Dear New Frugal You,
Something we will soon be facing in our family is how to manage money when our monthly income changes each month. My husband is anticipating starting his own business after the first of the year. Each month, the amount he brings in will be very different. How do we budget and how do we plan ahead? -- Kari
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You're right to plan ahead. Starting a new business can create financial strains for the family budget. Prior planning can help everyone to know what to expect and can put them in the best position to adjust as conditions change.
The simplest way to adjust the family budget to fluctuating income is to estimate what Hubby will earn in a bad month. Then try to cut your monthly expenses to match. That will likely mean some hardship for the family. Nonessential expenses will need to be eliminated.
This strategy will accomplish two things for your family. First, you won't have months where your expenses are too high for your income. By cutting expenses to match minimum income levels, you're pretty much assuring yourself that you'll have money to pay the bills each month. No surprises. No begging landlords -- or anyone else -- for a little more time to pay.
The second benefit is that you can use the better income months -- ones in which your income exceeds your expectations -- to your advantage. You can use that extra money to cover expenses that you've been delaying or you can tuck it away, in case there are many more hard months. Remember that most new businesses take a few years to become a steady income source.
You can also adjust your family's budget to a low, but not worst-case level. Use the months that have income above your level to help cover expenses in those months where income falls below your budgeted amount.
But I can't help but think that you may be asking the wrong question. Most new businesses die because of a lack of cash -- even ones that are profitable.
How much Hubby brings home each month may not be the key issue. A better question might be how much cash is available for both the business and your home. That's an important question because running out of cash at home or in the business will lead to fights at home and failure in the business.
Preparing a simple cash flow is not as tough as it sounds. Make two separate lists. One will contain all the essential home expenses; the other shows essential business expenses. Think it through on a month-by-month basis for two or three years, then add your expected income.
By putting all your expenses on paper, you'll make it easier for the family to handle the sacrifice during the business start-up. Hubby can't say that money needed for the business is being consumed at home. Conversely, the family knows that the business isn't wasting the money they're saving.
Be realistic in your estimates. Being overly optimistic on either income or expenses can put your business and family budget on the road to ruin. You'll be much better off planning for the worst case and adjusting if the business does better than planned.
Please don't plan on using credit cards to make up for a lack of cash, either in your business or for home expenses. It might seem like a good idea at first, but the interest rates will turn a small loan into a big problem in short order. Using credit to cover expenses is a warning sign -- a wake-up call that says you must take a second look at your business. Being an entrepreneur includes the possibility of failure. There's no shame in trying and failing, but don't be Don Quixote Inc. and go broke chasing an impossible dream. Know when it might be time to shut it down.
After you put together a cash flow, you may decide that you don't have enough cash to get the business up and running. Sad though that is, it's better to figure that out now before you spend all your savings and suffer a business failure. Perhaps delaying the business start-up until more money can be saved is all that's necessary. If so, that could be the difference between success and failure.
I hope that Hubby's business gets off to a great start.
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