ZERO BUDGET FOR THE SELF EMPLOYED

Since I wrote my post about How to create a zero-based budget, Ive had a lot of feedback asking how to
budget if youre self-employed or your income is irregular or unpredicitble. For the most part, the process is
the same regardless or how regular or irregular your income streams are. However, there are a few tips that
will help take the bumps out of budgeting an unpredictable income and may even make budgeting a
pleasant experience.

Overview

Use cash for out-of-control categories - Since you may not know when your next paycheck will be, its
more important than ever to keep a tight grip on variable expenses that tend to get out-of-control.

Build up a short-term emergency fund (STEF) equivalent to four weeks of expenses - A STEF will
help smooth out the bumps inherent in an irregular income

Determine the timing and priority of expenses ahead of time - Planning the order in which expenses
must be paid and allocated will relieve a ton of stress. Youll know exactly where your income needs to go
before you even get it.

Create a sample budget as a reality check and baseline - A sample budget helps to ensure you are not
only living within your means but also achieving your high-level, long-term financial goals.

Chunk your income and allocate it once or twice a month - By using your STEF as a shock-absorber
for fluctuations in income frequency, you can almost budget like a good-old corporate employee. While you
may not envy the corporate lifestyle, a steady paycheck sure makes budgeting easier. By allocating your
income in chunks you can budget like a corporate employee while keeping a self-employed lifestyle.

Create a just-in-time budget, allocating only what you need until the next paycheck - By
allocating only what you need until your next paycheck, youll be able to squeeze every penny out of each
inflow. Dont allocate your full grocery budget for the month if you only need half of it until your next
paycheck.

1. Use cash for out-of-control categories

My first recommendation is to use cash for variable expenses that tend to get out of control. This is crucial
for living within your means. Youll be amazed at how much you can reduce and control your spending just
by following this principle. Using cash will give you complete control over the total amount you spend in a
given category. When the cash is gone, its gone. This is especially important when you need to make the
most of each monetary inflow because you may not know when your next inflow will be.
2. Build up a short-term emergency fund (STEF) equivalent to four weeks
of expenses

The second step is to build up a short-term emergency fund equivalent to 4 weeks of expenses. This step
alone could save you hundreds of dollars in late fees and will give your life a little more peace. It will also
keep you from going into debt when an emergency hits. Most importantly for those with an irregular income,
a STEF will allow you more flexibility in budgeting and will help compensate for lost income during periods of
unemployment or under-employment. For detailed instructions on how to create and manage a STEF, see
my previous post.

What if your income varies drastically?

If your income varies drastically, you may want to increase your STEF to 2 or even 3 months of expenses.
The more drastic the fluctuations the more of an emergency fund youll need. The goal with the emergency
cushion is to store up funds in times of plenty to compensate for the times of scarcity. Start with a STEF of 4
weeks and adjust up as needed. However, dont adjust down. A STEF should be a minimum of 4 weeks of
expenses.

3. Create a Timing of Expenses list

A timing of expenses list simply shows all your bills and when you have to pay them. This will help in our
next step to prioritize the order in which expenses should be paid. It will also act as a reference to help
ensure you pay your bills on time. To avoid late fees, make sure all your bills are on auto-pay. If auto-pay is
not available, highlight the bill so youll always remember to pay it on time. As you write your bills down,
note on each item if the payment day changes from month to month. There are three main scenarios:

Paid on the same day each month (e.g. on the 15th

of every month)
Paid every x number of weeks (e.g. paid every other
Tuesday)

Paid every x number of days (e.g. paid every 30

days).

Once you create this list, updating it every month should only take a minute. After a few months you should
be able to predict within a day or two when each expense will occur.

4. Create a Priority of Expenses list

Note: The priority of expenses list and the timing of expenses list can be combined depending on
personal preference.
When living on an irregular income, its important to have clarity ahead of time about exactly where your
income will go when youre paid. Having a pre-determined plan combined with a STEF will help you sleep
well at night and decrease the feelings of impending doom and uncertainty that you wont be able to pay the
bills. The priority of expenses list is the main tool in helping you decide ahead of time where your income
will go. It is essentially a budget arranged chronologically and by importance, rather than by grouping
similar categories. You will refer to this list every time you are paid in order to determine where the money
goes.

First, list out all your bills in chronological order

List all your bills in chronological order. This will show you the hard landscape that your other categories
have to fit around.

Next, list out the rest of your remaining budget categories in order of importance

For most, this list will probably start with necessities like grocery and clothing, followed by high-priority
items like savings (STEF, retirement, long-term savings) and debt reduction. Of course, housing would also
be considered a necessity but is probably listed under bills.

As an example, my list might be ordered like this:

Bills (in order of date due)

o Mortgage - 12th

o Utilities - Every third wednesday

o Car payment - 23rd

Allocations (in order of importance)

o Grocery

o Gas

o Cushion

o STEF (if needed)

o Retirement savings

o Medical

o Car maintenance
 o Haircut

This is an extremely abreviated list but you get the picture. After the bills, the most important categories are
first and the least important, last. In other words, I first need to make sure I eat and can pay for necessary
travel. Then I want to make sure I pay myself (retirement savings) and replenish any STEF if needed.
Expenses like medical and car maintenance may not be used every month but will accumulate over time.
Therefore it usually wont matter when in the month I assign those allocations. If I happen to be sick early
in the month, I could either use medical funds already allocated in previous months or move that expense
up on the list for just that month. Finally, I figure I can allocate my haircut last. If I have a bad month, I
could go without one entirely.

Your priority of expenses list shouldnt vary much, if at all, from month to month. Include all your budget
categories, even if they dont apply every month. If you have categories that dont apply in a certain month
(like birthdays), just skip it and move to the next category when allocating funds.

5. Create a sample budget as a reality check and baseline

Having an unpredictable income makes it hard to ensure youre meeting all your financial obligations, not to
mention your financial goals. Therefore, its important to create a sample budget based on averages to see if
you can meet your obligations AND achieve your goals, despite fluctuating income. The sample budget will
give you a baseline from which you will vary from month to month based on your actual income. You should
update your sample budget whenever you have a significant change in overall income or expenses to ensure
youre still on track with your long-term financial goals.

