No idea how to manage money

[HornungTheHelpful]

I am lucky in that I am a high earner (sole trader barrister). However, I have a number of problems managing money. Many of these stem from the fact that I am self-employed. I am not paid regularly, and sometimes payments can be extremely irregular. Despite the fact that I theoretically have enough money to pay everything, I often have cashflow problems and end up using borrowing and/or credit cards.

I have tried hard for years to ensure payments are more regular and this is about as good as it gets. So what do I do? I'm bogged down in debt, that worsens the cashflow position, and struggle from month to month, rarely have savings, don't make pension provision as regularly as I should and while annually there should be a surplus I never seem to see it. I don't know what I'm doing wrong or how to fix it.

I've looked to find professional help, but there only seems to be people who want to help me get an IVA or people who want to invest for me, and I need something in the middle. I am cable of doing basic financial management, can read accounts and manage my tax affairs (except when the cash flow becomes problematic).

Any suggestions? Either for apps or techniques to help me, or the type of professional help that might work for me. Thank you.

I'd really recommend Dave Ramsey's total money makeover. Has baby steps for budgeting. Makes good sense about paying down debt and money management.

I use the app 'YNAB'. Which means you need a budget. It's great but you have to pay for it after the free trial.

I will say budgeting is like a piece of homework that gets easier but to start it's hard work and depressing!

Thanks, but do any of these help with budgeting when you have wildly unreliable income? Everything I've looked at is only relevant if you have a regular monthly income. I can be paid nothing for three or four months and then get paid six figures in a short period - but it all goes on covering the deficit from the previous months. Then I get depressed and just give up!

Just downloaded YNAB. Will give it a go!

How much debt do you have & what's your average annual income?

If you have an erratic income you need to save on good months to cover expenditure on bad months. That will help even out the budget.if you have a high income you should be able to do that. Borrowing is not the answer and will lead you into a debt spiral which is difficult to get out of. You may need a debt solution like a DMP if your unsecured debt is out of control.

First thing you need to do is draw up a realistic budget that covers EVERYTHING except debt repayments so you know how much you need to live on for a year. Try Moneysavingexpert for resources. Don’t forget things like Christmas, getting the boiler serviced, dentist visits, professional subscriptions, tax bills etc.

Stick it in a spreadsheet as a list with amounts if you have the skills.

Divide the total annual costs by twelve and then multiply by the longest period that you are likely to be without pay.

Next time you get paid a lump sum, put this amount into a savings account to live on until you get paid again and use the rest to pay off debts.

If you can’t afford to do this, then you do need proper debt management advice as your debt is so high you don’t have enough to live on.

If you can afford it, check your list of expenses for any big one offs due over the next period until you might get paid again and add these to the savings amount.

Do this every time you get paid until you no longer have any debt to pay off, then start saving.

E.g annual expenses £36,000. Can be up to four months you get paid again. £36,000/12 is £3,000 a month so put £12,000 into savings and anything you are paid above that pays off debt.

We were in a similar position from late twenties to mid thirties. DH in the same profession. For about five years we were very, very careful with our pennies in case clients paid late/went bust. I was the cushion. DH might have given up otherwise in those early years.

Do you have access to a clerk to help with the admin/chasing.

If this is a common thing in your profession, then what you need is a low-interest overdraft from an understanding bank manager. Companies and businesses go through cashflow problems all the time despite being profitable on paper, so this is not an unreasonable request.

It might also be stating the bleeding obvious, but you have to drastically cut back your spending on anything that isn't absolutely vital.

You need to separate your business finances from your personal finances.

All your income to go into a business account and then pay yourself a regular monthly income into a personal account, then use this to pay bills and other personal living costs, after setting aside money for tax and pension contributions. However, you might not be able to fully move to this system until you're out of debt, but if you can move over to this in time, it will make things a lot easier.

Then you need to look at the debt management side. Minimising interest and charges should be your priority as this is just money gone on nothing. I don't know if a low interest business overdraft is a thing, but that sounds like a good solution if possible, so worth investigating. Interest rates on personal overdrafts and standard credit cards are very high so should be avoided where possible.

However, there are lots of interest free credit cards that can be used for spending, so if you still have a good credit rating, you can use these to manage your cashflow. Have a look at:

www.moneysavingexpert.com/credit-cards/best-0-credit-cards/

Make sure you get the right card and understand the repayment terms and time limits.

