If you depend on commission sales or other forms of self-employment for your livelihood, you may know what it's like to live on a roller-coaster income.

Having been self-employed most of my working years, I know exactly the justifications for being unable to plan ahead, create a budget or stick with a plan.

Those with irregular incomes live in constant uncertainty. Some months produce nothing, then a big account comes through. And invariably it takes that check in its entirety to catch up and bring everything current. In the good months when the big deal closes we forget about the lean months and that there may be many more ahead.

For many, at least in the beginning, self-employment is survival on a daily basis. Self-employeds usually conclude it is impossible to come up with any kind of reasonable spending plan or to live within their means, when the means are so unpredictable.

Small business owners make a huge mistake when they fail to become their own strict and unbending employer. Those of us in this position must wear two different hats—employer and employee.

As the employee you have to determine the absolute lowest reasonable salary you can live on and accept from yourself, the employer. This is not your dream salary, but the amount you must have to stay out of debt, save for the future and keep food on the table.

Let's say, for example, that your rock-bottom minimum figure to survive is $3,000 a month. You may intend to bring $10 million into the business this year, but determining your reasonable monthly requirements has nothing to do with the business' annual income. As the employer you must determine if your business (this applies to commissioned salespeople, too, who must view themselves as self-employed) can commit to this $3,000 monthly expense to hire its favorite employee. Let's assume that it can.

Next you must open another checking account. If you are a typical small business owner, you take varying sums of money (depending upon current need or availability) directly from the business account and deposit them into your personal checking account as you need it or funds are available. The amount probably fluctuates from month to month. As a freelance artist or commissioned salesperson you have been used to depositing your commission checks directly into your personal account. This is a problem.

Another checking account will help you take control. Example: You receive a $10,000 commission check in January, nothing in February, nothing in March; in April you receive five checks, $550, $1,200 $3,000 and $850. Not so bad. That's $15,600 for four months which should more than cover your expenses of $3,000 a month. The problem is in January you had to play catch-up on holiday bills which you couldn't pay because December was a dry month. And then there were all of those great sales and it felt like you had extra money so you splurged a bit. Along come February and March and no income. The personal checking account is depleted, the credit cards are called into action, and it's desperation time until April. The $5,600 received in April barely gets you caught up, and so goes the ride on the roller coaster.

With the new checking account method, here is what would happen: The January $10,000 check would not be deposited into your personal checking account. Instead it would go into the holding account. On payday—a predetermined day that you pay yourself each month—you write yourself, the employee, a paycheck for $3,000 and not a penny more. After all, as your own employee you can't expect a raise every month. It's $3,000 (or the amount you negotiated with yourself) on payday and that's it.

On February 1 you write yourself a $3,000 paycheck. On March 1 you write yourself a $3,000 paycheck. On April 1 you deposit the $5,600 and write yourself a $3,000 paycheck and so on each month.

If your self-employment position is sufficient to support you and your family, you should not have to worry. The income flowing into the holding account should exceed the paychecks. If not, perhaps it's time to call this a hobby not a viable business that can afford to pay an employee.

As the holding account becomes healthy, there will be additional funds to carry you through lean times. When things are going well and there are sufficient reserves, you might even consider negotiating a raise for yourself, but remember to think this through. Weigh the pros and cons.

Consider the position of both the prudent employer and the needy employee.

Your success self-employment success lies in your willingness to be a strict employer and at the same time a grateful and humble employee.

Originally posted Sept. 2006


  "Debt-Proof Living" was founded in 1992 by Mary Hunt. What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt. Today, "Debt-Proof Living" is read by close to 100,000 cheapskates.    Click here to subscribe.