First, calculate your average income over 6-12 months. Then calculate your typical monthly expenses
including contributions to savings and other financial goals (e.g. debt reduction). Enter in budget amounts
for a sample month including these income and expense figures.

If you cant meet all your obligations AND financial goals on your current average income, youre due for a
change. Otherwise you will never get ahead and always be flirting with increased debt. You need to
eliminate unecessary expenses or find additional income streams until you can meet all your obligations,
necessities, AND savings goals on your average income. In some cases, a dramatic change in lifestyle may
be in order.

6. Creating your actual budget - tips and tricks

Now its time to create your actual budget. All the steps until now have helped you create a solid set of
reference materials to help you make budget decisions. In fact, youve basically made all the decisions about
your budget already. Now you simply need to adjust the timing of payments and allocations based on when
your income is available and how much there is.

Dealing with income

There are two ways to deal with income depending on how frequently youre paid. If inflows are infrequent -
roughly once or twice a month - treat each check individually and allocate it only for the time period until
your next check. If inflows are frequent - roughly more than four times a month - group the inflows and
allocate them once or twice a month.

Allocate infrequent inflows check by check

If youre paid once or twice a month, its most efficient to allocate each check individually for the time period
until your next check. Lets look at an example. Lets assume you are paid $2,000 on the first of the month
and you anticipate youll be paid again in ten days. Refer to your priority of expenses list, determine which
bills are due in the next ten days, and allocate the $2,000 accordingly. If the $2,000 doesnt cover all your
bills, or it doesnt cover the bills and your necessities (e.g. food) for the next 10 days, use funds from your
STEF and allocate it as needed. In this case you would designate the STEF amount used as income on your
budget.

If the $2,000 covers all your bills and necessities for 10 days, continue on down your priority of expenses
list allocating until the $2,000 runs out. Remember, after your necessities are allocated, replenishing your
STEF should take top priority.

Allocate frequent inflows in chunks

If you recieve inflows more than four times a month, its easiest to allocate your income in chunks rather
than each inflow individually. If you recieve your income in the form of checks, save them up and deposit
them twice a month. If your income is automatically deposited into a bank account, just wait and allocate it
all every two weeks. Its easier to allocate a larger chunk of income twice a month than to constantly be
allocating fragmented deposits. With your full STEF in place, youll be able to safely deal with income twice a
month without worrying about negative bank account balances. The STEF acts as a shock absorber, allowing
you to budget almost as though you had a regular income.

Split up single budget categories and allocate them in smaller pieces to create a just-
in-time budget

Occaisionally you may want to split up a single category, allocating part of it with the current inflow and part
with a later inflow. If income is tight, this type of optimization will help you squeeze every penny out of a
paycheck. By doing so, you create a just-in-time budgeting system, allocating only what you need, when
you need it.

For example, Lets say you have an inflow of $2,000 at the beginning of the month. $1,000 may go to a
housing payment, $200 to utilities, and $300 for a car payment leaving you with $500 to allocate. Even
though you could fully fund a $300 grocery budget category with the remainder, doing so wouldnt leave
enough for other categories like gas, personal, and cushion. Instead, if you think your next inflow will be in
two weeks, just allocate what you think youll spend in the next two weeks on each budget category.
Instead of allocating the full $300 for grocery, you might be able to get by on $150, leaving you more
money to allocate to your other important categories and making it less likely youll need to dip into your
STEF.

Allocate bills/obligations first, then everything else

Every time you allocate money for a period, follow the priority of expenses list, first allocating your bills
and obligations and then allocating the rest to your other expense categories according to priority. Your
allocations may vary from month to month but having the priority of expenses list should make the
process much easier.

What if I make more than average in a month?

If you make more than average in a month you should have already referred to your priority of expenses
list and funded all your budget categories. With the remaining income you should fully replenish your STEF
to prepare for future months when you recieve less than average income. Allocate the rest however you
want.

What if I make less than average in a month?

First cover all the expenses you can from your allocated categories. Hopefully you will already have most of
your expenses allocated already. If you run out of income to allocate, you can either take money from your
STEF or skip the remaining categories if they are optional (like haricut). Fortunately, by the time you run
out of income to allocate you should be near the end of your list where the categories are less important.
Depending on how much your income varies, you may need to dip into the STEF quite a bit. Its ok, thats
what the STEF is for. In the worst-case scenario, you should be able to cover a whole month of expenses on
NO INCOME.

Conclusion

With a little planning and a methodical approach, budgeting on a self-employed or irregular income can be
just as easy as budgeting on a regular income. By using the techniques above, you can take much of the
variability out of your planning and know ahead of time exactly where your money should go.

Please let me know your comments and questions. Also let me know if there are points that need additional
explanation or clarification. Do you have any additional tricks youve learned? Please leave a comment and
let me know!

In my last post, I covered why most budgets dont work and how to fix them. One of the ways to make your
budget work is to create a zero-based budget. Todays post outlines how to create your first zero-based
budget. Over the next few weeks Ill be addressing various aspects of creating and managing a budget. Lets
start with the basics. Some of these steps may seem obvious or simplistic. But for those who just cant seem
to get a budget started, I hope to give you some step-by-step detail that will help make creating a budget
easier.

What is a zero-based budget?

A zero-based budget is one where your total income minus your total expenses equals $0. In other words, it
forces you to assign every dollar of income to an expense (or savings) category. As Dave Ramsey puts it,
youll be spending your months income on paper before you spend it in real life.

Benefits of a zero-based budget

Using a zero-based budget and properly dealing with the difference from month to month will allow you to
gain total control over every dollar you spend. If you get a bonus or spend less than you planned during the
month, you can easily redirect that money where you really want it instead of letting it dissipate through
unfocused spending.

A word about spreadsheets

I highly recommend using a spreadsheet to do your initial budget because its very easy to calculate
amounts and rearrange the order of items. If you dont have Excel, you can download the free Open Office
CALC spreadsheet software or use a free online spreadsheet like Google Spreadsheets or NumSum.com.
Simply using paper and pen is ok too. If you do, you may need to re-write it a couple of times and be sure
to double check your calculations.

When first starting your budget I would NOT use the budgeting tools in Quicken, MS Money or other
automated tools. You may be able to use those tools effectively once you have a solid hold on your budget,
but for now its best to make your budget by yourself so you know every nook and cranny. That way youll
be less likely to make errors due to not understanding how an automated tool is built. You will also be more
likely to use a budget if you create it yourself. Once you have a high degree of confidence that your budget
is working properly, feel free to experiment with pre-built tools and spreadsheets like pearbudget.com.

