My friend Jenny, a freelance designer, gave me her numbers to crunch and here’s what we came up with:
3. Budget for taxes
As Benjamin Franklin said, “in this world nothing can be said to be certain, except death and taxes.” Taxes are a fact and there is no reason for them to surprise you every year.
Many employees get taxes taken out of their paycheck before they ever even see it. In a way it’s nice because what you get is what you keep and there is no need for additional budgeting. As a freelancer the responsibility is on you to pay the government its due at the end of each year.
The easiest way to budget for taxes is to immediately deposit 20% (or whatever is appropriate for your government’s tax rate) of every paycheck into a separate fund. If, like me, you are lazy and don’t want to manually deposit 20% of each check, then set up an automated monthly deposit for 20% of last years average monthly income. Jenny, our freelancer, would set up a recurring monthly deposit of $388. Depending on your tax bracket at the end of the year you may need to pay a little more out of pocket, or you will get a nice little “refund” from your own account, but you won’t be caught with your financial pants down.
4. Track everything
First of all, get separate accounts for your personal and business spending. This allows you to get the most benefit out of being a business owner. Larger businesses have an entire accounting department to keep track of their finances and limit waste. As a freelancer you are also the accounting department and you need to keep track of every business related expense. Did you buy a new tablet this year? Tax writeoff! Did you take a business trip and rent a car? Also a tax writeoff! Did you take your friend out to dinner who also happens to be a designer? We’ll let you decide if that’s a “business meeting” or not.
But tracking your spending doesn’t just allow to you pile on the writeoffs. It also gives you a visual representation of your spending habits and can highlight areas of waste in both your business and personal spending, as well as help you decide how much you can spend each month (see item 5).
Technology has given us some life-altering ways of visualizing our personal finances. My personal favorite is Mint.com (no, I’m not paid by them, just a fan). When you hook your accounts up to Mint it automatically tracks and categorizes every purchase you make through a credit or debit card. It also tracks every time you withdraw cash from an ATM. From here you can view your data in countless ways – by category, by month, year, net profit per months etc. You can look at a pattern from every angle. For instance, here’s a visualization of my restaurant habit: