If you’ve been running your therapy practice for a while, then you already know how important it is to have a budget. 

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But many therapists who are experts at managing their practice’s budget struggle to budget in their personal lives. Still others struggle with any type of budgeting, period.

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If that sounds like you, then consider this your complete guide to personal budgeting. Not only will you see how personal and business budgets interact, but you’ll get actionable takeaways you can use to make your business accounts—and your pocketbook—easier to manage and maintain.

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Practice budget vs. personal budget

In the same way that you and your practice have two separate checking accounts—one for personal use, and one for business—you also have two separate budgets.

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One is for personal income and expenses, and the other is for business income and expenses. But the two budgets also differ in what kinds of data you use to create them.

Your practice’s budget

You build your practice’s budget, and modify it as time goes on, based on:

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• Bookkeeping data. Your bookkeeping data includes financial reports, the most important of which are your profit and loss statements (P&Ls). Your P&Ls let you see how much you’ve spent on different types of expenses in the past. They also report your practice’s income month to month. You can use this information to determine your practice’s average income and expenses.
• Financial projections. Using past financial reports you can create financial projections. These are models of how much your practice will earn and spend in the future, as well as how much working capital (money in the bank) you’ll have on hand to cover expenses and reinvest in your business.
• Input from an accountant. You may decide to consult with an accountant to set your practice’s budget. An accountant can do the heavy lifting for you, analyzing bookkeeping data and creating projections. 

Your personal budget

You set your personal budget, and make modifications, based on:

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• Past spending and earnings. In all likelihood you do not have a bookkeeping system in place to track your personal income and expenses. The data you draw upon to set your budget will come from checking account and credit card statements. 
• Personal long-term planning. Your personal goals impact how you budget. Saving for retirement, building up an emergency fund, or saving for a large purchase like a down payment on a house–all of these affect how you use your income.
• Input from a financial coach. Accountants typically are not in the habit of helping individuals create personal budgets. For that you may want to turn to a financial coach. A financial coach can help you figure out what you need to do to cover day-to-day expenses while setting aside savings for the future.

How your business and personal budgets interact

Even though they operate separately, your business budget and your personal budget affect one another in a few ways:

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• Your personal income. The amount you pay yourself impacts your personal budget directly, since you use your income to pay for expenses and create savings plans.
• Your salary as an expense. If you’re taxed as an S corp, the amount you pay yourself also directly impacts your business budget. On the books, your salary or owner’s draw is a regular expense. It affects your practice’s cash flow and its ability to pay for other business expenses.
• Benefits. If you’re on the payroll as your own employee, you may receive benefits. These can include business contributions to a health savings account (HSA) or retirement savings. That creates another recurring expense for your practice.

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Why you need to cut yourself a paycheck

Many therapists who are new to running their practices treat their businesses like an ATM. When they need cash to cover personal expenses, they take it out of their business savings account and record it on the books as an owner’s draw. 

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That means that their personal income is irregular (since they only take out money when they need it). It also means their business expenses are irregular (since, as an expense, the owner’s draw is variable and hard to predict).

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If you plan to create a personal budget, and if you want to keep your practice’s budget under control, then you need to pay yourself a regular owner’s draw or salary.

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A regular owner’s draw or salary—taken on a biweekly or monthly schedule—allows you to anticipate business expenses and personal income and create predictable budgets for both you and your practice.

Owner’s draw vs. salary

If you operate as a sole proprietor (or an LLC taxed as a sole proprietor), you can take earnings from your business in the form of an owner’s draw. This is simply a transfer from your business checking account to your personal checking account. On the books, it’s recorded as an owner’s draw.

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Since you and your business are identical for tax purposes, all of your income—both business and personal—is taxed the same way. There’s no need for tax remittances or other paperwork. 

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On the other hand, if you operate as an S corporation (or an LLC taxed as an S corp), you must pay yourself as an employee. That means setting up a payroll system, putting yourself on payroll, and paying yourself a salary.

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It also means withholding income tax and payroll taxes (social security and Medicare) from each payroll or bank deposit, remitting them to the IRS, and recording these payments on the books.

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High earning self-employed therapists typically choose the S corp tax structure because it allows for tax savings. Only your personal income as a therapist is subject to payroll taxes, so some of your income—the earnings kept by your S corp as working capital—are taxed less than they would be if you operated as a sole proprietor.

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For more info, check out How to Pay Yourself as a Therapist and When Should My Therapy Practice Become an S Corp?

How much should you pay yourself as a therapist?  

There’s no easy answer to how much you should pay yourself as a self-employed therapist. 

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Variables affecting your personal earnings include:

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• How much your practice is earning
• How much you need in order to cover personal expenses
• Personal savings plans
• Your practice’s total earnings and expenses
• How your income is taxed based on your business structure

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That being said, if your therapy practice is an S corp, the IRS requires you to set yourself a reasonable salary.

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A reasonable salary is an amount of pay determined to be appropriate for you based on your experience level, your work hours, your education, the types of treatment you offer, and where your practice is based.

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The IRS doesn’t want S corp business owners to pay themselves tiny salaries while keeping most of their profits as working capital. This would allow them to pay a minimal amount in taxes (based on how S corp income and personal income are differently taxed).

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For more, see How to Calculate a Reasonable Salary as a Therapist? 

Basic budgeting for therapists

There are a variety of ways to determine how much of your income to allocate to different expenses. These are covered below. But before you can start setting your budget, you need to build a basic framework.

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At this stage, your budget may take the form of a document, a spreadsheet, or even a rough copy you print out and fill in by hand. Later on, digital budgeting tools (also covered below) can help you stay on budget and make updates as you go. For now, though, the simplest approach is to lay out your budget in tables.

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Your budget will have three sections:

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1. Date
2. Income
3. Expenses

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For help visualizing this, download the Budget Template for Therapists. It’s designed to be a business budget, but it follows the same format as a personal one.

Date

This section of your budget specifies which period of time your budget covers. A monthly budget will include the start date, the end date, and the year. An annual budget will include the year running from January 1 to December 31.

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It’s usually easier to build a monthly budget that you can replicate from one month to the next, and later build an annual budget based on that. For the sake of your personal budget, start with a document covering the first month you’re budgeting for.

Income

Your therapy practice may have multiple revenue streams—in-person sessions, remote sessions, speaking fees, online courses, contract work, and so on. 

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Your personal budget is simpler. Under Income, the main line item is “Therapy Practice Draw” or “Therapy Practice Salary.” 

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If you also work as an employee for someone else, you may include a line item for that job. 

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At the bottom of your Income section, include a line item for “Total Income.” This is your total projected income for the period being covered.

Expenses

The bulk of your personal budget will consist of expenses. Each expense falls into one of two categories: Fixed and variable.

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Fixed expenses are the same from one month to the next. They include:

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• Rent or mortgage payments
• Fixed utilities (phone, internet, or flat rates for other services)
• Subscriptions (streaming services, apps)
• Financing payments (vehicles, furniture, electronics, or other large purchases)
• Debt payments (student loans and other types of loans)
• Insurance (medical, dental, vehicle, homeowner’s)
• Childcare
• Savings contributions (retirement, emergency fund, house downpayment)
• Taxes

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Fixed expenses may change over time. For instance, your student loan payments may decrease as you pay down the principal. Or your total financing payments may decrease as you pay off certain purchases like your vehicle. 

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Variable expenses change from one month to the next. These include:

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• Groceries
• Variable utilities (electricity, gas, water)
• Gas
• Home repairs
• Vehicle repairs and maintenance
• Toiletries
• Clothes
• Entertainment
• Pet needs, including veterinary care
• Hobbies
• Charitable contributions
• Uninsured medical treatment

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Keep in mind that these lists of expenses aren’t written in stone. They vary according to your particular situation. 

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For instance, if you make recurring charitable contributions to a particular foundation, they would count as a fixed expense. Or if your childcare costs vary from one month to the next, they would be a variable expense.

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At the bottom of the Expenses section is a line item for “Total Expenses.”

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Why fixed and variable expenses?

The purpose of splitting expenses into the fixed and variable categories is to help you recognize which you can easily budget for. 

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For example, your phone bill might be $60 each month, so you know you need to budget $60 for it. On the other hand, you might spend $100 on entertainment one month and $500 the next. It will take more work to figure out how much to budget each month for entertainment.

Projected vs. actual spending

Each line item in your budget should intersect with two columns: One labeled “Projected” and one labeled “Actual.”

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Under Projected, you enter the amount you intend to spend on a particular item over the course of the month, or the amount you expect to earn from a revenue source. You do this before the month begins.

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Under Actual, you enter the amount you actually spent on a particular item or the amount you actually earned from a particular income source. You do this after the month ends.

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By making sure to update the Actual column at the end of the month, you can see how closely you adhered to your budget. This not only keeps you accountable, but helps you to make changes to your budget as time goes on. 

How to project revenue and expenses

Variable expenses fluctuate from one month to the next. And even if you cut yourself a paycheck every two weeks, you may find you need to adjust it based on your caseload and the need to cover business expenses. That can result in fluctuating revenue.

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So, how much should you expect to pay (in expenses) and earn (in revenue) from one month to the next?

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You can calculate projected expenses and revenue by reviewing past amounts and determining an average for each.

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The farther back you look in your financial history, the more accurate your projections are likely to be. 

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For instance, you could look at your electric bill over the past three months and determine an average based on that. But the amount you arrive at will be less accurate than it would be if you looked at 12 months’ worth of receipts.

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To find an average, add up the amount of the expense for X months, then divide by X. Here’s an example for three months’ and 12 months’ worth of electrical bills:

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Since 

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247.29 ÷ 3 = $82.43

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the average projected expense for electricity is $82.43.

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Since 

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956.29 ÷ 12 = 79.69

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the average projected expense for electricity is $79.69.

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Personal budgeting systems for therapists

Once you’ve listed all of your expenses and revenue, and projected averages for each, it’s time to settle on a budgeting system.

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A budgeting system determines how you allocate extra income (if your revenue exceeds your total expenses) or cut costs (if your total expenses exceed your revenue).

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It also gives you a set of guidelines to follow when making changes to your budget. You may need to change your budget if:

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• Revenue or expenses increase or decrease
• Your initial projections turn out to be inaccurate
• Your long-term goals (e.g. saving for retirement) change

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There’s no one-size-fits all budgeting system. It’s important to compare different systems before settling on one. You may even find none of the most popular budgeting systems fit your particular circumstances, and create a system of your own.

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Vitally, once you choose a system, you should stick with it. Having a system in place gives you a firm foundation and makes it easier to stick to your budget from one month to the next.

The 50/30/20 rule

Following the 50/30/20 rule, you break down your revenue into three parts:

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• 50% to cover your needs. These include housing, groceries, utility bills, and any expense that is absolutely necessary.
• 30% to cover your wants. These include travel, meals out, gifts, and other optional expenses.
• 20% to serve your financial goals. These include retirement savings, paying off debt, and saving up for a large purchase like a downpayment on a house.

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The 50/30/20 rule has a few benefits:

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• It’s simple. Once you’ve determined your average earnings per month, all you need to do is break them down into three categories and assign cash to the expenses under each category.
• It helps you meet your goals. Even if financial goals make up just 20% of your revenue, by reserving that amount exclusively for long-term plans, you’re guaranteed to build up savings or pay off debt.
• It leaves room for fun. A strict budget that doesn’t allow for any luxuries is hard to stick to. By setting aside 30% of your income for recreation, you’re less likely to feel deprived—while ensuring your entertainment spending doesn’t run wild.

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But there are drawbacks, too:

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• It doesn’t work for everyone. If you need 70% of your monthly income to cover needs like rent and groceries, that leaves only 30% for both entertainment and savings. At that point, you need to make some tough decisions about how you spend your money.
• It doesn’t account for major changes. Even if the 50/30/20 rule works for you at first, it can be thrown off by changes in your earnings and expenses. A sudden, unexpected expense not covered by your savings, time away from work, or (more optimistically) a spike in your income means you’ll need to make changes that may throw off the 50/30/20 ratio.
• It doesn’t help you make adjustments. The 50/30/20 rule is just that—a general rule. While it can help you set up a budget, there are no guidelines for adjusting that budget as your situation changes.

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Some individuals follow the philosophy of 50/30/20, but adapt it to their needs. If your living expenses are high, you may find you choose to follow a 70/20/10 rule. If they’re low, you may settle on something like 40/30/30.

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Whatever the case, while 50/30/20 can help you get started budgeting, it may serve better as a tool for helping you think about your budget rather than for building it. 