Preparation: Get out those statements

Before you get into the thick of things, youll want to do a little preparation by collecting the following:

Pay stubs
 Records for other income such as bonuses, gifts, and
tax returns

Copies of your recurring bills

If you track expenses in Quicken or MS Money, print

out monthly reports of your expenses for the last few
months

If you use checks regularly, it may be useful to have

your check register on hand

Agree to be civil

Now take a few deep breaths. If you are doing this with a spouse, agree to be civil. Ask yourself how can I
do this and enjoy it? As you go through the initial steps of allocating, dont nit-pick too much. If one person
wants to budget funds for a category and the other disagrees, let them budget the funds and you can go
back later and adjust once you know if youre over and by how much.

If things tend to get heated, I also recommend setting a time limit for your budgeting. My wife and I tend to
do well in chunks of about 30 minutes. Once we go over that, I start to get grouchy. Its ok to do this a little
at a time. If you schedule 30 minutes a night for several days, you should be able to get through
everything.

Step #1: Write down all your sources of income for the month

Lets get started. If you have a fixed paycheck once or twice a month, this step will be easy. Just write down
how much you make every month. If your finances are really tight, you should do a budget for each
paycheck to ensure you have the funds on hand to pay bills that occur in that time period.

If you are self employed or have an irregular source of income, youll want to wait until you get an actual
check and then follow this process for just that check. In the meantime, you can follow this process for the
money you have available in your bank account. Just use your balance as the income. For example, if your
bank account balance is currently $3,000 then put that amount as your income. As we go through this
process youll be allocating how youll use that $3,000 until your next paycheck.

Do I put down net or gross income?

It really doesnt matter if you put down net or gross. If you use gross (the amount before taxes, insurance,
etc that are automatically deducted from your paycheck) you need to be sure to include the categories and
amounts that are automatically deducted from your paycheck in your budget. I prefer using net so that I
dont need to write the extra expenses down every month. Because taxes and insurance are the same from
month to month I prefer to simply check the amounts every quarter or so to make sure everything is still
the same. Its more efficient to track them separately.

Of course, if youre self employed, be sure to allocate for paying taxes.

Step #2: Write down a list of expenses

Write down a list of all the expenses you expect to have this month. Ive included a list of possible expenses
below to prompt your memory. Be sure to include expenses unique to only this month. Do you have a friend
or family birthday? Is your registration due? This step may actually unearth some expenses that you forgot
about. If you think of expenses that are coming up but not in this month, thats ok, just go ahead and write
them down and well deal with them a little later.

Income
o Paycheck 1

o Paycheck 2

o Other Income 1

o Other Income 2

Expenses

o Taxes (if using gross income or you are self

employed)

o Mortgage Payment

o Second Mortgage payment

o Household (yard)

o Utilities: Gas

o Utilities: Elect/Water/ Gar

o Auto: Gas

o Auto: Insurance

o Auto: Maintenance

o Auto: Registration
o Satellite TV

o Life Insurance

o Debt reduction

o Babysitting

o Clothing

o Grocery

o Grocery: Eat Out

o Grocery: Eat Out

o Grocery: Nonfood

o Medical

o Hair cut/personal care items

o Charitable Donations

o Emergency Fund

o New car savings

o College Fund

o Dry Cleaning

o Gifts: Birthdays

o Gifts: Christmas

o Gifts: Holidays and Other

o Household: Maintenance

o Retirement Savings

o Magazine Subscriptions

o Entertainment: Dates

o Entertainment: Video rentals

 o Personal money (1 for each individual)

o Cushion

Youll probably miss an expense or two at first and find yourself part way through the month saying shoot,
I forgot to budget for that. To address this scenario, be sure to budget a cushion account (last week I
called it a grease account, but I think cushion is simply more understandable and descriptive, so Ill stick
to that). I recommend starting at about $100 at first. Over time, youll be able to get a feel if this is too
much or not enough.

Include savings and debt reduction in expenses

When I say expenses, I really mean funds that will be spent or allocated to other purposes. Saying
expenses is just so much easier. Include any savings allocations, debt reduction payments, or any other
monetary outflows in your expense list.

Step #3: Identify your expense types

For this step, simply go through all the expense categories and mark if they are fixed, semi-fixed, or
variable. Just write an f,"s-f, or v next to the category (or in another column if using a spreadsheet).
Fixed expenses are those that dont change from month to month like your cable bill. Semi-fixed expenses
are those that may vary slightly from month to month like a phone bill. As a rule of thumb, semi-fixed
expenses shouldnt vary more than $10 in a month. Variable expenses are those that vary from month to
month more than $10 like groceries or gas expenses.

Step #4: Allocate your fixed and semi-fixed expenses first

The reason we marked each expense type was to determine the order to allocate them in. First allocate your
fixed and semi-fixed expenses. I recommend doing this simply because its easy. Your fixed expenses will
probably include your largest expenses, such as your mortgage, so it will be easier to deal with the smaller
amount left over. Plus, most of your fixed expenses are probably not very negotiable without dramatic
lifestyle changes or disruptions so they give you a sort of hard landscape around which you will fill in the
variable expenses.

Once we are done allocating all our expenses, well circle back and see if we want to eliminate one or more
of the fixed expenses. For now though, allocate them all.

Average out your semi-fixed expenses

For your semi-fixed expenses youll have to average out how much youve spent over the last 3-4 months.
No need to get too crazy or precise as long as your in the ball park. Youll be wrong anyway.
How to deal with periodic expenses

There will be many expenses that wont occur this month but that you will need to save for like car
registrations, birthday and Christmas gifts, and some insurance payments. To ensure you have enough
money when the time comes you need to start saving that money now.

Most people just divide these expenses by 12 and save that amount each month. DONT TAKE THIS
APPROACH WHEN STARTING A BUDGET. You will end up short unless that expense is a full year away.
Instead you need to take each expense, count how many months away it is, and divide the total payment
amount by the number of months. For example, if I have a car registration payment of $100 due in four
months, I will divide $100 by 4. That means I should budget $25 a month to save towards the registration.
As soon as I pay the registration, I can then divide the next registration payment by 12 and save little by
little for next year.

