How To Budget When You're Self-Employed - The Frugal Farm Wife (2024)

Are you learning how to budget when you’re self-employed? This article will break down exactly how we divide our money, and why we do it this way.

First let me start by saying that I’m not an accountant, or any kind of financial expert. The things I’m sharing here are my opinion only, and what has worked for me.

My background

Throughout my childhood, my dad went bak and forth between being a W2 employee at a factory, and being an owner-operator truck driver. Then when I was about eleven, he sold everything and went “all in” to become a professional farrier, taking his knowledge of hoof anatomy to the next level by getting a top-level farrier certification.

So, I’m no stranger to self-employment, and getting a W2 job was never in my life plan.

I’ve been self-employed my entire life.

Actually, my plan after getting married was to become a full-time mom, but after a short stint as a broke full-time mom, I started building online businesses, which allowed me to be home full-time, but also be self-employed and no longer broke.

It was at this point that I had to learn how to budget self-employed income well, because letting it all come and go from one bank account and spending as little as possible just wasn’t cutting it anymore.

I needed to know exactly how much I should allot for business expenses, make sure I had enough to cover federal taxes, and work toward retirement, while accounting for daily life expenses. I needed to know how to budget when you’re self-employed.

My top resource for budgeting when you’re self-employed is Mike Machalowiz’s book Profit First, and my own method of budgeting is based on his system. (If you don’t have time to read, I highly recommend listening to Profit First on Audible – you will still get access to all the worksheets and graphics.)

What Happened

When we got married, Gabe and I had one joint account, and I was always afraid that in Gabe’s checkbook shuffle of losing one checkbook and starting another, we’d lose track of what we had and overdraft. (this was before online banking)

I hated feeling so out of control, like I was still this child who didn’t really know what was going on, and had no control over our financial future.

Helpless. How could I impact our finances if I couldn’t account for where money was going?

So I took steps to get in charge.

NOT to take control away from my husband, but to get clarity, to be able to bring facts and figures into our money conversations. And yes, to influence my husband’s decisions with that information.

See, you can do a lot with just a little money, if you get in charge of your budget and tell your money where to go, but in order to do that, you have to know exactly what you have.

So here are the steps I took to get in charge of my budget:

How To Budget When You’re Self-Employed

Open more bank accounts

1. Checking account for income. As a self-employed couple, instead of getting one big check twice monthly, we get payments of as little as $6.50 many times throughout the day. So it’s important for us to have a dedicated income account where the money can collect throughout the month until we’re ready to do our accounting and divide it up on the first of every month.
   
   
2. Checking account for business expenses.On the first of each month, we account for all of our income, and divide it up. 30% goes back into the business expenses account. Any and every expense in operating our business – buying supplies, advertising, hired help, gets taken out of this account. Our business doesn’t go into debt, or consume more than that 30%. This keeps us from becoming the infamous cobblers children who go without shoes.
3. Savings account for taxes. Since we’re self-employed we don’t have anyone withholding income for Uncle Sam, so to make sure we have that covered come tax time, we take out 15% of our total income, and put it in this tax savings account, hoping that we won’t need it all.
4. Checking account for personal use – “Owner Pay”.Since 30% goes back into the business, and 15% goes toward taxes, that leaves us with 55% of total income for personal use or “Owner Pay”. Part of this 55% goes into our personal use checking account, but the amount varies depending on what we need for the month, and how much we put into savings.
5. Mandatory Savings.The percentage of income put into this account varies depending on how much income we generated the month prior, and how much we need for living expenses, but we have big investing goals, so we prioritize it as much as we can. Our mandatory savings is 5% each month, which may not be much, but we’re dedicated to puttingsomethingin savings every month because as far as I know, nobody else is out there saving money for my retirement. 😉

This method of budgeting requires that we essentially live off of last months money, because we let our income collect into one account throughout the month, and only begin using it after we divide it up on the first of the next month.

Separating the money we intend to invest out of our checking account ensures that we can’t “accidentally” spend it, and that we always have an emergency fund available for real emergencies.

It can be difficult to get to that place, but it’s 100% worthwhile. I’ve detailed the how’s and why in this article how to live on last month’s money.

Having these accounts puts us in charge of our budget with solid numbers every month to worth with.

There is no question about what we can afford, because it’s all laid out for us in those five bank accounts.

We’re in charge of our budget, we each know what’s going on any time we log in, without having complicated conversations about budgeting.

Decisions are minimized by pre-determining the percentages going into business and tax, so there is no more talk without action – there is just sitting down at the beginning of each month, and deciding how much goes into living expenses, and how much goes into savings.

There was a little work up front, and a raised eyebrow from the bank teller when I walked in and asked to open all those new accounts, and it’s been well worth it.

This doesn’t necessarily eliminate the nitty-gritty of determining how much you need to budget for groceries or car insurance, but it forces you to figure it out so you know how much to transfer into your personal checking for the month.