In response to: Answer to Gail’s Polly Riddle
I would love to see a blog for us Nervous Wreck Self-Employed Persons…which I am one of. I am always struggling about how to budget, have an emergency fund, how much to take for personal, etc! Worth it?? you may ask…I’m not always sure about that, depends on the day!…
This is a great question! And not just because it’s a nice Anon. But particularly because I am ALSO a self-employed person.
Here’s my kind of rough assessment because this is what I’d do for myself.
I am not assuming that security is any safer with a company than without, only because for me, you can get fired at any time, and in Canada you get 2 weeks pay when you leave…hence the 2 week notice that most employees provide to their employers before leaving.
Anyway with that being said this is what I’d keep for myself keeping in mind that my cash flow would be wonky and not a steady cheque each month to “count” on as a set amount, because I could be going through periods of total unemployment which is unforeseen. The key is just to save and be smart about your money.
And this reader sounds just as paranoid as me. So a hefty, healthy cushion is the only remedy to relieve stress and nervousness.
How to Budget
I am assuming that everyone is cool with the idea of spending LESS than what we make.
Here are some rough percentages on how to budget your net income and an example of $1000/month.
Use them as a guideline and adjust them until they fit you.
Naturally, don’t think that putting 50% to Rent repayment is reasonable.
And if you spend less on your car, then you can put more towards Debt or Savings (which includes Retirement Savings) and so on.
Note: I put Debt Repayment at 30% (MAX) because if you have debt, you should do the max repayment in my opinion. And more if you can afford it.
Start Saving first. Save up a cushion of $1000 – $5000 and that can act as your temporary Emergency Fund, and then stop and move on to Retirement Contributions and get that locked down next.
Savings is something you draw on once in a while when you go over your budget (overages) and also where you save money for a Vacation or a Down Payment.
It’s also more liquid than your Emergency Fund since it’s able to be dipped into, once in a while, like a Piggy Bank … unlike an EF which you should not be touching at all until you really, REALLY need to.
2) Retirement Savings
I like to save at least 5% into retirement on top of savings if you are in your 20s.
If you are older, you need to save higher percentages to make up for lost time (10%, 15%, 20%)
Once you get that locked down and you feel comfortable, you decide to can save up for a larger Emergency Fund or re-distribute the money among your Savings for other things.
3) Emergency Fund
This can be saved for last as long as you have that Savings Cushion of at least $5000, and if you want to start saving more money.
So you can build this one slowly (no need to knock yourself out building this!) after you’ve cleared the debt, saved money and are regularly contributing to a retirement account.
For me, an Emergency Fund is not the same as Savings or Retirement Savings. An Emergency Fund to me is something you DO NOT TOUCH AT ALL unless you truly need to.
I like a minimum of 6 months as your Emergency Fund and ideally as your maximum (because I’m a Paranoid Polly) 2 years.
I know. It sounds outrageous.
But 1 to 2 years if you can reach it is a great financial cushion. Maybe a bit too much for some people, but just right for me.
My reasoning is just in case I have to live a year without working, and then a medical emergency happens while I’m NOT working – I have the second year’s fund to help!
I have a budget in mind of around $1500/month:MINIMUM = $1500 x 6 months = $9000
MAXIMUM = $1500 x 24 months = $36,000
But I don’t even need the whole $1500 because in there I’d only spend around $1000 on truly essential living such as rent, utilities and food which is what I’d be doing if I was in dire straits.
And you can throw a whole year into bonds or something that will stay in there and yield a decent return, because you still have a year’s worth as liquid cash.
How much to pay yourself
I only take out what I need for the month. If I need $1500 a month as my budget, that’s what I pay myself. But if you want $2000 a month to live comfortably, then withdraw $2000.
But don’t try and leave everything in the company and then start eating tuna out of cans – you have to pay yourself a wage too!
Also, don’t try to take EVERYTHING from the company – it still needs to survive!
It all depends on what you’re bringing in as an income (after taxes on the business) and only you can be the judge of what is reasonable.
I should say, that if you plan on staying in the country for a long time, keeping the money in the company and then withdrawing a wage when you retire or as dividends when you retire, is kind of like an additional retirement account for you to draw from.
It’s what I would’ve done if I had stayed in Canada. Kept my company open and drew out money as dividends when I retired.
So.. that’s what I’d do. Pretty conservative I’d say, but that strategy would make me feel very comfortable financially to weather ANY upcoming financial storm.
And hey, even if you never put in 20% into retirement and 10% into savings and another 10% into emergency fund and you only manage to save 10% a month in total but splitting it between retirement and savings, that is still better than 0%.
The key is that you are actually trying to save money and think about it, PERIOD.
Which to me, is the most important thing.