A Freelancer’s Money Management Techniques

Guest post by my talented friend Becky, who very bravely started her own business a few years ago. Becky is even more knowledgeable about personal finance than I am (can you believe it?!) and she knows about managing a small business- something I know nothing about. Thanks, Becks!

You can follow Becky at @thebeckyhamm, if you love her advice already!

A Freelancer’s Money Management Techniques

I’ve owned my web design business for 2 years now. Going from a well-paying salaried position to freelance was a huge shift in the way I thought about money, but the basic principles remained the same. Here’s my general process.

Note: Since very small businesses is what I know best, this article is geared towards them. If you have a brick-and-mortar type location, your cost structure will be quite different.

Setting Things Up

As a freelancer, there are a few things you need to take care of before you get to the “making millions of dollars” portion of the job.

One warning: starting a business isn’t going to be as cheap as you think it will be. I’ll try to outline my costs for you so you can get a more realistic idea.

1. Register Your Business

If you are doing more that just babysitting on the side, I recommend you register for either an LLC or a corporation. This is best discussed with a tax accountant or an attorney (or very knowledgeable parents/friends/relatives). Incorporating your business limits your liability if something goes wrong down the road. Most states have an online portal these days where you can officially register. In Florida, it costs about $140/year to be registered in the state.

2. Get Your EIN

Get your EIN (employer identification number). This number is used for tax purposes for your business, and sometimes clients will ask for it. This is free! Yay!

3. Hire an Accountant

Hire an accountant. This can’t be said enough. You will not be able to fill out a 1040-EZ anymore as a small business owner, and taxes will turn into a giant headache. Yes they are more expensive than the DIY approach, but I can tell you from experience that they are DEFINITELY worth it. I saved over $5000 this year because I used an accountant. Depending on how much money you make, your accountant will help you file either a personal return or as an S-Corp. The difference can mean thousands of dollars for you.

Getting your tax return done by a professional can cost between $200 and $1500/year depending on how you file. Yep $1500 sounds like a lot, but you’ll save more in time and money by going with an accountant.

4. Separate Your Business $$ from your Personal $$

Open a business checking and savings account. I am a self-professed hater of Big Banks and their ridiculous fees, so make sure you check out your local banks and credit unions for good accounts with no minimum balances or weird rules. At credit unions, opening an account is usually free!

5. Track Your Expenses

For my first couple of years, I tracked expenses in Excel. I kept all of my receipts in one place and matched them up against my business checking account to make sure everything was gravy. However, I just started using Quickbooks Online, and holy crap my life is so much easier now. Since it connects to my business account, all I have to do is enter mileage. Awesome! It’s worth the $11/mo for me.

Income

There’s one main rule with your income: deposit all of your hard earned money into your business checking account. I highly recommend NOT putting it straight into your personal bank account. It’s much easier to keep business expenses separate from personal expenses this way.

Taxes

You may be scraping the bottom of the barrel your first 6 months (or year…or two years) as a new business owner, so it is very tempting to just “think about taxes later”. Unfortunately, Uncle Sam doesn’t agree.

It sucks, but you need to take out a good chunk of that payment you received and keep it for taxes. Here’s what I do:

  1. Once your see your deposit show up in your business checking account (because you did open a business account, didn’t you?), immediately transfer 25-35% of it into your business savings account. That savings account is for Uncle Sam.
  2. If you want to keep things more separate, open 2 business savings accounts – one for true business-related “savings”, and one for ol’ Sammy.
  3. Consider how much “spending money” you want to keep in your business checking account for expenses like software programs, notepads, conferences (airfare, hotels, food, etc.), and any other regular expense. I leave a minimum in my account for that purpose. Depending on a lot of different factors, my business expenses range from $2000-$5000/year.
  4. After you’ve transfered away much of your hard earned cash or determined to leave some for expenses, then feel free to move the remaining money over to your personal accounts. You can do this by setting up a transfer between your accounts, or just write yourself a check.

Every quarter, I pay the IRS my quarterly estimated taxes. Edit: I used to do that. Now I talk to my accountant to figure out whether I need to submit estimated taxes, “payroll” taxes, or pay at at the end of the year. If you do submit quarterly taxes you can send Sam a check via snail mail, or send it online through EFTPS (the Electronic Federal Tax Payment System).

Saving and Investing

As Kate has so thoroughly described on her blog, saving is massively important. What will you do when your transmission fails? Or your dog swallows a rock and needs surgery? Or your computer implodes? Your first line of defense should be your emergency fund, followed by your regular checking account, followed by your credit card (because I sure don’t know anyone who enjoys paying interest).

Emergency Fund

As a freelancer, there will be times when you have just enough money to pay your rent and you have NOTHING EXTRA for savings. Yep, it happens to everybody. It’s ok. There will be other months when you are rollin’ in the dough, a la Scrooge McDuck (though perhaps on a smaller scale), and you can use that extra income to plan for your leaner months. For example, in my business I’ve learned that my 4th quarter is slow. So this year I’m saving more to compensate.

Accounting for these ups and downs take a little more effort than if you were getting a steady paycheck, but it is still relatively simple in the grand scheme of things. I have a few general rules that I follow when determining when and how to save.

  1. Look at your checking account. Does the amount in there add up to at least a month and a half of your expenses? This is the point where I take out 30% of the amount I pay myself and transfer it to my personal savings. Yep, 30%. Yes it hurts, but not so much if you do it right away and just pretend it wasn’t in your checking account to begin with. Even better, you can transfer money DIRECTLY from your business checking into your savings. Ta da! You’ve tricked yourself and helped your future self all the same time.
  2. I have some semi-regular contract gigs that I receive checks for each month, and one or two side gigs that are irregular. Sometimes I put the entire side gig check (sans tax) straight into savings. I don’t miss it from my “regular” income pool, and I’m preparing for any emergencies.
  3. By the way, the bank I use for my personal accounts is Charles Schwab. Guys, they are seriously the best. I turned Kate on to them. If you’re going to be putting your hard earned money somewhere, make sure it’s somewhere that isn’t charging you any dumb “maintenance” fees, minimum balance fees, foreign transaction fees, ATM fees, check fees, etc. Schwab charges nothing, you get all ATM fees refunded to you each month (you can use any ATM in the world), and their customer service is stellar. If they had business checking accounts, I’d be on it like white on rice.

Investing

When I worked at my old company, I had a 401(k) and a Roth IRA. As Kate says, a 401(k) is essentially the closest thing you’ll ever get to free money, so if you still have access to one, TAKE ADVANTAGE OF IT.

Now that I work for myself, I do not have the option for a regular 401(k) but there are other options like Individual 401(k)s or SEP-IRAs (Self-Employed IRAs). Do your due diligence: if you don’t already invest, talk to some of the more reputable (note I said reputable, not famous) investment firms and see what they have to offer. Personally I use Vanguard, but I hear good things about T Rowe Price and Fidelity.

If you can swing a 401(k) with matching by paying yourself and then matching yourself (another good reason to talk to an accountant), then start there. If you “max out” your pre-tax investing, then add anything else you want to invest to your Roth IRA.

Now you’re ready to manage your money as a freelancer! I told you it was easy. The hard part comes next – you have to make money in order to manage it. Best of luck!

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Car shopping

I don’t know anything about cars except that you shouldn’t put diesel into a car that doesn’t take diesel and also something about sugar in a gas tank will wreck the car?

Understanding cars is a monster subject. I don’t even own a car, so this is the first installment of a few guest posts by Darius about our most loved appliance.

