Few in personal finance take much account of the self-employed. Whether banks or KiwiSaver providers, articles or websites, the examples and advice that they give is on the basis of a knowable income with a similarly knowable surplus after living costs have been paid. Such assumptions do not describe the position of the self-employed.

Often the self-employed do not have the same reliable cash flow as those with salaries and are, in fact, constantly juggling so that they can pay their bills and have something left over to live on.

In difficult times like these, that juggling may be tricky as customers are slow to pay their bills and suppliers want their money sharp on time.

And yet, most of us run our businesses in the hope that we will at some point achieve financial freedom. We need to save and invest like everybody else, manage our mortgages and budget.We are just as much in need as those with salaries.

Lumpy incomes

Perhaps the biggest difference between the self employed and those who earn salaries is that the self-employed tend to have lumpy income and lumpy outgoings.

The salaried can meet their mortgage payments and buy the groceries with some confidence – the self-employed have another job, which is to manage their uncertain cash flow.

Sometimes that’s a big job! Take real estate agents as an example of the self-employed. They may make a decent income annually, but they never quite know where their next sale will come from – nor when. They may have a flutter of sales one month, but that may be it for a couple of months … or longer.

The self-employed may also have lumpy tax to pay. Both GST and income tax requirements can come in big dollops and catch out those who do not allow for them. People who are self-employed cannot simply take each payment and spend it – they have business costs that need to be met, tax to pay, and they ought to save for the future.

Managing cash flow

I have been self-employed since I left teaching in 1977. Over that period (nearly 50 years) I have found that the easiest way to manage cash flow is to run several different bank accounts, each with its own purpose. At its most simple, these accounts may be named something like:

• My business costs

• My tax

• My living costs

• My future

Each payment I receive is split to each account at a different percentage. Each account will get a set percentage so that I know how much of each payment that I receive will go into each account.

Figuring out these percentages will take a bit of work (and possibly some help from your accountant). It may take a few goes to get the amounts right but it is well worth persevering so that you are never taken by surprise when any bill appears. The important thing is that each category is properly catered for as the money comes in.

I have run this system personally for 30 years or so and it has become almost second nature for me. My business has mostly had a small number of larger payments each month and that makes it easier. If your business has a lot of small payments (eg a retailer or in hospitality), you can easily take a week’s turnover and split your takings into the accounts accordingly.

By way of example, my own percentages and the amounts that I would put to each account if I received a $5,000 payment would be like this:

My business costs: 10 per cent $500

My tax: 35 per cent $1,750

My living costs: 45 per cent $2,250

My future: 10 per cent $500

You should note that I am starting to become a bit older and, therefore, not working or earning as much as I was. This means I have less requirement to put money aside for the future.

There are three main advantages of the system.

1. You have money put aside to meet bills (including tax) when they come in. If you are struggling to meet bills, the chances are your percentages might need some adjusting.
2. Assuming these bank accounts are interest bearing, you should receive some interest income. It may not add up to a big amount, but you may as well have the interest rather than the bank.
3. You are treating your future seriously and not simply leaving it to chance. Having a bank account labelled “My future” should serve as a reminder of why you are trying to grow your wealth.

Although the “my future” category is last on this list, it is not least priority. Like everyone else, the self-employed need to be sure that they have their futures funded – after all, it is the future where you will spend the rest of your life! T

Martin Hawes is a financial author and presenter. He is not a financial adviser. To find out more, visit martinhawes.com