This approach may cause a little strain on your budget at first because you will need to be saving a larger
amount each month for the expenses coming up in the short-term. However, once you make the payment,
your monthly allocation will go down for that category freeing up extra cash that you can redirect wherever
you want.

There is one other approach I should mention. My wife and I find that we will fairly consistently receive
windfall money two or three times a year in the form of bonuses, gifts, or tax returns. Occasionally we will
budget portions of the windfall to periodic expenses so we dont have to worry about saving from month to
month. The only problem with this approach is that if you dont have enough windfalls, you could end up
having a periodic expense and not enough money to pay it.

Step #5: Allocate your variable expenses.

Now that youve gotten a good chunk of your income out of the way, its time to deal with whats left
(hopefully it isnt depressingly little). So far we havent worried about calculating income minus expenses. If
you want to, you can do a quick calculation at this point so you know how much left over youre dealing
with. Or you can just speed through and budget your variable expenses and do a mass calculation at the
end.

Try not to scrimp too much on your necessity categories like food, clothing, and transportation/gas. Most
people underestimate these categories.

Personal money

I highly recommend allocating personal money for each spouse. Having your own money to spend however
you want is crucial to making a budget work. Even if you can only afford to budget $10 or $20 dollars, it will
help your budget feel more manageable.
Step #6: Calculate the difference between income and expenses.

Ahhh, the moment of truth. Subtract your total expenses from your total income. This is where a
spreadsheet comes in handy. You might want to be sitting down when you do this.

Step #7: Adjust your categories until income = expenses

Now comes the hard part. You need to adjust your categories until your income equals your expenses. This
is where you will need to make some trade-offs between one category and another. This step is usually
where the most conflict occurs between couples because it exposes their conflicting values. If things get too
heated, its probably better to take a break and continue later. Just remember that this is your first budget
and you will refine things as you go. You dont have to feel locked in to the decisions you make now.

What to do with a positive difference

If youre in this situation, congratulations! Now you just have to allocate the remaining money. The whole
point of a zero-based budget is that you need to ALLOCATE EVERYTHING. That way the remainder wont just
disappear through unconscious spending. The good news is you can allocate it any way you want. If you are
going to allocate it as money to blow, thats fine as long as you consciously do so. Some other suggestions
for allocating this money include:

Pay down debt

Save for retirement or your childrens college

Save for larger purchases like vehicles or furniture

Save for a vacation

What to do with a negative difference

Im guessing that the vast majority of people will have allocated more expenses than they have income
resulting in a negative difference. Dont be discouraged! The first time we did this, reality hit us hard. We
had to do a major evaluation of our priorities and really distinguish between our wants and needs.

For many families this process will expose that they have been spending more than they make and cant
support their current lifestyle on existing income. It can be extremely hard to realize that lifestyle changes
are in order, but at least you now know the truth and can fix your problem instead of going into more debt.

Here are some suggestions for adjusting your budget:

1. Identify all your non-necessities. Yes, cable is a non-

necessity.
 2. Each spouse should rank the non-necessities in terms
of importance to them

3. Eliminate or reduce those that both spouses agree are

a low priority

Hopefully by eliminating or lowering the easier consensus items you will now be at a zero balance. If not,
you will have to negotiate which categories are most important to each of you. You may have to make a
lifestyle change by either earning more income or lowering your cost of living. In some cases, moving to a
less expensive place may be in order. Housing is usually the largest expense and can make the biggest
difference to your expenses. Not long ago, my wife and I almost had to move in order to live within our
means because we had a bad year with some unexpected medical expenses. That is what prompted us to
really take control of our finances. If we hadnt got on a budget, we would have had to move to a less
expensive home.

Step #8: Print out your final budget

I strongly recommend you print out your final budget and put it in a binder. This gives you a hard-copy
record of your decisions. The problem with keeping only an electronic version is that you sometimes cant be
sure if its been changed from the original. Printing a copy allows you to put a stake in the ground for your
decisions up to that point. It will also be useful when reconciling at the end of the month and planning next
months budget.

Next steps

Congratulations! Youve now completed your first zero-based budget. Now that you have a budget in place
you will need to execute your plan and follow up at the end of the month to deal with what you actually
spent. Over the next few weeks, I will be covering some ways to make tracking your spending and
reconciling your budget much easier. The first month you use a budget, review it as often as you need to
stay on track. Take a few moments each day to review your spending if necessary. I recommend reviewing
your progress at least each week at first. Once you get your budget down, and with a few tips and tricks,
youll be able to stay on track with a single monthly review.

Lets face it, budgeting can be a pain. Most people get too discouraged trying to get a budget to work. They
spend hours trying to figure out how much to budget in each category and may even track every penny
spent during the month only to find out that reality didnt match what was budgeted. In these instances
budgeting just seems like a futile theoretical exercise. Theres no follow up or reconciliation to tie one
months budget to the next. Add to this the emotional issues that budgeting can trigger and your chances of
maintaining a budget dive bomb. Many people who get to this point just give up and quit.
Why most budgets dont work

There are three major problems with a common budget:

1. They dont reflect reality.

2. They dont connect from one month to the next.

3. They dont track the surplus money left over after all the categories are filled.

1. Most budgets dont reflect reality

Budgeting is an exercise in being wrong. Every time you sit down and write out all your categories and how
much you think youre going to spend, youll be wrong. Being wrong month after month quickly can get
discouraging and many people give up. Whats the point in trying to predict how much youll spend each
month if you know youll be wrong.

So you overspent. Ok, at least you know you overspent and that could be helpful in planning next month but
where did that overspent money come from? How are you going to reconcile the difference?

Unfortunately theres no way around being wrong. Theres really no solution besides developing obsessive
tendancies and even thengood luck. You must first accept that youll be wrongevery month. My wife and
I have never been right even though weve had an established budget for years. Accept it.

Now Im NOT saying you wont start getting really close. In fact, in many categories you will be right. But so
far Ive never been 100% right. Dont get discouraged if youre just starting out because for the first few
months youll be REALLY wrong. It took us about 3-4 months until we started getting into our budget
groove.