You are ready to buy a car, you say?!  You have followed Kate’s budgeting advice and you want to hit the road.  Great!!  What do you think the first step is?!  Color?  Brand?  NO!  The first step should be listing the criteria you want your new car to meet.  Only one of those criteria should be price.  Here is a sample list:- How many people do you want to carry?  Seems simple but it is a valid question. Why buy a four door pickup that can seat six when it’s just you?! (a tip for the boys…size really doesn’t matter). Do you and your friends take turns being sober drivers? You might want more seats for more safety.  For the ‘about to have kids’ readers, the smaller the person, the more junk they need. ‘Lower lift height’ is a parent’s new best friend.  Plan accordingly.
– How much cargo do you need to carry/tow? Cargo capacity is not just the weight a vehicle can haul.  An SUV with a racy and slick curved rear roofline looks nice but you can’t fit nearly as much into the back as you can with an SUV that has a more squared off look.  It’s just geometry (<—this is the moment your math teacher told you about). *Note from Kate: my mom has a Honda Fit and one time we fit a shelf, two dressers, a nightstand, a mirror and two people in there without even breaking a sweat! That car is a miracle clown car!*
– What kind of mileage do you want?  Automakers want you to focus on the highway mileage of their cars.  Unless you are commuting 50 miles over a traffic-free highway per day, you want to disregard this number. The EPA has implemented it’s ‘combined’ fuel economy rating and it is the BIG number on the car sticker.  This is calculated using a mix of driving 55% in the city and 45% on the highway and should give you a better idea of what mileage the average user can expect (and should help you estimate gas costs)
– Do you live in an area that requires four or all wheel drive?  Four wheel drive (in most cases) weighs more and lowers fuel economy.  It also costs more (except on Subarus) and requires that much more maintenance.  Does it make the car safer to drive?! On snow, ice, hurricane level rains, mud, and loose dirt: yes. Otherwise…no. If you don’t live in an area where you need the extra safety, save yourself some cash and stick with two wheel drive.
– How much do you want to spend? There are a few options to get your hands on a car. You can:
  • Pay cash. This means no interest and therefore will save you money in the long run. Cash price=sticker price.
  • Finance. Remember this simple rule…on average for every $1000 you finance (fees and interest rates included) with a bank, it will cost you $16.67 per month in payments for a five year car note (60 months) (depending on your loan rates).  $17,000 financed = ~$283 per month. The total amount would be lower if you paid cash up front.
  • Lease. Leasing means that you can pay less to get a nicer car (overall), and you don’t have worry about maintenance because the car is under warrantee. However, this is not a good financial option because you end up with no physical asset at the end of your lease- you have been making monthly payments and when your lease is up, you have no car. For most twentysomething readers, this is a bad financial decision.
  • If you have bad credit, do NOT sign up for a high interest loan. Horror story from the front page of the LA Times here. (Summary: Ms. Lee paid $3000 down and signed a loan with 20% interest for a $7500 car. Over the next year and a half, she paid $6,966 more on the loan ($9966 total for a $7500 car). According to the terms of her loan, she still owed $11,610. When she fell behind in the payments her car was repossessed and she was left with nothing (even though she had already paid more than what the car was worth. This is not an unusual story. If you have $3000, buy a less nice car with cash and then save up for a nicer car.)
  • Don’t forget to budget in your insurance costs.
– Do you live in an urban or rural area?  Buying a 4X4 Heavy Duty pickup when you live in a city will mean that you will be very frustrated driving to (and parking!) any event in the city.  Parking spaces are tight and parking garages have an average clearance of 6′ 6″.  Consider where you live…trust me…you will do your future self a lot of favors.
Next time:  Resources for Car Knowledge.

New Year’s Budget Resolution Revolution Reminder!

Just a reminder to all my savvy readers who are becoming the boss of their finances:

Today is the suggested deadline to set up a checking account and a savings account (that you are thrilled with). Can you believe it has been two weeks since New Year’s? My resolution to do squats while brushing my teeth has already flown out the window (it really wasn’t that fun, after all). Hopefuly you are doing better than I am by following the easy-peasy step-by-step plan!

If you have set up your bank accounts already, HOORAY! You are an amazing rockstar and you are well on your way to financial success!

If you haven’t done this yet- take a half hour and do it! You will be glad you did. Think of all the worry and anxiety you will save yourself by setting up your own personal finance system.

