One of the questions I am often asked by self-employed people is how to budget. Most self-employed people tend to live in a world of feast or famine. When times are tough they skimp, beg and borrow, but when times are good they spend like the good times will never end. Their largess knows no end and they will have a party to thank those that helped out during the tough times, they will upgrade their car or take the family on a big holiday – all in celebration of having survived the tough months.

The problem with this strategy is that one starts to live a boom or bust lifestyle which is not only unsettling for the household but it leaves one very financially vulnerable.

All business owners or self-employed people know that there are certain months of the year which are tougher than others and occasionally those tough months go onto being a tough year. One needs to plan for those tough times by saving during the good ones.

The best way to manage a variable income is to have a basic household budget that covers your basic day-to-day expenses. This is the amount you need to live – it does not include the luxuries.

Your aim is to minimize this budget so that it can be covered by your income in any given month.

Then like a squirrel preparing for winter, when you earn money over and above that budgeted amount you save it and build up an emergency fund worth several months of income. This is income you can draw on in difficult months. The best strategy is to keep this in a notice account or fixed deposit so that you are not tempted to dip into the money unnecessarily.

Only once that emergency fund has been built up are you really in a position to start spending on luxuries. Riana Grobler, a business consultant at Old Mutual, says she always advises people to have a saving milestone in their mind. Once they have reached that milestone then they can start to look at their “wants” list.

House and car repayments are also difficult to manage on a variable income if you have over-extended yourself. Before buying a home or car you need to make sure you can cover the payments in your basic budget, not the income you earn in the “good” months. Even if you have landed a new contract and are feeling very positive about it, in the world of business things change very quickly so don’t use it to justify going into debt. Rather save the additional money to put down a larger deposit or even buy the car with cash.

According to Grobler tax and VAT are responsible for the biggest financial disasters for self-employed people because they often forget to keep it aside. The golden rule for self-employed people is to keep tax and VAT money separate and never to spend it! As soon as you receive the income, put the VAT and tax into a separate bank account. The receiver of revenue is a first in line creditor which means you have to pay SARS before you even pay your bond!

This article was first published in City Press