Reduce Debt Increase Wealth

Budget self-employed

August 22, 2021 MisterChuck Season 2 Episode 75
Reduce Debt Increase Wealth
Budget self-employed
Show Notes Transcript

If you are self-employed or thinking about starting your own business here how you should do a budget. Included are the percentages for each category to consider when reviewing your monthly budget.

Article Links:

https://www.gobankingrates.com/saving-money/budgeting/recommended-budget-percentages/ By Kathy Evans

https://www.thebalance.com/how-to-figure-out-budget-percentages-for-money-goals-4171689 BY REBECCA LAKE

Charles McDonald:

Hello, I'm your host, Mr. Chuck, a retired accountant turn truck driver, I reduce my debt in a relatively short period of time. That reduction to achieve financial freedom takes commitment, confidence, determination. budgeting for this self employed, the biggest difference is the determining what you use for your income and your budget. If you work for an employer, it's simple. It's your net take home pay is what you use for your budget for yourself and your spouse, plus any other income that you may have on a regular basis, such as rental property. But if you're self employed, and you file a Schedule C, you're self employed by yourself. Or you're a partner in a partnership, or you're a farmer, or maybe you just have rental properties. And that's your basis, or your only source of income is from rental properties. Or you're a real estate salesperson with rental properties. We are determining your self employment income for your personal budget is gonna be different than if you work for employer. Everything else is gonna be the same as far as the categories for your expenses, and the percentages you should be using. So everybody is gonna benefit from this episode. The first part of it, I'm talking about self employed. As a self employed person, your taxes are based on your profit. At the end of the year. Maybe you have an accountant that does an income statement for you every month. That's a good indication of when you make your income. But the total income that you pay taxes are is determined for the entire year. So how do you determine what you use when you're doing your personal budget. In what you're going to be using would be the drawls that you take on a regular basis throughout the year. The drawls are, it's like your paycheck without any taxes coming out. So when you're self employed, you need to separate your business life from your personal life, which means you need a business checking account and a business savings account. And you need a personal checking account and a personal savings account. It's important, it's even more important if your income fluctuates seasonally. So you need to say money. And that savings account so you have the money to pay bills, when your income is down. When you're in business, you're going to have to pay all of your employees own employment taxes, your self employment taxes 15.3% Plus, you're gonna have to pay the federal income tax your state income tax and at other local income taxes, you may be subject to. So on your business level, you need to put aside in a saves count about 30% of your profit, so that you have the money available when the taxes become due. If you've been in business for multiple years, you're most likely making estimated tax payments for the federal and the state. So you need to have that money available and not spend it on buying inventory or paying your personal bills. Because that's money that's not belongs to you. It's gonna be due to the government sooner than you think. When I was self employed, my biggest expenses was paying the taxes, paying my own taxes would hurt me the most. So once you have that figured out, and you have a business, maybe you have inventory, maybe you don't, so you got to pay all your business expenses. So you because you can't sell anything if you don't have inventory. If you have people working for you, you got to pay payroll, and you got to pay payroll taxes, which is going to be at least on a monthly basis. And you got to have rent and utilities and all those type of things, maybe security for your business. And then when you have money left over, if that's, you know, if that happening, maybe you have a lot of money leftover, some of that should go into your business savings accounts. So you have to pay your income taxes later in the year. Some of it should be there as an emergency funds for when your sales drop off, you have money to pay the rent and utilities and your payroll when the when they are due. So you're going to be taken a draw, most likely on a monthly basis, or maybe a couple times a month. And that drawl is the money that you use to pay your personal expenses. So that is your income for your personal budget is the drawls that you take out of your business is the income for your personal budget. Everybody else, it's your net, take home pay. If you have an if you're an employee, and your net, take home pay, you don't have to worry about budgeting for taxes, because the taxes already came out your payroll check. You don't maybe you have health insurance. So you don't have the budget for your health insurance, because it's already paid. That's why you're using the net amount to determine the amount of incoming money you have for your personal budget. Then from there, you're going to have categories for expenses. The categories that are important are the four major categories, housing, transportation, food savings, I did not include health insurance, because if you because you may have it