Next up: Set up automatic bill pay by January 31. That one will make your life much easier!

New Year’s Budget Revolution Resolution!

The number two resolution for 2014 is to make a budget (right behind weight loss, which I have no advice about other than: stop eating so much ice cream for breakfast).

Hopefully you have already been reading my brilliant blog and are taking all of my amazing advice immediately. Right? Right?!?

If, instead, you have just been reading my brilliant blog and then intending to take my amazing advice at a later date….that’s ok too. But things won’t improve unless you take action, so let’s use New Year’s as an excuse for some action! Yeah! Plus isn’t improving the state of your bank account more appealing than getting up at 5 am in the icy cold tomorrow to run 5 miles? (why the heck do people do that??!)

Here is your New Year’s Budget Revolution Resolution Plan:

1. Set up at least two bank accounts: one for checking and (at least) one for saving. Make sure you aren’t paying any extra fees (because that is NOT a good way to start the New Year). Might I recommend Charles Schwab for checking and Ally or Capital One 360 for savings? Fill out the forms and call the excellent customer service numbers if you need help. This one takes a few days for the paperwork to go through, but it is worth it!

New Year’s Budget Revolution Resolution deadline: January 15. Yeah! Pour yourself a hot toddy, this was the most annoying part of your whole resolution!

2. Set up automatic bill pay for all of your bills. Never pay late fees again! Pat yourself on the back for being a financial whiz kid!

New Year’s Budget Revolution Resolution deadline: January 31.

3. Start tracking your spending. This one is ongoing, but thanks to Mint (or whichever tracking software you use) it should be painless (and if you are like me you will think it is fun to play with the graphs).

New Year’s Budget Revolution Resolution deadline: set up a budget tracking system by February 15.

4. Make your best guess at a budget (based on your spending) and do your best to follow it. Don’t worry if you don’t get it right at first, it is a marathon, not a sprint!

New Year’s Budget Revolution Resolution deadline: make a budget by March 15 (beware the Ides of March!)

5. Start paying off your credit card balance and use automatic bill pay to pay off more than the minimum each month. This will feel awesome! Make a plan and stick to it, and you can beat the system!

New Year’s Budget Revolution Resolution deadline: April 1.

6. Start an emergency fund. Again- marathon, not a sprint. You won’t suddenly wake up with a rainy day fund of savings- this may take a year or two to accomplish. When you start it, have money automatically transfer into your savings and then poof! You have completed step 6 of your Budget Revolution Resolution!

New Year’s Budget Revolution Resolution deadline: April 15 (tax day, boo!)

7. Start investing to earn some sexy compound interest! More information coming soon on where you actually are putting your money when you invest it.

New Year’s Budget Revolution Resolution deadline: May 15.

8. Review your budget and tweak it. In the red? Try slenderizing your spending (stopping eating ice cream for breakfast works here too, your ice cream bill will go down).

New Year’s Budget Revolution Resolution deadline: June 1.

What is this? Just halfway through the year and you are already done with your New Year’s Resolution?!?! You didn’t even have to get up at 5 am in the icy cold to go running? YOU ARE AMAZING!

Obviously some of these items will need updating or monitoring as your finances change in the future, but the hardest part is getting a system set up. Six months of baby steps to set up a system that will lead you on the path to long-term financial confidence- that is an awesome resolution!

Here’s to a financially savvy 2014!

Budget like a Rock Star

So you are convinced that it is a good idea to make a budget, right? Right!

But how do you start?

Let’s start with the easy part- income. Most people have a fairly steady income and should know how much money is coming in. If you have a variable income, you need to treat it like you treat your spending- use your best guess based on history/upcoming income that you know about, and be conservative. Update it as you learn more.

After you know how much money hits your bank each month, start by getting an idea of where your money is going now. A baseline, if you will. It will probably take a few months for you to get a full picture of your expenses, but don’t let perfection get in the way of planning. Estimate now and then you can adjust as you go. When I got my first job out of grad school, for the first four months my clothes spending was triple what it is now because I needed a full professional wardrobe. Now that I have the staples, I’ve adjusted my budget to reflect my lowered spending and my lowered need for clothes (did I really just say that?! There is no such thing as a lowered need for clothes!)

