Spend less than we earn

A reader recently asked for advice on debt reduction and living within their means, and I realized that the biggest lesson I have learned is to spend less than we earn on a monthly basis. When I first heard this statement from a debt reduction planner, I thought it was common sense. But then I also realized that it may be common sense but that we weren't following that rule! That was when I created a detailed budget for the first time, and started keeping track of all debts and bill payments. I still find it quite a struggle, mainly because our income is highly variable AND our work is highly variable. Being a small business means that sometimes we wait for months before we get paid for a job.

This is my biggest challenge. I had a reserve of money set aside to ensure I received a monthly wage even in times where I had no contracts. The reserve was 5 months in wages. I thought this would be enough. It turns out it is not enough primarily because there was no room for late payment of invoices. Although it drives me crazy to be waiting for 2.5 months for invoices to be paid it appears to be par for the course in this business, and I need to build a bigger buffer in my business finances to account for this. From what I understand, many businesses will run a line of credit to cover these kinds of issues. I would prefer to have a cash reserve on hand at all times though instead. My parents have always done this with their business and have made it through lean times without further debt because of it.

And of course, we need to pay down our debts so our monthly costs decrease, allowing us to take less of a wage in leaner times too.

5 Comments:

  1. mariam said...
    I really do not understand "par for the course" comment for late payments. Did you institute your late penalty? Is that "client friendly" or will you lose business being inflexible? I mean, if you are late in your cc payments they charge. I don't understand why your clients think they can get away with it with you.
    Mr. Cheap said...
    mariam: Its tough when your running a business to get tough with people you're hoping to get repeat business from. Often they'll justify their late payment as "we're a big organization, it takes time for us to process invoices" or that "90 days is standard in the industry".

    If you kick up a fuss, or try to charge a penalty, either you might look like you're hurting for money (then they worry that you might be too penny ante for their needs) or you seem difficult to work with and they might go with someone else for the next job.

    Its a balancing act, staying cool with customers so they give you repeat business but gettiing them to pay in a timely manner.
    mariam said...
    Hi Mr. Cheap,

    Thanks. I don't have any experience in being self-employed but I wouldn't dream of putting someone else in that position. That's just plain rude. Even if I owe somebody a nickel, I will pay them back the next day. To me, this isn't even a money issue, it's a moral issue but maybe I'm over-sensitive.
    Mr. Cheap said...
    Mariam: I agree with you completely, sadly many people don't seem to share our perspective (and its tough in the early days of starting a business to be too picky about who you do business with).
    Wooly Woman said...
    Hi Mariam & Mr Cheap,

    Yes, it pretty much is as Mr Cheap said, but the worst part is that in this case I am a subcontractor to the company. They have already been paid by the client and are now sitting on the money waiting to pay me. I have repeatedly asked the office where I subcontract from about the cheque and they are equally annoyed I don't have the money. It is head office in Vancouver that is slow getting cheques out and they don't seem to give a damn. I can't professionally even consider withholding services, and I doubt if I would ever see any penalty charges if I put them on the next invoice; they would simply take it out of the project budget, to my detriment again.

    The only bright side is that my time subcontracting ends in a month. I have another large contract which is the first I have obtained through my company alone, and I can't wait! Then I only have to wait for the government to pay and in recent years they have generally become much better at paying within 30 days.

    I agree with you Mariam, it shouldn't been this way and I would never do it, but for the next month or so all I can do is rock the boat a little.... and keep checking the mail.... And in the future try and build up a reserve so I don't have to worry as much!

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