Also, a period of spending as little as possible will help you get ahead and free up money to cover gaps in income. But without details about what you earn, what your essential expenses like housing, bills, basic food and travel are, and how much debt you are in, it's hard to say how severe or long lasting this needs to be.

I suspect lack of time might be a barrier to working through all this? If you're off at Christmas, might that be a good time to sit down and work through reorganising your finances?

Good advice above, but if it really isn't working for you, have you considered not being self employed? Perhaps this type of income just isn't something that works for you and you need a regular, steady salary. There is nothing wrong with that and it makes things a lot easier to manage. Your employer then pays into your pension and it's the same each month etc.

Exactly what @BarbaraofSeville says. A new current account to put your earnings in, then transfer a monthly income on the 25th of each month to your "home" current account. Prepare a budget and make this income the absolute bare minimum you can afford to live on and EXCLUDE debt repayments. You should make the debt repayments direcrly from the business account.

If you have a surplus at the end of the month on the house account, if at all possible keep it there - you want to build up that account because your budget will contain some annualised expenses you need to make provision for.

Then on the other hand you have to take the steps to manage down your debt. If your debt is high initially you may discover it is difficult to build up a balance on the Business account which would enable you to "smooth" your income (eg if you get nothing for two months then £4000 in month 3, you'll go overdrawn in month 1 and 2 if you try and pay yourself an income. However once you get the balance right you should hopefully be able to see what headroom you have to make regular debt repayments.

I used to run my own business with the sort of fluctuations you’re talking about and I did what @BarbaraofSeville has suggested above.

Have a business account with business income and expenditure (can just be a second personal account if you’re self employed) and then pay yourself a regular monthly amount into a personal account.

Start on day 1 when you get a decent sized payment in and make your “wage payment” on that day of the month each month after that coming out monthly.

You need to set that monthly amount to quite a bit lower than 1/12 of your annual income and budget to live on that each month (including monthly debt repayments in my opinion). You can use any of the generic online budgeting advice, taking this amount as your income.

Gradually savings will start to build in the business account but leave those alone until you reliably have enough to completely cover the longest possible payment gap. Once that is done use any extra to pay a lump sum off the highest interest debt first.

This system will be helped massively if you can kick start it by having a couple of very frugal months at the beginning to give yourself a chance to reset.

I’d also recommend going through a couple of months bank statements with a fine tooth comb and checking that you aren’t paying any old direct debits / seeing if there is anything that you could pause for a couple of months.

good luck!

It is tricky and the lure of a regular income was one of the reasons I moved from the Bar to a law firm.

What happens when you get the big lump sums? Is it all going towards the debt or do you also "make hay while the sun shines" and treat yourself? If it is the latter, could you have a really frugal few months to try to get past the debt so that when you receive a lump sum you use it for future months rather than past months?

DSIs is a barrister and it is so common in the industry. My DM manages DSIS money for her because if she has some she spends it! DSIS has a business account which she pays all business expenses, chambers fees, tax, and a small pension out of and DM sets up a standing order order monthly to her personal account. In Feb DM looks at whether there is scope to make extra pension (her allowance isn’t £40k some years) and tops her pension up.

You need to work out your personal monthly expenses (inc personal debts) and transfer this monthly leaving excess in the business account. Business expenses (inc business debts like tax) need to be paid from that account. Consider yourself an employee of your business with a fixed salary.
Every year DH and I go through all our bank statements and analyse where we spend our money (the first year we did this (because we we’re starting to have negative money at the end of the month) we spend £7k on eating out and entertainment 😳) and then set a realistic budget for the next year - hopefully there are some things you can cut back on. Also do this for your business and check you still want all subscriptions/IT costs etc.

bogged down in debt

The first place to start is to acknowledge the real reasons for the situation. Having debt rather than savings is a sign that your overall spending exceeds your income.

Keeping spending below income means that your debt will be paid down and your savings will build.

This may be complicated or even masked by the irregular payments, your debt is not caused by them unless your clients are defaulting on payments they owe you. It may just be the the idea you have in your mind of your earnings is higher than actuality.

Sorry to sound harsh but true.

The solution is to live very frugally for some months or years to build up a cushion to cover your living expenses and pay down debt, then build savings.

The place to start is to establish the absolutely minimum budget you need in order to survive. Start by setting out up your obligations, including rent/mortgage, utility bills, local tax etc.

Don't just guess, look these up and work out the extra to be expected over this winter.

Include transport and foods, the very minimum to survive, not lunches out at work.

