Budgeting is hard enough for people in regular employment, who need to cover today’s bills alongside tomorrow’s emergency savings and some investment in their future. But if you’re a self-employed sole trader, you’ve got three more financial headaches on the list: setting aside the right amounts for the ATO, covering your own super contributions, and getting through the stretches when there’s no income coming in at all.
It can feel like a formidable task, and there are plenty of sole traders across Newcastle and the Hunter wrestling with exactly this. The good news is that with the right advice, you can build a budget that helps you navigate the whole minefield. Here’s how, step by step.
Structure your budget around your minimum reliable income
If contracting or freelancing is your only income source, ask yourself: what’s the lowest amount you can reasonably expect to earn in a year? Base your budget on that figure, not on your best-case expectations.
Then set your monthly household spending target close to your lowest expected monthly income, and direct any surplus from the better months towards savings and investment.
Separate business and personal finances
You’ll want separate bank transaction accounts for your business and your household income and expenses. Your household income then becomes a regular “salary” you pay yourself from the business account.
If it helps, create two budgets, one household and one business, and keep a separate account again for the money you set aside to cover income tax and super.
Budget for unpaid working time
Employees get paid for public holidays, sick days and annual leave. As a self-employed person, you don’t. You also need to allow for unpaid time spent on administration, bookkeeping, marketing and professional development.
It’s worth being realistic here: you may only be able to bill clients for 25 to 30 hours a week, even though you’re working full-time.
Expect slow-paying clients
Your budget should assume that not every invoice will be paid on time. Your income may also vary seasonally, and some work you’ve been promised will inevitably get cancelled.
Try to avoid the classic mistake of committing to expenses based on invoices you’ve issued but haven’t actually been paid for yet.
Treat tax as an unavoidable expense, not an afterthought
Employees can rely on their employer making PAYG deductions before their salary hits the bank. The self-employed can’t, which means resisting the temptation to treat every dollar received as business income. Some of it is GST (if you’re registered) and some of it is earmarked for income tax through PAYG instalments, both usually payable quarterly to the ATO when you lodge your Business Activity Statement (BAS).
As a rule of thumb, set aside 25 to 30% of your gross revenue for income tax. Add another 10% if your revenue includes GST, and ideally another 12% for your own super contributions.
Plan for superannuation
Sole traders aren’t legally required to pay super contributions for themselves, but it’s a smart move to provide for your retirement in a tax-concessional environment. You may also be able to claim a tax deduction for your personal super contributions.
An adviser can help you set up contributions into an external or self-managed fund and talk through the pros and cons of claiming them as a deduction. It’s a core part of the retirement planning work we do with self-employed clients.
Level out irregular expenses
Plenty of expenses land quarterly or annually rather than weekly or monthly. On the personal side, think life insurance, car registration and council rates. On the business side, professional indemnity insurance, accounting fees, software subscriptions and equipment replacement.
Where you can, take advantage of monthly payment plans, provided there’s no financial penalty for doing so. Otherwise, add these bills up, divide by 12, and set that amount aside each month.
Consider fixed expenses cautiously before committing
Large fixed commitments, like a mortgage, vehicle finance or an equipment lease, can really put the squeeze on you if income falls short of expectations. Before signing anything, think carefully about how you’d manage those repayments in a slow month.
Create a cash buffer
Aim to build a cash reserve capable of covering both your household and business expenses for three to six months in an emergency. That buffer gives you flexibility if you lose a major client, payments get delayed, or you’re temporarily unable to work.
Work with a financial adviser
Sole traders face a lot of financial pressure, and it can become a genuine distraction that keeps you from focusing on actually running your business. Bringing in a financial adviser takes a fair bit of that weight off, helping you build and maintain a budget that covers your current needs while still building towards your future security.
This is exactly the sort of groundwork we cover with self-employed clients as part of our financial planning service, and it sets the foundation for longer-term wealth creation.
Talk to Virtuous Wealth
If you’re self-employed and want a hand building a budget that actually holds up when income is lumpy, we’d love to have a chat. Get in touch with our Newcastle team to book a no-obligation conversation.
This article provides general information only and does not take into account your personal objectives, financial situation or needs. Before acting on any information, you should consider its appropriateness, having regard to your own circumstances, and seek personal financial advice from a licensed adviser.
