An added benefit of being self-employed is that you can claim back any of the expenses you have accrued over the tax year. Before you start, it is wise to research what you can and cannot claim for so that you can keep an accurate record of your outgoings for your end of tax year self-assessment. Knowing what you can legally claim on your expenses can save you thousands; say your turnover is £50,000, but you spent £10,000 in train fares, rent, business events etc, your taxable income will then be £40,000. It is helpful to know that if you work from home you can claim for a proportion of the lighting, heating, cleaning, insurance, council tax and general maintenance as part of your expenses.
Find a Pension Scheme Which Works for You
With so many things to consider when running your own business, it is easy to forget or not even consider your potential retirement and pension. However, the earlier you start to save for your retirement, the more you will have and the more secure your old age will be. If you are self-employed you are still entitled to a state pension as everyone else is, but you will still have to make a certain number of national insurance contributions over your working life. Most private pensions will require you to make regular monthly contributions so make sure you can budget for this and that your financial projections have taken this into account.
Keep on Top of Your Finances
Keep a record of everything coming in and everything going out in the form of receipts and bank statements. This will not only help you when it comes to bookkeeping, it will also help you when it comes to filling out your tax self-assessment. This way if you ever become part of a tax inspection to ensure you are paying the right amount, you have everything filed away to prove you are not underpaying. Keeping on top of your finances and bookkeeping will also help ensure that you do not miss any payments which could not only damage relationships with suppliers but also affect your credit rating; building a strong personal credit rating will become important when it comes to applying for loans or for a mortgage. Many financial institutions are now much warier about who they lend to after the 2008 banking crisis. It is partly for this reason that when you work for yourself and rely on an irregular income, you will need to have at least two years’ accounts, a track record of regular work and a good credit history to be eligible for a mortgage.
This might sound like obvious advice, but it can easy to make lots of micro-purchases on the likes of coffee and snacks and not realise how much you are actually spending monthly. There are lots of helpful apps out there which can keep track of your spending for you, freeing you up to concentrate on other tasks. Finance apps like B and Monzo will track everything you spend, make projections on your personal finances for the rest of the month and categorise all your expenses. Utilising this kind of technology when self-employed well help you make more sensible decisions with your money, which can be all so important when your income is unreliable.
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