One way to get your budget closer to reality is to allocate every dollar of your income. If you have money
left over after addressing your needs, allocate it. I dont care where; put it in a fun category or direct it
towards meeting a financial goal. Dont just say oh, I have leftover money. I must be doing really good at
budgeting. If you dont allocate everything you will end up wasting that which is left over and your budget
will be broken from month to month.

Another way to close the reality gap is to be realistic about what your needs are. Things like shelter,
clothing, and food are not optional. Many people have unrealistic expectations about what they will spend on
these categories. Im certainly an advocate of being thrifty and looking for good deals but you can only take
it so far. If you refuse to face how much you really need to spend in these categories to survive without
eating ramen every night, your budget will not be an effective tool.

Yet another way of helping your budget reflect reality is to make sure you have a way of dealing with the
difference between your budget and actual spending. And that leads us into our second problem.
2. Most budgets dont connect one month to the next

Quicken is a great example of why this problem exists. Quickens budgeting feature seems great. It allows
you to easily enter budget amounts and will even pre-populate projected amounts for you. At the end of the
month you can run a nice neat report telling you how much you over or under-spent. Theres just one
problem. There are no tools for helping you deal with the difference (if there are, please let me know about
them). You just enter in the next months budget amounts using the exact same process and projections as
the month before. This makes for a nice, neat, pretty budget sheet but not a very useful one.

Many people think a budget is a static document. You fill out one template reflecting all your categories and
how much you should spend each month and use the exact same sheet from month to month. Thats not a
budget. Its a dead document. A real budget is a living document or series of documents. It changes from
month to month and should be a reflection of reality, not a theoretical exercise.

The fact is, your expenses change from month to month. Car registrations sneak up on you. Unexpected
birthdays pop up. Unexpected expenses happen. And you cant always just take your yearly expenses and
divide by 12. If your car registration is coming up in 3 months and you havent saved anything for it,
dividing by 12 will only leave you with a quarter of what you need to pay it. The unique expenses for every
month need to be dealt with individually, not just from a nice clean Quicken projection.

For a budget to work, you must link one months budget to the next.

Is there too much money left over? Great. Where does it go? Should we pay off debt, save for retirement,
save for a vacation, or just blow it and buy that new toy? Im not against throwing caution to the wind as
long as its done conciously and not by default.

Is there too little money to cover all our spending? Where did it come from? Will we be spending less on
groceries, lowering our savings contribution, or going into more debt?

3. Most budgets dont track the surplus money left over after all the
categories are filled

For a budget to work, you must allocate ALL of your income to categories. As Dave Ramsey puts it, you
must spend your whole month on paper before you spend it in real life. Other analogies that come to mind
are Stephen Coveys concept of the spiritual creation before the physical creation and David Allens idea of
writing down EVERYTHING that is on your mind so you can get it out of your head and on paper.

Stephen Covey Comparison

Lets look at the Covey analogy. Covey says that you should begin with the end in mind. One way of doing
so is to create what youre trying to achieve spiritually first, and then physically. A builder doesnt build
without a blue print. You should have a good idea of where you want to go either on paper or in your mind
before you set out. Doing so makes your efforts more effective.

When it comes to finances, by writing ALL YOUR PLANNED SPENDING down on paper first (spiritual
creation), your chances of actually following your plan significantly increase (physical creation). Youll also
be much more likely to achieve your larger financial goals (physical creation).

David Allen GTD Comparison

Now lets consider David Allens idea of capturing everything on paper. He teaches that you should get
anything and everything down on paper that occupies your mind. Doing so frees up mental RAM and
allows you to spend your time more effectively rather than eating up endless mental cycles on the same
issues, questions, and to-dos.

Similarly, by writing down how you are going to spend every dollar, you free yourself from mental worry and
guilt and allow yourself to think about much more enjoyable things. Combine this with using cash for those
categories that tend to be out of control and you can literally eliminate financial worry and anxiety. Every
dollar you spend will be focused and controlled with very little effort.

No matter how you want to look at it, you need to allocate EVERY SINGLE DOLLAR ON PAPER for a budget
to be of maximum effect. Why? Doing so forces you to really think about where you want your money to go
and insures you use each dollar to its fullest. Youll probably notice that when you dont allocate every
dollar, your left over dollars usually end up spending themselves. You end up with nothing to show for it, not
even the concious realization that you had fun wasting that money.

Spend frivolously and feel good about it

By saying that you need to allocate every single dollar, Im not saying you cant have fun with your money
or spend frivolously. Go ahead and conciously decide to have fun or even waste the leftover money. Allocate
it as fun money to be spent however you want, whenever you want. By doing so you may enjoy spending
that money even more. Youll be able to do so with confidence and no guilt that you should be spending it
elsewhere.

Decide before youre in the heat of the moment

Like using cash, allocating all your funds allows you to make more concious decisions about where your
money should go. Instead of waiting until youre standing at the register, you can decide where your money
will go while your looking at the big picture. Your decisions will be more rational and less emotional. You will
also be able to direct your money towards meeting your larger, longer term goals. Instead of pittling money
away, save for that new car or piece of furniture. Or for real financial peace, pay off debt.

Harness the power of focus

Allocating every dollar allows you to harness the power of focus. Take your plumbing, for example. Water by
itself isnt very useful in a puddle or lake. But give water the contraints and focus of a pipe and all of a
sudden it can be used for your toilet or sink. Focus water through a hose and you can water your lawn or
put out a fire. The constraint actually makes the water more powerful and useful. Similarly constraining your
money by allocating every dollar makes your money more useful and powerful. Your ability to save and
reach your goals will be increased.

See if you can identify with this personal example. Before we got our financial acts together, every time we
recieved a bonus, raise, gift, or other unexpected income the money would just seem to slip through the
cracks. Most people tend to expand their lifestyle to meet their income. In contrast, imagine if you were able
to focus and direct every extra dollar. Every time you got a bonus, heck, every time you saved $5 on your
phone bill, you would be able to easily redirect that money to another purpose. Your power and ability to
aggressively meet your financial goals would increase dramatically. Without an effective budget, what is the
point of trying to save a few dollars when they disappear anyway. But with an effective budget every dollar
counts and is directed exactly where you want it.