already deducted out of your paycheck, if you're self employed, maybe you're paying your health insurance from a spouse is paying it, maybe your health insurance is paid through your business account with it, which is fine, you can do that. The number one category is housing. And your housing includes your mortgage payment or your rent for an apartment, your utilities, maintenance, that category should not exceed 35% of your income. And these percentages are not using the 50 3020 rule. I'm not using 7030 rule or any of those other budgeting, I'm just saying 35% of your monthly income or less, you should be spending on housing. If your housing costs is 43% or higher, you will not be able to get any other loans, you may not be able to refinance and you will be in financial problems sooner than later. Food, food and clothes includes groceries, and dining out 15% if you're getting over 15% of your monthly income for food, then you got to look for ways to reduce it. Maybe you're dining out too often. You maybe you can go to the grocery store, and eat and more and save some money there. Transportation that's also 15% and includes your car payments, gas and maintenance on your automobiles and also insurance. That may be tough to stick to. But you need to try to get as close to 15% as possible. So that's 65% of your income is eaten up already. And three of these categories. Savings should be another 15% or more. The more you can save, the better off you're gonna be you're gonna have an emergency fund, and you're gonna be able to meet those unexpected and expected expenses. Is that pop up from time to time, because you never know. Also, you need if you have a tax liability, you need to budget for your income taxes, whether it's federal, state, or city, whatever level that you're paying. If you need other insurance, like your home insurance to be part of your housing, your automobile insurance is part of your transportation. Maybe you need life insurance, because you have a wife, and children. So if someone happened to you, you would leave some money for them to survive. Maybe a disability insurance, if something happens to you, you're unable to work as an insurance that kicks in for that. Anything else should be going in to your savings account, there's no an ifs or buts. Occasionally, you're going to buy clothes, that's gonna be a small percentages of your spending. Health would be for doctors and medic medication, maybe for vitamins, stuff like that. But your four major categories housing, food, transportation, and savings are the four major categories that you need to focus on. So housing is 35. Food is 15%, transportation is 15%. savings is whatever is leftover 20%, 30%. And then entertainment, clothing, could be another 10%, you want to increase your savings as much as possible. And if you don't have savings, and you have a lot of credit card debt, then you need to focus on you getting that credit card debt paid down and off. Because it's really expensive to maintain meant as a large credit card debt, you'll get behind and You'll never catch back up. So if you stick to those percentages in your budget, for those four main categories, that'll give you 35% of your monthly income or if you're self employed, your monthly draws to set aside for savings. But we know that's not gonna happen, because you got credit card debt, and you can't be living off your credit cards if you're self employed. Because they'll cost you and it could cost you your business if you're not careful. So part of that 35% you're going to use to pay off your credit card. My advice for getting out of credit card debt is one, quit raiding new debt to pay the minimum amount on each of your credit cards, and three, get an emergency fund set up savings account and have at least $500 I prefer $1,000, or even more, so that if something were to happen in the future, you have the money to pay for it without using a credit card. Or you can reduce the use of your credit cards so that you can get farther ahead instead of digging yourself deeper, and deeper and a hole. So 35% is a big number, some of that is gonna be going in your savings, and some of that is gonna be going to pay off your credit card debt. And some of that is going to be an outer miscellaneous category, such as clothing, maybe they care or other things that you are paying on a regular basis. Then once you get your budget set up and tune in, the first thing you need is to focus on seeing how close you are to those percentages of your income. Maybe you can do a spreadsheet and put in your monthly income and put housing. Do the math 35% of your monthly income. Food 15% transportation 15% that's 65% total remainder should be 35%. A can even break it down farther if you wish but those are the four major categories. He should at least focus on and if If you're over those percentages, what can you do to get the closer to end range? Now, let's say that your housing is at 38%. So you're a little bit over, that means that 35% for your credit cards and savings is going to be reduced down by 3%. Same thing with your transportation and food and entertainment, I call it food and entertainment, because going out to eat is entertainment for me, it may not be for you. But that's I consider dining out as a entertainment expense. From time to time, I don't do it all that often. So that's what you need to look at and focus on. So that you can stay with in your budget. As far as these percentages in the key areas, he should be focused on. The self employed is even more important, because you have all those