My freelance accounts
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A few weeks ago while enjoying my favorite beverage at one of my local hangouts (coffee shop), a fellow freelancer asked me about my finances. Most freelancer do not like to explain their finances and process. I have no problem explaining my process. I use a five accounts process for my finances. Each of my accounts have a specific role, but two of my accounts are the drivers.
What five accounts do I use? I have a tax account, living expense or personal account and business account, emergency account, retirement account and life account. These are not line item accounts. I have 5 totally different accounts. I use two different banking institutions.
Tax Account
I set aside 15% of my total earning for taxes. I have set up with my Certified Public Accountant’s assistance a quarterly account with the Internal Revenue Services (IRS). I paid 15% of my total earnings each quarter. Typically because I am a solo entrepreneur, I can write off a lot of expenses. Business trips, dry cleaning, office equipment, business services, travel trips to clients, conferences expenses, etc.
Some fellow freelancers have told me that they save between 15% – 33%. It really depends on your CPA and all your expenses. I have a lot of expenses. I travel a couple times a week to MeetUps. I go to at least 5 – 10 WordCamps. I have several applications subscriptions, which can be expenses. This is a primary expense, and is paid first.
Living expense or personal and business Account
Since I know what my family expenses are…this is a fixed expense. I have added up my housing, gas and electricity, garbage, food expense (we use the envelop system, so only a certain amount is use…and it is cash), cable, cell phones (for family members…mine is a business expense), auto payments, gas for our cars (we use envelops) and insurance payments.
My business expenses are totally separate from my personal. My business account pays for all my subscriptions, office space, cell phone, office supplies, dry cleaning, etc. My business trips are generally paid out of my life accounts, which I will explain later.
Typically I will put 10% more in this account for unexpected things. Sometimes the cost of gas is a little bit higher and the envelops are not sufficient. We are a tithing family, and sometimes our faith based organization has a few more collections. Many times we as a family want to contribute to a cause. I do have a life account, which does not include anything that is a fixed cost for my family.
Emergency Account
Because life is so unpredictable, we have an emergency fund. This is used for when an appliance goes out. When a repair is needed for our car, or if your sons are playing catch and the baseball ends up in your living room. This is a fund, which has a percentage based on what is left from the tax and living expenses. I do place this amount into a saving account. Rarely do we need to touch this account, unless something large and unsuspecting happens.
I do have a cap on this fund. If the account reaches the amount, then I still put the percentage back. Only I put the amount into my life account.
Retirement Fund Account
I am not qualified to invest in a 401K. I do have a Roth IRA. This account is used to fund my Roth IRA account. This account is driven by a percentage. I am lucky that most months, I will max out my Roth IRA. This is a saving account with money marketing features.
In the past, if I am experience a down month, then I will pull from my Life Account to maximum my Roth IRA contributions. But this is a very rare occasion, since this is a saving account with money marketing features.
Life Account
Because we do not know what life holds, I have a life account. This is based off of a percentage from the balance of my tax and living accounts. Typically my life account percentage is higher than mine emergencies and retirement account. My life account is used to meet shortcomings from my emergencies and retirement accounts.
The life account is used for major expenses. Family vacations. Major purchases. Something which is a want and not a need.
How it works
The best way to explain my process is to put actually numbers. These are not my actually numbers, they are an example only. For this example, we will use $6,000 as my monthly revenue.
I would put $900.00 in my tax account. Remember I put 15% of my total revenue. My CPA will send me invoice on a quarterly basis (March, June, September, and December…and I send a check by the 15th of the following month). My balance is $5,100.00
Next is my living expense. Say my living expenses are $3,000.00. Maybe my rent is $1,000.00. My gas and electricity is $300.00. Garbage/sewer is $20.00. My cable cost $50.00. Cell phones for family members is $250.00. Auto payments is $250.00. Gas for cars is $300.00. Insurance (health and life) is $430.00. Food is $400.00. Which would equal to $3,000.00 My balance is $2,100.00.
Then I would calculate my business expenses. I am constantly looking to make sure all my expenses are items, which benefit my business. I do an audit every three months. Say my business expenses are $500.00 a month. This would pay for any hosting services, cell phone, subscriptions services, office supplies, etc. My balance would be $1,600.00
My emergency fund percentage is 20% of the balance of my tax and living expense. I would put $320.00 in my emergency funds.
My retirement fund percentage is 20% of the balance of my tax and living expense. I would put $320.00 in my retirement funds.
My life account fund percentage is 60% of the balance of my tax and living expense. I would put $960.00 in my life account.
Conclusion
When I explain this to most, I am hit with funny looks. You are only saving $320 for retirement. For this particular month…but over 12 months, it would be $3,840.00. The max you can place in a Roth IRA is $6,000 annually (if you are over 50, then it is an extra $1,00). This information is per my CPA, but you might want to check with your accountant. The key is to save.
You might even ask me about $320 for my emergency expense. Again, I have not had to experience an emergency each month. Typically I will save for 6 – 9 months before this becomes an topic of conversations.
Lastly, why do I put living and business expenses together. No they are not in the same account. Typically these are the accounts in which checks or a lot of transactions happen. Only reason…I could separate and 6 accounts.
This system has worked well for me. I have used it for the past 18 months and came up with it after reading Profit First.
Image courtesy of Austin Distel.
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