There are a few ways to go about tracking your spending. While working on this part of your finances, I would recommend relying on debit or credit cards (but don’t use this as an excuse to overspend!) just so that you don’t make yourself crazy trying to figure out where your cash went (or, if you are a diehard cash user….save those receipts!) When it comes to actually following a budget once the amounts have been set there are ways to use cash only and still stay on track- I’ll cover that later.

Method 1: The Worksheet Method

Make your own spreadsheet and fill in your expenses. Pros: You can adjust it to fit your lifestyle. This is good if you have complicated finances or if you mainly use cash, because you will have to manually enter your expenses anyway. Also, you can keep it supersecure by saving it only to your computer. Cons: Pain in the butt. High maintenance, and you really have to be committed. If you suspect this will be too much work for you, don’t do it. Make it easy on yourself to stick to a budget!

Method 2: The Automated Method

Use a personal finance tracking software. I use Mint.com, which is very secure (and pretty awesome), but there are other options out there. Mint works by linking all of your accounts into one website so you can look at your spending, your budgets, your savings goals and your investments all in one place. NICE. Mint automatically uploads your spending and files each purchase into your budget tracker, so you can see how you are doing for each category. Mint also tracks long term trends in spending. It’s pretty great. And there’s an app.

Worried about security? Mint is just as secure as online banking. But more awesome because everything you need is in one place.

Ok, now you know where your money is going. Next, set your budget!

First you need to make a list of the main expenses that come up regularly in your life. Here are examples from my own budget:

  • Rent
  • Utilities
  • Cable/Internet
  • Phone
  • Public Transportation
  • Taxis
  • Emergency fund
  • Restaurants
  • Savings
  • Gym/Fitness
  • Alcohol/Bars
  • Retirement investments
  • Groceries
  • Clothes
  • Charities
  • Haircuts
  • Travel

Next, set target amounts of what you want to spend in each category based on how much you normally spend. Be realistic-  don’t worry about “trimming the fat” just yet. If you usually spend $250 on groceries, don’t suddenly expect your spending to drop to $100 just because you wrote it in the budget. Some items won’t come up every month- I don’t travel every month, but I plan to fly every three to four months, and that is in my budget.

Now, add it up. Is your budget less than your income? Awesome! Book your flight to Vegas, baby! (Or, keep reading this blog so you can learn about some good long term plans for that spare ca$h).

Is your budget more than your income? Still awesome, because now you know where your money is going, and you can make a plan to tweak your spending so that you are living within your means. You are becoming empowered to take charge of your financial life, and that is something to be proud of.

Getting started

I am a 28-year old who used to feel:

  1. bewildered
  2. guilty
  3. insecure and
  4. not interested

about personal finance. I didn’t have much money, I wasn’t sure how to use the money I had, and I wasn’t interested in reading a boring book about investing when I didn’t have any money to invest, anyway.

My parents set great examples when it came to spending and avoiding debt, but when it came to practical advice and long term planning, I didn’t know what I was doing. My eyes glazed over every time I thought of whatever the heck a 401k is, and I didn’t have much motivation to change it up.

All of that changed when my brilliant and successful friend Becky introduced me to personal finance. When I started taking control of my finances, I began to feel:

  1. smart
  2. capable
  3. interested
  4. proud

of my money managing skills. Do I have more money? Not really. Do I feel a heck of a lot better about the money that I do have and my long term plans for the day that I will have money? Yep.

This blog is about personal finance, yes, but it is also about changing your feelings about money. I want you to have good, happy, proud feelings associated with money instead of guilty, worried and confused feelings about money. It doesn’t mean you will have more money, but it means that your attitude will change, and going into your money making years with a good attitude towards money may mean that you can eventually buy a Caribbean island to retire on (if that happens, please remember where your success all started and build me a guesthouse in the back).

Kate

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