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What does daily life look like if you set aside 30% of your income for luxuries? What would your long-term savings look like in five years if you allocated 20% of your earnings to them? Answering these questions can help you mentally prepare for a new way of spending and saving.

The Profit First method

Businesses use the Profit First method to manage their spending, but the same approach can be applied to personal finances.

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Following this method, a business first allocates a portion of its revenue as profit. The remainder it allocates to covering expenses. 

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When there’s more money to spend on expenses, many businesses have a tendency to increase those expenses—by hiring new staff or launching new marketing campaigns, for instance. Then, when revenue dips, the business struggles to cover its expenses while reporting a declining profit. The benefit of Profit First is that the business is always guaranteed a profit, while spending on expenses is kept under control. 

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The profit first method for personal finances is a slightly modified version. It assumes a steady income (bi-weekly paychecks). Then it allocates money to multiple savings accounts (or, in a simplified version, a single “buffer” account). Setting aside money for emergency expenses takes priority.

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Here are two ways to implement Profit First for your own finances: A simplified method, and a complete one that is (potentially) more robust and adaptable.

The simplified Profit First method

Following this approach, you have at least two bank accounts: One for income and one that acts as a buffer.

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Your income account is where you deposit each paycheck. It’s also the account out of which you pay your recurring monthly expenses.

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Your buffer account is where you keep money to cover unexpected expenses. These include uninsured medical bills, home or vehicle repairs, or periods where your income decreases and you need extra cash to cover recurring monthly expenses.

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Here’s how to do it:

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1. Add up all of your unexpected expenses for the previous twelve months. Then divide this amount by twelve. This is the amount you should allocate to your buffer account each month.
2. Pay yourself a regular income on a biweekly basis.
3. Each time you pay yourself, put one half of your monthly buffer account allocation in your buffer account.

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You may find it helpful to break your buffer account up into separate accounts: One for medical bills, one for repairs, and so on. 

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That requires more complex calculations. You’ll need to calculate how much you spent on each type of emergency expense in the previous year, divide by 12, and then allocate that amount each month to the appropriate account.

The complete Profit First method

Using the complete Profit First method, you divide your income into five accounts:

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1. Income
2. Vault
3. Recurring payments
4. Day-to-day
5. Debt destroyer

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Here’s how you use each account.

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Income account: This is where you deposit each paycheck before distributing funds to other accounts. Before making any distributions, set aside a portion of each paycheck for retirement savings. According to the guidelines in Mike Michalowicz’s Profit First book, if you have debts to pay off, you should allocate 1% of your monthly income to retirement savings. If you don’t have any debts, you can allocate more.

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Vault: Your emergency funds are stored in the vault account. At first, you should aim to save up enough in this account to cover one month’s worth of expenses. From there you can continue building up savings.

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Recurring payments: All your recurring monthly payments—rent, insurance premiums, and other fixed costs—are paid out of your recurring payments account. Each month, allocate the total amount you need to cover these payments, plus 10%, to this account. 

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Day-to-day: You pay for regular variable expenses from your day-to-day account. These include groceries, toiletries, gas, and entertainment expenses. Calculate the average amount you spend each month to pay for these expenses and distribute it here.

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Debt destroyer: The debt destroyer account is exclusively used to pay down debt. All of your extra income goes into this account.

Pros and cons of Profit First

Like any method, Profit First has both its benefits and its drawbacks.

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Pros:

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• Routine building. Making your bi-weekly or monthly distributions to various accounts becomes a set routine, helping you to get into the habit of following a budget.
• Clear demarcation. Different bank accounts for your income and for your various savings and spending accounts help to prevent you from overspending in certain areas or dipping into savings.
• The buffer: Whether you use the simplified method or the complete method, you’ll prioritize preparing for unforeseen expenses. That’s helpful if your therapy practice’s revenue is uneven and you find you need to reduce your paycheck. It also prepares you in case you have to stop working for an extended period.
• A way out of debt. With every cent of excess income going towards paying off personal liabilities, profit first can set you on the path to getting out of debt. 
• Adjustments are baked in. Since the amount you distribute to each account is determined by your expenses, as your expenses increase or decrease, you automatically increase or decrease how much you allocate to cover them.

