The Power of Planning
Budgeting for periodic expenses is an important facet of money management for everyone, especially for self-employed people whose income fluctuates from month to month. Taxes, business licensing, subscriptions, association memberships, and continuing education are just a few examples of the periodic expenses self-employed people face. By planning for the expenses in advance, you can save a little each month rather than have to come up with the money all at once when it is due.
Self-employed people need to remember the five P's: Prior Planning Prevents Poor Performance. While this is applicable to many aspects of life, budgeting is a habit where it is particularly powerful. Cash flow management is absolutely critical to a self-employed person's success, and avoiding sudden large outflows of cash reduces the ever-present stress level of every self-employed person.
The best way to budget for periodic expenses is to sit down at the beginning of the year and make a list of all the recurring periodic expenses you anticipate for the year. List everything you can think of: quarterly taxes, licensing fees, annual association dues, subscriptions to professional journals, any required continuing education, and any other large expense that occurs periodically throughout the year. Take the total and divide by 12. That will give you the amount you need to put away each month to meet those expenses. It is much easier to save a little each month to meet these expenses than it is to come up with the money all at once.
If you are paid on a commission or project basis, and you don't receive a steady, reliable stream of income, the calculation is a little different. The best way to figure out how much to put away each time you get paid is to take the amount of money you made last year and calculate what percentage of that figure represents your periodic expenses.
For example, if your periodic expenses were seven percent of your total income last year, you should save seven percent of every dollar you earn this year to meet your periodic expenses. If you want an even more accurate method, use the list of expenses you made for the current year and calculate what percentage of last year's income they represent and then use that percentage this year. Obviously, if you anticipate a significant increase or reduction in income for the current year, you should adjust your savings accordingly.
Perhaps the best way to budget for periodic expenses is to use one of the many free budgeting software packages that are available. The Wall Street Journal recommends MySpendingPlan.com, and it is excellent. By setting up a written budget, you take much of the guesswork out of where the money is going to come from when a major recurring expense arises.