Another benefit of allocating every dollar is that your budget will reflect reality more closely. If you have
money left over after allocating your needs, that extra money almost always WILL be spent one way or
another. If your budget doesnt reflect that, it doesnt reflect reality enough to be effective. To eliminate
financial stress and a sense of being out of control once and for all you MUST KNOW where your money is
being spent. You must TELL IT WHERE TO GO rather than letting it decide.

Using a Zero-Based Budget

A critical tool to help solve these basic budget blunders is the zero-based budget. Now if youre expecting
something flashy, youll be disappointed. A zero-based budget simply means that you allocate every dollar
of your income so that your income minus your expenses equals zero. Its as simple as that. No special
forms or fancy software are necessary. Using a zero-based budget forces you to allocate every dollar and
will help your budget more closely reflect reality.

Always track and DEAL WITH the difference between budgeted and
actual

Make sure you follow up at the end of every month and write down what the difference is in each category
between what you budgeted and what you actually spent. You then need to deal with that difference. Dont
just look at it and say oh, theres a difference. Good to know. You must either reallocate the money on
paper or carry the difference over to your next months budget.

For example, if you spent $5 more on your phone bill than you thought (a common occurance since the
phone bill tends to be quite variable), you must spend $5 less in another category. One option is to see if
you spent $5 less than you thought in another category that month. If so, simply adjust your allocations on
paper. If there is no unspent money in your categories then you need to carry that $5 over to the next
month and allocate $5 less in a category for your next months budget.

Implement a grease category

To deal with small instances of overspending, I always budget a grease (a.k.a. blow, cushion,
RealityBites) category of about $100 that gives me a cushion in dealing with such instances. Since you
know youre going to be wrong (see above) you might as well plan for it. This account acts like the grease
that keeps the financial gears turning. It picks up my slack. And if I have extra grease money left over at
the end of the month, it directly gets realocated for something else the next month (often something fun as
a little reward).

Putting it all together

I realize that Ive skipped over many specifics. Implementing some of these concepts may seem a bit
confusing at first. If so, no worries. Ill be addressing specifics in future posts. For now, let me summarize
the steps you can take today:

1. Implement a zero-based budget. Stay tuned for

examples and templates.
2. Allocate every dollar of income to a category. When
you subtract your budgeted expenses from your
income, it should equal $0.

3. Be sure to budget a grease category to deal with

minor inaccuracies.

4. Be realistic about how much you are going to spend

on necessities. Most people under-allocate in the
categories of food, clothing, and transportation.

5. Know that your spending wont exactly match what

you budgeted. If you are just starting, you may be
WAY off. Thats ok. Do a little, learn a lot. It WILL get
better. If youre married, be easy on your spouse.

6. Calculate the difference between budgeted and

actual spending and either adjust the current
months allocations or deal with the difference in next
months budget. I realize there are some BIG
procedural holes and questions here that Im
skimming over for now. Stay tuned.
 7. Be Careful When Using Credit Cards to Fund a New
Business
8. For Many new entrepreneurs, funding a business means borrowing money. It may be only a small amount,
or it may require hundreds of thousands of dollars. An increasing tend, especially with smaller home-based
businesses is the use of credit cards to fund a startup. While with proper use they can be a great tool, there
are many things to watch out for.

9. Ease of Obtaining Credit Cards

10. If you think that you receive a lot of personal credit card offers in the mail already, just wait until you finally
register your business. You will have credit card offers arriving in your mailbox on a daily basis. It may seem
tempting to open up a new business credit card in order to immediately establish some cash flow, but just
because it is easy doesnt mean it is a good idea.

11. Be Wary of Interest Rates

12. Just like personal credit card, business cards will lure you in with attractive 0% offers or reward programs.

13. Once the introductory rate has concluded you may find yourself paying 15-25% APR. This high interest can
eat away at any profits you may begin to make with your new business.

14. Business Credit vs. Personal Credit

15. One of the biggest misconceptions people have is that their business credit card isnt a part of their personal
credit record. In most

16. cases, this is not true. A new business starts out just like a teenager who just turns 18; there is no credit
history. Many people believe that just by opening up a business credit card that they will establish credit for
the business. This is almost never true.

17. Those card offers you get in the mail are really business credit cards, but when you read the fine print, you
are actually signing a personal guarantee on the account. This means that you are personally responsible
for making payments if the business is unable to. The bad news is, even if your business fails, you are
personally on the hook for the debt, and if you make late payments, they will go on your credit record. Dont
be fooled into thinking it is a risk-free way of financing your business.

18. Credit cards do have their place in business just as they do in personal finance. They are a convenient way
to make purchases and potentially receive cash back or other rewards. What you have to realize is that you
should treat a business credit card just like you would a personal card. Only charge what you can afford to
pay back, keep interest rates low, and make payments on time.

Small Business Banking 101

5 Reasons Not To Mix Personal & Business Banking

One of the basics of small business banking 101 is to set-up a business bank account. This fundamental business
function is often lost with new and part-time business co-mingling funds. Using a personal bank account for small
business banking is common among part-time business like multi-level marketing and self-employed sole-proprietors
such as realtors and consultants.

Venturing out into the world of entrepreneurship is risky. Many new business owners reduce the risk by

starting a business part-time while retaining a full-time income. This can be a great approach to starting a company,
but run the business as a business.
Frequently, business owners try to process business transactions through their personal bank accounts in an effort to
reduce expenses and bank fees. Unwittingly, they are creating more potential problems for the business in the future.

5 Reasons Not To Mix Personal and Small Business Banking

Hobby Business: Government rules stipulate that only businesses can deduct business expenses.

If your business may look like a hobby, a personal bank account for business creates a harder time convincing the
government you are operating a business.

Tax Time Nightmare: When it comes time to declare income and expenses from the business, personal
transactions will have to be separated from business transactions. It will be a nightmare and time burden going
through all transactions and figuring out business from personal.

Limited Audit Trail: It is not a requirement of the government that you have a separate small business banking
account and record keeping method. It is required that all records be accurate, complete, permanent and showing a
clear record of income and deductions. Providing a separate business statement and record provides a clear audit
trail.
Missed Deductions: Co-mingling your small business banking with personal creates a mess of transactions on
your account statement. It is easy to overlook or miss deductions you may be entitled to. Whether you or an
accountant will be preparing the tax return, messy record keeping will cost more in time, money, and possible missed
deductions.
Lack of Professionalism: If you have clients who write checks to you, check writing in your personal name as
opposed to business can convey that your company is a part-time venture. Even if your business is part-time, take it
seriously and your clients will too.

