Budgeting is an essential skill for successful money management and it should be practised by all persons, regardless of their income level. Without a clear idea of the real cost of your lifestyle, you may make improper spending decisions and jeopardise your future financial well-being.

Preparing a spending plan is even more critical if you are self-employed, especially if your income is generated sporadically and you cannot predict when your next dollar will be earned. While there is freedom in being your own boss, there are numerous challenges with not having a regular pay cheque.

If you carry out proper planning by utilising a comprehensive budget, it can help you to overcome some of the feelings of insecurity and apprehension that may be triggered by possible income instability. Here’s how creating a spending plan can be advantageous for self-employed persons.

Determine all your expenses

The first priority in your budget plan is to ensure that you have accounted for all the things you need to, or want to spend money on for a year. This helps you to calculate how much it really costs you to live and to determine how best your business can generate the income you require to cover your bills.

Make a list of your expected spending items in categories such as household, personal care, medical, transportation, children, and financial obligations. To make this process simpler, you can download a budget form at financiallysmart.org, which will have various types of expenses already laid out for you.

Plan your income earning

After adding up your average monthly costs, consider if your business can pay you enough money to deal with all your bills. Be honest with yourself; if you have not been making enough sales to cover basic business costs, then you may have to seek other income sources for your personal expenses.

The monthly income requirement indicated by your budget should be used as a target to encourage you to become more productive and consistent in earning. Calculate how many extra items you would need to sell, or additional clients you need to serve each month, in order to achieve your income goal.

Time your bill payments

The budget will also help you to identify the specific periods when you need to pay for occasional bills such as school fees, car insurance and property tax. Very often, persons are blindsided by expenses that do not occur every month, and end up being forced to borrow money to deal with these costs.

Instead of incurring debt, try to organise your sales efforts to match the due dates of occasional bills. You could have special promotions in the preceding months, so that you will have enough extra cash. You could also put aside a little money each month so that it’s easier to meet these ad hoc payments.

Put aside before your spend

When allocating your money, remember that not all of your profit should be used for personal needs. You should hold back some of the money you generate for future business requirements such as purchasing raw materials, upgrading your equipment or increasing your marketing efforts.

In addition, although you don’t have to pay statutory deductions and taxes to the government every month like employees do, don’t forget that some of your income is required to cover these costs. If you fail to make allocations for statutory expenses, it can become a major burden at tax time.

Understand your tax obligations

In Jamaica, self-employed persons are required to pay three per cent (3%) of their statutory income to the National Housing Trust; five per cent (5%) of statutory income, up to a maximum of J$75,000, to the National Insurance Scheme; and two and a quarter per cent (2.25%) of earnings for education tax.

In addition, once you have generated net income after allowable expenses in excess of the tax-free threshold of J$507,312 in a calendar year, you must pay twenty-five per cent (25%) of this profit as income tax. For more details, contact the Tax Administration of Jamaica at 1-888-TAX-HELP.

Prepare to spend less than you earn

When calculating how much you really need to earn in business to cover your personal bills, you should inflate this amount to account for non-spending requirements. These would include your savings and investments, tax obligations, and charitable donations.

For example, if you save 10 per cent for the future, give another 10 per cent to church or charity, and pay on average 20 to 30 per cent (after allowable expenses) for statutory costs, then you could have only about half of your income remaining to deal with your general living expenses.

Your budget calculator will make it easier for you to examine all the figures to determine exactly how much you need to earn as a self-employed person. It is an indispensable resource that can help you to set and achieve realistic income targets that will allow you to enjoy a balanced, fulfilling life.

Copyright © 2014 Cherryl Hanson Simpson. No reproduction without written consent.

Originally published in The Daily Observer, October 30, 2014

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Cherryl is a money coach and business mentor, and founder of Financially S.M.A.R.T. Services. See more of her work at www.entrepreneursinjamaica.com and www.financiallysmart.org. Contact Cherryl