business expenses. So you gotta be paying First, you have all the taxes, maybe you have employees, so you'll have payroll taxes, if you get behind on paying your payroll taxes, you're gonna get penalize, and you'll never get out from under it, and you'll get definitely get in trouble. If you think for filing, bankruptcy is gonna get you out of it, you are mistaken, because bankruptcy is not going to give you out of any federal income tax obligations that you may have in the future, or in the past. A budget is an important tool, it's a plan for your money. Failing to plan is planning to fail. Whether you're self employed, or you're work for somebody else, having a budget is important. It's a plan. And if you know where your money is going, you know how much you have coming in, you know how much is going out by different categories, you have that under control, you can keep your finances in check. And you can say for your future with no problem. It doesn't matter how much you make, the more money you make, the more likely you need a budget, because you'll tend to overspend. If you don't have a lot of money, you need the budget because you have to be careful where you're spending your money. I think the people with the lesser amount of money tend to be more careful on what they buy, because they know they can't afford to buy whatever they want. If you make a decent income, he might get careless on your spending. And before you know it, you have a bunch of credit card debt, because you got three or four credit cards with a$ 10,000 or $20,000 limit and you get out of hand and at 7% to 20% rate of interest, ou'll never get paid down. It'l take you forever. So you have t have a plan for your money. Y u got to know what your c rrent monthly expenses are gon a be. So that you can plan ahe d for those larger purchases. o you don't have to borrow a much money. So you have a igger downpayment. If you're go ng to buy a house or a normal bi l, so you can reduce what you b rrow, you can get paid off quick r and easier. without it b ing a struggle for your life. T at is what a budget will do fo you. So whether you're self emp oyed, or you're a partne in a partnership, or no matte what your business is all abou , you still need to have a pe sonal budget to take care o your personal life. Even if yo have a working spouse that help with the income you need. Stil have a budget, have it under co trol, know where your money is oing. And don't waste your money When I was an accountant, I had a lot of clients that really idn't have a clue about be ng in business versus their pe sonal expenses. They had one ragon account, they paid all their business stuff through it they paid all their personal stuff through it. They took ca h out whenever they want to go o t and have a good time or go g ocery store or whatever the were doing. And it may be a m life thorough accountant. Littl more difficult because now I s w All these things, and I ad to determine is that a bu iness expense, or is that a pe sonal expense. So if you can ke p all your business expenses, i your business accounts, and al your personal expenses, an your personal accounts, the your accountant doing your ncome statement and your balance sheet or in your statement o cash flow or whatever they're doing for you, whether it's a m nthly or quarterly basis, make their life easier. So they wo ld be able to do a better job fo you. So you know, how much money you're making, how much money you're not making, you'l know which are good, which months are bad, and we have some consistency, and your accounting. And that's what it's really all about being consistent with your finance, month in and month out. Both for your business and your personal. I hope this is gonna help you and I'll be back in one moment with my final thoughts. If you listen to this podcast using an apple podcast app, please rate and review this podcast. If you don't know how to rate and review within the apple podcast app, do a search even if you're already at reduced that increased wealth, you do a search. When the search is done, you click on reduce that increase wealth Eden scroll down through the episodes and towards the bottom, you'll see write a review, you can rate the stars Bay. If you click on write a review, you can write your comments and then click on the number of stars you wish to select. Having a budget whether you're self employed or working full time for somebody else is important. Determining what to use as your income, if you're self employed, is using the drawls you take from your business account. If you have more than one business, it may be from more than one business account. Your personal budget is still important. You still have to know how much income you need every month to pay your personal bills. So keeping it simple, keeping it defined with the four categories, housing, transportation, food savings. Savings also includes paying off credit card debt, or paying down your credit card debt. The more you can say, the better off you're going to be in the future. Because the less credit you'll need to use, and the less credit cards you use. Overall, your financial life will be better and easier. less stress, less debt. Failing to plan is planning to fail. So having a budget no matter how simple it is, keep it simple. So that you know and understand what your income and expenses are a month a month and you need to update it every month. So they can get a accurate picture so that you know exactly from time month to month, year to year, what your needs are to pay your personal bills.