Dealing with Unpredictable Income
Now let's really dig into dealing with an unpredictable income. Zero sum budgeting is a great style, but it might not be what works best for you, so here are some other techniques that you can be using. First, you really need to calculate your bare minimum number. So how much so I need to just straight up get by? Lights are on, rent is paid, debts are paid off, food's on the table, perhaps childcare is paid for, and I can keep my business running. What is that number for yourself? Also don't forget about taxes when you're calculating that number, cause I think some of the times we think oh, all I need to make is at least $2000, and we forget oh, every time I get paid I need to put money aside for taxes. Rule of thumb is generally 30%. We're about to dig into that but make sure that you tack taxes on to whatever your bare minimum number is. Putting away at least 30% for retirement. This is the rule of thumb. I have another one that I will give to you in a minute, but anybody who earns a...
variable income or if you're traditionally employed and have a side hustle, it's also really great for you to be putting money aside for taxes, cause you might get to a point where you still have to be paying quarterly estimated taxes on your side hustle. You can speak to an accountant more about that, but just an idea. But if you are self-employed, every quarter you have to pay taxes, they don't want you to just wait until the end of the year. Sometimes that tax bill comes in and it feels very overwhelming, because you do not have the money saved. When you get paid as a freelancer, generally taxes have not been taken out so you have to do it yourself. My recommendation is that you have a savings account set up. Mine is actually called Uncle Sam's Money. And every single time I get a paycheck, I actually put 45% of that paycheck into my Uncle Sam account, because for me that's a forced way to be saving for retirement in addition to my taxes. And also as a self employed person, you have to pay self employment tax and that's money that's going towards Medicare and Social Security. So it's not just about your federal and your state taxes, but it's also about that SE tax as well. Thirty percent is a generally good rule of thumb, typically will get you enough money in order to be able to pay those taxes, but if you want to be force saving for retirement, inch it up a little bit maybe 35-40%. Next is to build a savings buffer for your bills. What I found really helpful when I transitioned from a stable to a variable income, was having a checking account that was just earmarked for all of my bills. That's what I pay rent out of, my renter's insurance, my utilities, my cell phone, everything is in there, and my goal is to three months worth of living expenses in that account at any given time. Three months of my bare minimum number, and it's a way that I can separate that from my regular spending. It's in a completely separate checking account than my regular day-to-day spending, and that for me visually especially has been really helpful, and it means if I have a lean month, I don't necessarily have to dig into my emergency savings. I have this extra little buffer that I've built for myself, so you can kinda think of it as emergency savings just for your day-to-day bills.
I have a question.
So when you're talking about all these different checking accounts and savings accounts you have, are these all when you log in to one place or do you just have different bank accounts with different checking, I'm just confused.
Sure, so and I get to get into a little bit more with pay yourself a salary. I actually bank at three different banks. I have one bank that's just for business. It's purely my business account as where all of my money now gets paid into or if I get a check I deposit it into my business account. In a second I'll talk about paying yourself a salary. Then I also have my personal checking accounts, and I have two separate banks for that. Again back to that idea that of, I put a system in place, so my savings is out of sight, out of mind. So my main checking, so where my main bills checking is and where my day-to-day spending is in one bank, and then another bank that has a much higher interest rate on their savings account is where I keep all of my money that's in savings. I have one checking account at that bank just for kinda when I set it up it just sorta happened that way. I don't use it all that often, but that's where all my different savings accounts are, and I personally have different savings accounts for different goals, which we will get to in goal setting. It's a personal preference. Some people do not like the idea of having a bunch of different accounts, I do because I'm a very visual person, so logging in and actually seeing this is money for bills, this is money for personal spend. I find very, very helpful in making sure that I'm monitoring my money. Because you can see this nice influx buffer of cash in your account, and you might think, oh I have that to spend this month, when that really was money that was meant to protect you in a time of lean down kinda payment months. One thing that I have moved to doing this this year. I mentioned in the last segment, keep personal and business as separate as possible, when you are self-employed. This is really important, especially if you're ever going to get audited. It just keeps a nice streamline. None of us want to go through it, but we might. But it also really helps make sure that you have enough for your business and you have enough for your real life. And I have started to actually pay myself a salary, which helps stabilize my income. So every single time I get paid, I put money into my, immediately percentage for me it's 45%, but it should be 30% at least. Goes in to my savings account for a check, like the minute I see it hit my account, I do this. And then the rest of it, just stays stockpiling in this business checking account, so that when I have a really great month, you know you're stockpiling some really good money in there, and you're not then tempted to spend it, cause you can, cause it's there. And then when you have a lean month, you have some surplus, and what you can do is you can start to pay yourself a salary, and you have to calculate for yourself what actually feels like a stable amount. Maybe you just start by doing your bare bones needs plus a little bit, to have a little bit discretionary spend, but then you consistently every single month, pay yourself almost as if you are your own employee of your business. You say, every month I'm paying, hypothetically let's say $3000,goes into my bank account. This is gonna go towards my bills, my savings, and the money I have to spend. So like I said, when you have great months, cause we do, that's part of variable income, it goes up and it goes down. So when you have those great months, your now stockpiling that money for the future, as opposed to putting it in your regular checking account, and let's be honest, probably spending it. This also, it helps with the volatility of the cycle, and it helps again, separate personal and business, which is really important.