Best Budgeting Practices For Solopreneurs

Being a solopreneur comes with many of the same rewards other self-employed business owners reap but also some unique challenges, including fluctuating income and out-of-ordinary expenses -- both of which can make it tricky to create and follow a budget.

The Department of Labor estimates there are more than 25.5 million people like you running businesses on your own, without any employees. And financial experts acknowledge the difficulty solopreneurs and other small business owners can face when it comes to managing expenses with a fluctuating income. And that’s one reason a budget is so important.

“By creating and sticking to a budget, you can ensure that there is enough cash available for day-to-day responsibilities as well as any emergencies that crop up,” writes April Maguire in an article for the Intuit Quickbooks website. 

Here are the best practices for budgeting as a solopreneur.

Create an annual and monthly budget.

Financial experts and software suggest creating an annual budget, then break it down by month. This way you can see where your income is expected and anticipate your monthly and quarterly expenses -- to track and plan for any trends.

“Failing to maintain a budget prevents entrepreneurs from making informed decisions and identifying problems before it's too late,” says Matt Baker, vice president of corporate strategy and international expansion for the accounting software provider FreshBooks, in a business.com article by Chad Books.

Maintaining a budget, he says, means you’re not caught holding a bill on tax day that “you either can't afford or that is going to blow a hole in your finances.”

Make a fallback fund. 

This is also called a backbone fund. Look at it as a safety net, much like that three-months-saved emergency fund that’s recommended in personal finance. It can keep you afloat when your income ebbs or other unexpected expenses are thrown your way, and ease your anxiety if a cash flow issue hits.  

To start a backbone fund, the freelancing platform Upwork suggests stashing away enough money to cover a month’s worth of your expenses, such as housing, food, utilities, taxes, etc., but then keep building it until you have a year’s worth in the fund. (Yes, a year!)

It’s true a backbone fund sounds a lot like a savings account, the Upwork post says, and in certain situations it is a business savings account. But think of the backbone fund like a cushion for your business.

Schedule time to go over your finances regularly.

Check in often on your budget. Put it on your weekly or monthly calendar – schedule a regular finance meeting with yourself. Also this could be a good time to touch base with your accountant if you have one. 

Having a prescheduled check-up on your business income, expenses and taxes is a good way to monitor and stay on track with your budget and incorporate any unexpected changes or adjustments.

Budget for your retirement.

Everyone gets this advice, regardless of the size of your business. Such is the case for solopreneurs too: incorporate retirement savings into your budget.

There’s actually a retirement account designed specifically for solopreneurs, the solo 401(k). It works like a traditional 401(k) or employer-sponsored plan but only business owners with no full-time employees can set one up and contribute.

“The nice thing about a solo 401(k) is you get to pick your tax advantage," writes Arielle O’Shea on NerdWallet.com.

Choose a traditional solo 401(k) and your contributions reduce your income in the year they are made. In that case, distributions in retirement will be taxed as ordinary income. The alternative is the Roth solo 401(k), which offers no initial tax break but allows you to take distributions in retirement tax-free.

Use a business bank account and credit card.

Be sure to keep your personal and business banking accounts separate – this can make tracking business vs. personal expenses easier, and your budget more manageable to maintain. Same deal when it comes to credit cards.  

 A business credit card can help solopreneurs and other small businesses with organization and record-keeping, writes Rebecca Lake in U.S. News

"For people who are self-employed, it may often times feel like their personal and business lives are one and the same," says Jay Singer, senior vice president, global small and medium enterprises at Mastercard, in the U.S. News article. "Having separate financial accounts helps keep those flows organized and accounting records straight."

Make two budgets.

In her QuickBooks article, Maguire suggests taking the budgeting thing a step further – create two budgets – one that reflects your current income level and another second budget, what she calls “an inspirational budget as impetus to increase your earning power.”

“Not only can this second budget inspire you to pursue higher-value clients and take on new jobs, but it may also encourage you to cut costs,” she writes.

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