Finding the Balance When You Are the Boss

Cynthia emailed me this question a few weeks ago concerning the unique needs of trying to set up a budget when you own your own business or are on a commission based income. I have already written a few blogs on this subject ( Feast or Famine , Finally Breathing , Your Business , The Power of Percentages ) but I felt like this question is so relevant to so many people that is bares revisiting.

Cynthia wrote, “We desperately need a budget and it has been difficult for us to budget because we own our own business. I need to create a budget for the business as well, but it’s really the net personal income that I need to manage.

I’m going to use your example of the $50,000 net annual income ($4166.67 monthly)

$4,166.67 income
$3,166.67 hypothetical expenses
$1,000.00 left over to go into a surplus, not an escrow account

Then should we make any additional money over the $4,166.67 goes into the escrow account.
Here is my question:
If I am taking last year’s figure of $50,000 and make the same or less amount of money… what do I put in escrow? Isn’t the example assuming I will make more than I did the previous year?

My problem is that I know by the end of the year, we make enough to pay our household bills and more. The problem is some months there is enough money to pay the bills, other months there is way more money.
I guess I’m just not seeing the whole picture.”

Cynthia’s question is exactly the reason why you would set up what I call an “escrow account” and why it will work for you. As she states in her question, she is already living successfully on her income and there is enough money to pay the bills. The whole idea of an escrow account is not that you are going to make more money, but rather that it will help you to live on the median of what you actually make rather than have an abundance one month and not enough the next.

The principle of the escrow account (which I explain in detail in Finally Breathing) is that it acts as a storage for when you have months of surplus. The idea is that you have based your budget on a very realistic estimate of what you are going to make this year. Remember, it is better to be conservative in this estimate because overestimating means that you will end up spending more than you make which equals debt. So with a conservative income estimate you will then subtract taxes and divide that number by 12 to give you an estimate of your monthly salary on which you can base your budget.

However, when you own your own business (especially when you are starting out) the income rarely comes in in dependable monthly amounts. In fact, I could say it NEVER
comes in in dependable amounts. The only thing you do have an idea of is how much you are expecting to earn for the year. So our numbers are going to be based on that estimate which basically says that even if you make $1500 this month and $7000 next month, at the end of the year you will make around $50,000 (take home pay). So divide $50,000 by 12 and you get $4166.67. So every time your monthly income is above $4166.67 take the additional money and put it into your escrow account. When your monthly income falls below $4166.67 then you will draw money from your escrow account to make up the difference.

Now if you do own your own business, it may be that you set up your business finances to serve as the escrow account and you simply just draw a salary. This is actually the way it works in most businesses, especially well established businesses. However, if it is a very small business (like you are the owner and there is no one else), you will need to look at the expenses of your business and take them into consideration. Most very small business owners will pay bills for the business and draw everything left as salary and this is exactly when you need a personal escrow account. If you don’t want to leave it in the business, then go ahead and draw it as salary. The point is not to consume everything that you bring in in the really good months, and an escrow account will keep you from doing that.

And if they are all really good months and your income from the business never dips below what you need for your budget, then Praise Jesus!!! And, you probably do not need an escrow account for your income right now. If you are in a position where you continually make more than enough for your budget and then just make even more some months, then the surplus money can just go into savings, or giving, funding your dreams, or whatever the Lord leads you to do with that money. But I would suggest increasing your budget and giving that money purpose like “Retirement Savings” by making it a purposeful part of your budget. Money with no purpose just tends to get consumed and disappears. But the bottom line is, if you don’t need an escrow account, then don’t overcomplicate your life by trying to set one up. However, if your income does fluctuate below what you need for your budget, then an escrow account can actually be the key to simplifying your life.

I hope this has helped Cynthia, and again, if any of you are lost when I talk about escrow accounts then please go back and read my previous blogs on this topic as I went into much more detail on them. And if you are still lost, I would love to hear your questions.

God bless today and I will be back tomorrow.