Take the time to open a small business banking account to simplify your record keeping and life. Shop around for the
best deal. Small business banking varies in fees and features. The costs of a business account are far less than the
benefits to your business. Fees are partly tax deductible as an expense. Don't forget to consider that your business
may grow. Opening a business account with a bank earlier can help with required financing in the future. Remember
run your business as a business.

7 Ways to Make Record Management Easy

Part 1: Good Business Record Management Means Less Tax Time Stress

If you took the time to make a list of all the tasks you need to do to manage your business and then ordered them in
terms of how much you liked doing them, where would record management come in? Two hundred and seventy? Or
even lower?

But while most of us definitely consider business record management to be scut work and tend to give it a low priority,
good record management not only makes our working lives easier, but can give us real stress relief at tax time.
Heres what you can do to make record management easy:

1. Keep your business and personal expenses separate.

Sounds easy, doesnt it? But this is the part of record management that trips up most people. If you take a potential
client out for a round of golf, for instance, is that a personal expense or a business expense? (The answer is
personal, because green fees are not a deductible business expense.) Vehicles that you use for both personal and
business reasons are another perennial problem.

You need to know what qualifies as legitimate business expenses and what doesn't, and be sure that your business
record management reflects this accurately.

2. Get sufficient documentation for all business expenses.

Many business people make the mistake of thinking that "lists" are good enough for record management purposes.
For instance, they

have a list of purchases on their credit card statements, and think that that's good enough in terms of claiming those
purchases as business expenses.

Unfortunately, the CRA (Canada Revenue Agency) is more demanding. They do not accept credit card statements or
cancelled cheques as sufficient documentation for expenses when an invoice or receipt would normally be issued.

In terms of good business record management, there are two points to bear in mind:

a) Always get a receipt. Get in the habit of asking for a receipt whenever you make a purchase - no matter how
small. Little expenses add up, too, and you need the documentation for your business records.

b) Label your receipts, if necessary. There are still businesses around that hand out receipts that don't have anything
on them except the date the item was purchased and how much it cost which isnt very helpful when you're staring
at a receipt trying to figure out what the item in question was and which business expense category it fits into.

When you get a receipt, look at it and write the missing/relevant information on it, such as what the receipt is for and
the expense category. See 4 Tips for Handling Receipts for more on how to make keeping your receipts straight
easier.

3. Get a separate bank account for your business - and use it.

While the fees for business bank accounts are notoriously high compared to personal accounts, a business bank
account is absolutely necessary for good business record management. A business bank account helps you keep
your business and personal expenses separate. You will deposit all your business revenues into the business
account, and withdraw any business related expenses or payments from the business account only.

What kind of business bank account should you get? A chequing account preferably one that delivers monthly
statements and returns your cancelled cheques to you.

Business cheques help make your record management easy because you can use the memo line on the front of
each cheque to document the business purpose of the expense.

Part 2: More Tips for Easy Business Record Management

Here are four more things you can do to make your business record management easy.

4. Have and use a separate credit card for business expenses.

Using your personal credit cards for business purposes will swiftly drop you into a record management quagmire. A
business credit card greatly simplifies your business record management by helping keep your personal and
business expenses separate. (It also helps make your business look more professional.)

5. Keep a mileage log of your business travel.

If you use any of your vehicles for business purposes, a mileage log will be a big help in record management. Note
the mileage (or kilometer) reading on the odometer at the beginning of the year and then enter the mileage by date
each time you use the vehicle for a business purpose.

Keeping your mileage log in the glove box of your vehicle will make this easy. If you have more than one vehicle that
you use for business purposes, keep a mileage log in each.

6. Keep all your business records for a particular tax year together and in one place.
Having your business records scattered all over the place is a real time-waster when it comes to accounting or

preparing your taxes, and organizing your business record management system by fiscal year will make it much
easier to find the business records you need when you need them.

Need some help setting up a filing system? See The Easiest Filing System and/or Mastering Your Filing System for
tips.

7. Keep your business records for the correct length of time.

For some reason, there seems to be a lot of confusion about how long you have to keep your business records. For
tax purposes, "if you file your return on time, keep your records for a minimum of six years after the end of the
taxation year to which they relate" (CRA).

This six-year period of time starts from the last time you used the business records, not from the time the transaction
occurred.

The CRA also has rules about the destruction of business records; see How Long Do I Have To Keep My Business
Records for details.

These seven things you can do to make your record management easy arent difficult. Like a lot of the administrative
business related to running a business, they just require establishing good habits and persistence. But if you apply
these rules of good record management now and follow through, youll see a huge difference next tax time and your
accounting will be easier all year long.

The Easiest Filing System

A Filing System That Makes Finding Files Easy

Those of us who have been home-based for six months or longer, know the value of a filing system. In fact, when a
person sets up a business, this should be one of the legal requirements. Okay, not really, but it is or will be a vital part
of your own communications system.

A variety of ways exist to file correspondence, documents, articles and other important papers that we may (or may
not) refer to again. Being traditional, I chose to use an alphabetical, rather than numerical, system. And as soon as I
made that decision, I was faced with a few more (self-generated) problems and questions:

Should I use hanging files, or regular?

Or mix them -a hanging file as a main subject with a file inside?

Should I use one color, a variety, or straight manila? Yeesh!

Finally, I decided on manila and no color coding (yet).

This issue settled, I gave myself another dilemma: straight cut no tabs, 1/5 cut or 1/3 cut?

Then there were labels to consider: color coded? white? typed? hand written? Or just not use a label and write on the
file tab?

How could something actually so simple be turned into such a problem? Well, as all situations seem to do, this one
worked itself out.

So obvious a solution, it was easy to overlook.

Since Ive been through the label-a-file-in-alphabetical-order-and-have-a-new-one- come-in-and-mess-it-all -up way,
i.e.: aa, ab, ac, ba, bb, bc, only to have ad come along...I decided on 1/3 cut, alphabetical, and set it up like this:

ABC

DEF

GHI

JKL

M Misc N

PQ

RST

UVW

XYZ

With Misc. I have 27 file sections. In each section, files are alphabetized. If I need a copy of a letter to city hall, I go
to the right tabbed files and locate it easily.