The look at your income, gross and net. Consider the funds required to make provision for tax and other expenses an essential bill like rent on premises etc.

Over time, your income will smooth out. The key is to live much, much more frugally than you have been doing. Trying to arrange for your income to be more regular might help but isn't the real problem if you are building debt.

I was coming on to say ‘YNAB’ as it’s so good with irregular income. Because you make a plan with only the money you have right at that moment, it forces you to prioritise in a way a forecasting budget doesn’t.

There is a steepish learning curve but come back and ask questions, there’s lots of good resources around to help while you get started.

Absolutely what @BarbaraofSeville said + a dollop of @FinallyHere . Wouldn’t an accountant be able to help you untangle the mess? I suspect you’re beyond an app, unless you can be brutally forensic with your current situation.

You need to keep a business account and pay yourself a regular monthly salary from there.

The salary should be less than your annual income
So you can ride out the quieter times.
Also make sure you are billing your clients regularly. Interim bills aren't uncommon in your line of work,
Echo what others have said about Dave Ramsey and YNAB. Start with the book.

Irregularity is one thing

How predictable is it - can you say with some confidence that you get at least xx over the year ?

Turn that into a monthly income and prepare budge as if you are getting that each month

From that number you work out your budget which includes a paying off the debt share . And since you say it's good money your budget includes saving

So food allowance
All bills
Spending money for clothes , nights out , takeaways and travel

When the money comes in you pay of the debt that your budget says - don't try and clear it all off if it leaves you with nothing but stress about going back into debt - and live on the rest according to your budget.

It will take time to clear the debt off but the principle is exactly the same as a regular income - pay off what you can each time income appears

It does sound like you are spending more than you should be or the debt would be getting smaller each time you have to cycle at it

I used to know a woman who worked independently a a credit controller. Her clients were like you, she chased up payment to ensure cashflow, was paid a small percentage of what she brought in. She must've been good at it, she was rolling in it!

My income works the same ways as yours, OP, so here's what I do:

Separate business bank account, which all money earned goes into. This account also has all work-related direct debits etc. (professional fees, courses I go on etc). It has a DD to my pension, one to savings, and one to my general account.

If I find money building up in the non-savings accounts then I sometimes transfer a bit extra to my savings or pension.

If you have debt, I'd say tackle that first. Spend as little as you can until it's paid off. Write down everything you spend and see where it's going and what you can cut back on. Just prioritise paying off the debt as quickly as you can (obviously don't leave yourself short of cash for essentials). When you get into the habit of saving money, it really starts to make a difference - you realise you've been throwing it away on stuff you really can live without.

There's a lot of free information about YNAB on YouTube, I found it hugely useful when setting up a budget. I have found YNAB life changing - I've been on it since August.

That should be what OP's clerks are doing. But late payment is a known issue for barristers. It really shouldn't be as most clients are law firms but the law firms often won't pay until they have funds from the lay client. The Bar Council tried to tackle this with standard ts and cs about 15 years ago but it hasn't changed much.

Thanks, there are some really useful bits and pieces here. I do have separate business and personal accounts so that’s set up, but don’t pay myself a salary, which is a good idea. I also have an accountant but have never asked for help with my personal side, so maybe that’s an idea too.

once a year I assess my personal situation. Last year I was balance sheet solvent to the tune of c. £350k and my income did exceed my outgoings. I’m not taking on more long term debt. It’s just having to rely on short term debt to cover cashflow and hate not having savings/investments, paying down mortgage. I earn too much money not to be doing this. I find it really distressing. Like I’m so lucky and I’m letting my family down by not being able to manage everything.

For those with an understanding of how the Bar works, I do have clerks but they are awful at collection (fantastic otherwise though). Unfortunately they are big on paying Chambers expenses on time, which is a tough combination for the barristers. We also pay Chambers expenses on work done not receipts. Historically my Chambers has had lots of independently wealthy barristers in it so it hasn’t been a problem. It’s not the case anymore but the wealthy are still at the top so it’s hard to effect change.

I really wish, like the poster’s DSis, that someone else would manage it all for me and just give me a salary. I might see if my Dad will help.

But you are all right. The solution lies in spending less, however I achieve that! Thank you so much for all the suggestions. I’m taking them all on board. Xxx

You pay chambers' expenses on earnings not collections? I'd say that is a large part of the problem. Is that the norm? I left so long ago I can't remember what my old set did.