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Cons:

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• You still need a budget. Profit First isn’t a one-stop solution to budgeting. You’ll still need to calculate your average monthly expenses and make decisions about entertainment spending and retirement savings.
• Calculating adjustments could be tricky. Particularly when it comes to calculating distributions to your vault account, you’ll need to keep track of how your expenses change from one year to the next. That means revisiting your spending history on a regular basis and making changes to your distributions.
• Multiple bank accounts. Depending on where you do your banking, you may need to pay fees in order to open and maintain separate bank accounts. On top of that, you may find it more burdensome to distribute your income among four different accounts every time you get paid than to simply track your spending.

Business budgeting methods for personal finances

Besides the profit first method, there are five more traditional methods businesses use to manage their budgets. 

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You can adapt these methods to your personal finances. No single method is a complete solution, but each one gives you a basis for making adjustments to your budget as time goes on.

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1. Incremental budgeting. Every month you make adjustments to your budget based on the previous month’s actual versus projected spending. By making small changes as you go, you can keep up with fluctuations in income and expenses.
2. Activity based budgeting (ABB). Every expense is analyzed. You determine how important an expense is (e.g. meals out vs. groceries), and make cuts (or eliminate) low-priority expenses.
3. Zero base budgeting (ZBB). For each budgeting period you create a new budget based on your needs for that particular period. It takes more work than other methods, but this approach can help if your expenses are highly variable.
4. Value proposition budgeting (VPB). You prioritize different expenses based on their payoff. For instance, the electric bill has a high payoff (it literally keeps the lights on), while a new subscription has a lower payoff (it’s easier to live without bingeing a new TV show than it is to live without electricity). 
5. Envelope budgeting. Your income is relegated to different envelopes to cover certain day-to-day and recurring expenses. Once an envelope is “empty,” you no longer pay for the expense. Excess cash in each envelope may be carried over to the next budgeting period.

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As with the 50/30/20 rule, these methods may be less useful as hard-and-fast rules to follow than as tools for helping you rethink your budget and come up with fresh approaches.

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Cash stuffing for therapists

Cash stuffing is not a budgeting method. Rather, it’s a way to help you manage your spending once you have already set your budget. In this, as with so many things to do with money, psychology plays a role.

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When you use the cash stuffing approach, you literally withdraw all of your income as cash and designate it to different envelopes representing expenses.

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You then pay your expenses from these envelopes. 

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The main goal of cash stuffing is to make your spending more tangible. The theory goes that, when your money is represented by hard currency rather than numbers in your bank account, you’ll be more thoughtful about your purchases and spend less money overall.

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There are even some studies backing this theory up. In effect, cash acts as a stronger self-regulating tool than a card or a smartphone.

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Dealing with money hands-on may also make the prospect of budgeting and tracking your spending less overwhelming. Managing your spending becomes more like a physical chore, like organizing your sock drawer, and less like an abstract series of calculations.

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There are some drawbacks to the cash stuffing method, however:

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• Inconvenience. Paying utilities bills or putting money in long-term savings accounts may require trips in person to the bank.
• Liability. If you misplace your banking card, you can report it lost, freeze your accounts, and request a new card. If you misplace cash, it’s gone for good.
• Lack of credit building. While cash stuffing can wean you off the habit of using a credit card irresponsibly, it may also make it difficult to build credit.
• No interest. Money in your savings account accumulates interest, which can help to offset the effects of inflation. Physical cash does not.

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When used in tandem with a well-thought-out budget, cash stuffing may make personal finances less intimidating and help you to build healthier habits. But before you go and withdraw every penny in your bank account, check out this introduction to cash stuffing to help decide whether it’s right for you.

Personal budgeting tools for therapists 

While you can use a spreadsheet or even a printed template to track your spending, the process can become burdensome. 

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There are many apps designed to help manage personal finances and help you stay on budget. Some are comprehensive systems, meant to cover every aspect of personal budgeting. Others are specialized tools you can add to your existing setup and use to speed up everyday tasks.

Comprehensive budgeting apps

An all-round budgeting app operates similarly to accounting software. It helps you categorize income and expenses and track your revenue. Most allow you to automatically import transactions from your bank account, so there’s no need to manually enter the data. 

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More than that, though, a budgeting app typically offers extra features, like goal-setting and spending reports, that help you keep on track. 