So simple. Really. Now I just have to keep misc. under control!

Mastering Your Filing System

Filing Organization Tips For Fast Office Filing

As a small business owner, you need to be able to operate at your desk swiftly and easily. Though setting up a filing
system sounds difficult, it is a relatively easy task that can be made easier by a few filing tips and tricks.

(1) Sit at your desk for a few minutes and figure out where you will instinctively look for things.

I have a drawer to the right of my workstation. When I first set up my filing system, I didnt have anything in it. When I
would look for stamps, paperclips or my stapler, it was the first place I would look, even though I knew it was empty.
So naturally I put the stamps, paperclips and stapler in that drawer. For me, it was the natural home for those items.

Everyone will approach this differently, and what works for me may not work for you.

Take a few minutes to sit down at your primary workspace and reach for equipment, supplies and files. That will help
you establish the idea spot for filing those items for you personally.

(2) Now that you know where you will naturally look for information, you must determine whether an
alphabetical, numerical or subject filing system will work best for you.

Do you search for things according to the clients name? The category (i.e. expenses, financial, marketing)? By
reference number? This is a critical step, as it will determine how you will lay out your filing system. Do this before
you buy anything for your filing system.

(3) Next, roughly determine your storage needs.

Do you have a large number of files that you access on a daily basis? Do you only access your files weekly? The
answers will determine if you need a desktop file holder, a two drawer filing cabinet close to your desk or a four
drawer lateral filing cabinet across the room. So many options exist today, that you should choose carefully. Allow for
growth when looking at filing cabinets - buy something to accommodate twice the files you think you will have now.
This will limit the number of times you will have to resort and reorganize your filing system.

(4) Invest in a good labelling system for clarity and easy access.

Being able to read the file labels sounds obvious, but clarity in labelling will save you more filing time than you can
imagine. Most companies who make labels provide templates that integrate with the most popular word processing
software. You may want to consider one of the small label making systems that can now also print out individual
mailing labels. Items that perform double duty are usually a wise investment.

(5) Now you are ready to purchase file folders.

The best investment I have found is to purchase colored hanging folders (make sure the plastic label tabs are
included) and plain manila file folders for my filing system. I use colored hanging folders for two reasons: (1) easily
available and (2) ease of recognition for categories. For example, all my client files are in yellow hanging folders, blue
folders contain financial information and red is for marketing. This way, I can see roughly where I should be searching
for a particular file.

The KISS principle applies to setting up a filing system that is easy to use and easy to grow with. Keep It Simple
Sweetheart! Broad subject categories will allow you to easily add new files as you grow, and will eliminate the need to
upgrade or reorganize your filing system on a regular basis.

Happy filing!

Facts About Self-Employment

Would it surprise you to know that more than of the U.S. adult population dreams of (or at least considers) self-employment? That
amounts to better than 70,000,000 people! Chances are very good that you are in that population of potential entrepreneurs. But, with such
numbers it is surprising that only about 1% of all the people who think about becoming entrepreneurs ever take the plunge. Why do you
think this is?

The answer lies in the common human attribute of healthy fear. Yes, good old fight or flight kicks in when it comes to putting time,
money and life on the entrepreneurial line. And thats a major insight for anyone thinking about self-employment. Your entrepreneurial SELF
really knows whats best for you, so listen to what you know instinctively. In the game of self-employment over two thirds of the
participants fail, so fear and instinct may be saying At this point, your chance of winding up a winner may be poor. The better you plan the
stronger you will feel about going forward.

We tend to spend valuable time and money asking lawyers, accountants, SCORE representatives, SBDC staff, business teachers, and even
franchise salespeople what we should do. Sadly, none of these people can answer the critical questions of Is self-employment right for
you? and Which, if any, business should you choose? Its ludicrous, but we do it because those are the resources we are channeled to
use.

If youre among the really serious people for whom self-employment is the only cure for career boredom, pledge to be in the winners circle
and do things differently than the crowd. Start by developing a personal plan, a plan that is all about you not about the business. Business
plans arent worth a dime if they dont support what you want. New entrepreneurs really tend to miss this critical point.

Tough project? Yes it can be, but below you will find links to articles and programs designed to help clear up the confusion of getting started
as an entrepreneur. The most important factor that separates those who want to be an entrepreneur from those who actually succeed as
an entrepreneur is a clear personal vision of what they want, who they are, and how they are going to express themselves in self-
employment.

So the first step to successful entrepreneurship is to gain clarity about who you are as a potential entrepreneur and then creating a
personal plan that will drive a business plan. Begin by being different be yourself.

1. Become a student of entrepreneurship. Here are some wonderful articles about self-employment that will help you think outside the box
as an entrepreneur - Franchise Articles
2. Listen to your heart. It knows whats good for you.
3. Create a personal plan before you create a business plan. Here is an extremely unique program that can help define who you are as an
entrepreneur, in other words, help you create the personal plan you need for success. Entrepreneurship & You
4. Stay away from hype assessment tools with titles like Are you an entrepreneur? They dont work.

5. Listen to, but dont lean too much on, the advice of others. Most have never been (successfully) self-employed. Plus, only YOU can and
only YOU should decide on your future.
6. Dont let anyone sell you.
7. Be patient. Self-employment is a major step - step carefully.
8. Self-employment is a lifestyle not a job.

Choose as you would a spouse. You may find the first part of the following quote similar to your thinking. If so, realize that most potential
entrepreneurs feel the same way at first. Self-employment is a big step and most of us need help in taking that step toward becoming an
entrepreneur. If you identify with what this lady was feeling, then you can also take pleasure in seeing that she overcame her fears and
found entrepreneurial success.

"I always knew I could do something fabulous on my own, but only thought about being self-employed and took no action. I finally got a
plan together, a personal plan that showed me who I could and should be as an entrepreneur. I used "The Focus Program for Emerging
Entrepreneurs" and then went forward. After so many years of frustration and indecision I found my calling, and it was right; self-
employment was right for me in every way once I had a clear personal plan of action that helped me know myself as an prospective
entrepreneur. Had I not taken the first step I wouldn't be experiencing the pleasure in my work that I have today."
-Fran White, Realtor, Kansas City, MO

The Focus Program for Emerging Entrepreneurs is found at this page:

Entrepreneurship & You