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Different apps take different approaches to budgeting, offer different features, and come with different price tags. It’s worth your while to try a variety of apps before settling on one. Some of the most popular are YNAB (You Need a Budget), PocketGuard, and Fudget.

Receipt tracking apps

A receipt tracking app lets you take a picture of a receipt with your phone and upload the information to the cloud. You can refer to this data later to calculate your spending for a certain period.

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Receipt tracking apps are typically used by small business owners to track spending not automatically imported into their bookkeeping systems (ie. purchases made with cash). Employees of larger businesses also use them to report business expenses so they can be reimbursed. 

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But a receipt tracking app can also play a role in your personal finances, particularly if you make many of your purchases with cash or if you follow the cash stuffing approach. One of the most popular (and least expensive) is Expensify. 

Bank account budgeting tools

Increasingly, banks offer budgeting tools built into their online banking platforms. Beyond allowing you break out your spending into different categories, many of these tools include up-to-the-minute reporting and analysis to help you spot trends. That can be useful when you’re first setting out to build a budget and determining how much to allocate to each expense.

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If your bank offers budgeting tools but you’ve never used them, set aside some time to explore the various functions and features and decide whether they’ll be useful for you. If your bank doesn’t provide budgeting tools, consider opening a new account at a different bank. Bank of America, Capital One, and Wells Fargo all provide budgeting tools as part of their standard checking accounts.

Price comparison apps

One of the most difficult aspects of creating a budget is cutting expenses. You may find it easy to curb your spending on fancy meals and new clothes, but when it comes to groceries and other everyday essentials, where’s the wiggle room?

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Price comparison apps help you get more bang for your buck and reduce costs you might otherwise have taken for granted. Even if you’re not a coupon clipper by nature, the ease of using these apps can turn shopping for the best price into a sort of game.

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Check out:

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• PriceGrabber, a well-established website that lets you search or browse by product type and find the best deals.
• ShopSavvy, which allows you to snap a picture of a product’s barcode and find cheaper alternatives.
• CamelCamelCamel, to track historical prices of products on Amazon, so you know when a particular deal is worth cashing in on.

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Budgeting mistakes to watch out for

Once you’ve chosen a budgeting method and set your personal budget, it’s time to put it to work. But there are some pitfalls you need to watch out for, particularly when you run your own therapy practice:

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• Using business accounts to cover personal expenses. Dipping into business funds to pay for expenses not covered by your personal budget may seem innocent enough. But it compromises both your personal and business budgets, and may pierce the corporate veil.
• Underpaying yourself. When you first start paying yourself a steady income from your practice, make sure it will be enough to meet your personal budgetary needs—ideally with a little extra wiggle room in case you need to revise your budget later on. Your personal budget won’t be successful if you’re always coming up short of cash.
• Losing track of regular paychecks or draws. Paying yourself regularly from your business is a financial habit like any other: If you don’t stick to it, you won’t get the full benefit. If you start skipping paychecks—or, alternatively, taking extra draws to cover expenses—both your business and personal budgets will go off the rails.
• Dropping your budget once your income increases. Many newly self-employed therapists turn to budgeting because they need to adapt to a smaller income. As business picks up and they can afford to pay themselves more, they abandon their personal budget and fall back on old habits. But no matter how much you earn, you always benefit by following a personal budget.
• Failing to update and modify your budget. Your budget isn’t just a set of rules you follow. It should evolve organically to adapt to changes in your income and spending. Unless you regularly revisit your budget and make modifications, it will soon outwear its usefulness.

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Key takeaways

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• A personal budget can help you get (or stay) out of debt and adapt to fluctuations in income earned from your therapy practice.
• Paying yourself regular paychecks or owner’s draws is essential for helping you stick to a budget.
• To create a personal budget, you’ll need to review your personal spending and determine your average monthly income and expenses.
• The 50/30/20 rule and the profit first approach are both popular methods for setting your budget, but there’s no solution that is a perfect fit for everybody.
• Tools like budgeting and receipt tracking apps, and bank cards with built-in budgeting tools, can help you stick to a monthly budget.

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For help building your practice’s budget, check out How to Build a Budget for Your Therapy Practice.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.

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Bryce Warnes is a West Coast writer specializing in small business finances.