Here's a topic that every single one of us self employed people has struggled with: money!
Before I get into the topic here's a bit of a disclaimer: I’m not a financial advisor or accountant. I do suggest that you talk to both of those professionals, especially if you’re in debt or have a complicated tax situation. But even if your in a good place financially and have fairly simple taxes, financial advisors can be helpful with settings savings goals, putting aside money for retirement, or all those other money-related issues and questions that come up. And of course, a good accountant can save you money at tax time and make sure you’re aware of any changes to tax law or policies that you need to know.
I’m going to tackle this topic more from my own experiences. I’ve been running my own business for over ten years so I've had to think about this whole income equation many times over. I also grew up in a really money-savvy household, with both of my parents working in finance and my dad working as a credit counsellor in the last few years of his career. So needless to say, thinking about smart ways to handle your money is kind of in my blood.
Really it seems that everyone I know who works for themselves has money issues of some kind.
Maybe they struggle to make enough to pay their bills, so they have to supplement their income somehow.
Maybe they’re getting by just fine, but they’d like to have some extra cashflow for stuff like, you know, vacations and fun gadgets and saving for retirement.
Maybe they’re making a good income but want to start thinking about ways to make money that don’t require them to work so many hours in a week. Many of us (including my former massage therapy colleagues) bill by time, which means time literally is money.
I’ve been in all three of those positions and I know many of you out there can relate to at least one of them. I also know this can be a bit of a stressful time of year for massage therapists in Ontario, because your registration renewal is due to the CMTO soon, you’ve probably just renewed your professional liability insurance, and it’s still too early to take advantage of the December holiday income rush! So let’s dive right in to this money topic.
The Elephant In The Room
First and foremost, the big thing a lot of us need to get past is the fact that we don’t have a steady, predictable income. This is true no matter how much you make. I think a lot of the frustration that comes up with being self employed is that huge unknown. One major change to your schedule can mean a relatively large reduction in your income. If you were employed, it’s your company that would have to deal with this loss. Yes, it could mean losing your job, or it could just mean the company has to find another way to deal with the reduced profits. But when you work for yourself, you are the company, and there is no one else to take responsibility. That doesn’t mean you have to go into defensive mode and start getting really stressed about your income and your business, though. If you set up a budget and are smart about when and where you spend your money, you’ll have a lot easier time dealing with the ups and downs that are an expected and normal part of being self employed. And of course, as I've talked about in the past, if you do the work to keep your practice more steadily busy year-round, the ups and downs won’t be as extreme.
Expenses & Setting a Budget
So before you can budget a darn thing you need to know what your monthly expenses are. Expenses are the things that are going to be basically the same every month, no matter how much money you make. We’re not talking about taxes here - just the general living (that is, personal) and business expenses you have, such as rent, banking fees, website hosting, your mortgage, car payments, gas, electricity, food, and so on. Many small business folks have several large expenses that are only once per year, like insurance and registration. So a smart thing to do when looking at your budget is to add up what your expenses are for an entire year, then divide by 12 months to get an average per month.
This is also a helpful exercise to see where your money is actually going. If you’ve never looked at those sorts of details, you might end up shocked by some of the numbers. Better to know and be able to make changes than to not realize, right?
So now that you’ve got your expenses tracked and averaged out to a per month amount, you now need to think about how you want to budget.
Basically there are three ways people tend to budget.
The first is the non-budget budget. You see what you’re making each month as the money comes in and try to keep your spending in line with that. You keep track of what’s in your bank account but don’t really have a game plan for saving or paying your bills beyond the current month. And, you’re always feeling a bit stressed out about how many clients you have each month because you’re never sure if you’re going to be able to cover your expenses until you see how many clients you have booked each week. As you might imagine, this is not a good way to run your business or live your life and it’s only going to stress you out. Let’s call it like it is: this isn’t budgeting, this is just getting by. No one wants this!
Now, if you’re just starting out and your income isn’t enough to cover your expenses, that’s ok. I assume you have another way to cover your bills as you build your business. That’s totally fine. But you do need to be thinking about budgeting. You don’t want to have a non-budget budget - you want to feel confident you can pay for everything and live your life, whether the money is coming from your business or from something else you’re doing to pay the bills in the mean time.
The second way we self employed types tend to budget is the lean vs fat method. No, I’m not talking about food here. This is where you have two budgets: one for months where you’re not making as much income (the lean months) and one for months where you’ve got more income (the fat months). This can work, but I personally found it frustrating because I kind of felt like I had two levels of income and two levels of spending. I had to wait to buy things for the ‘fat’ months and felt like I could never get ahead with things like saving for retirement or buying a house, which was something I really wanted to do. Honestly it always felt like things were up in the air, even if I was very aware of the natural ups and downs of my schedule. So again, this isn’t a great way to budget.
The third way is to budget based on your average monthly income and stick to it. So you take a look at a couple of years worth of your income (gross, not net, since your expenses and taxes are part of budgeting) and average that out to a per month figure. Then you set up everything else based on this figure.
Doing things with this averaging method means some months you’ll have more ‘extra’ left over after paying your expenses, but that’s ok! You’ll need that for the months that are leaner to balance everything out. So don’t get spend it all in one place, ya hear? But seriously, this is the best way to budget, because it’s the most balanced approach and allows you to make realistic decisions on the other things we’re going to talk about like giving yourself a salary, saving for retirement and setting up an emergency fund.
So wait, I just said salary. Yes, you should be calculating a reasonable salary for yourself each month, and revisit that amount about every 6 months to see if the amount is still reasonable based on your current situation. The salary obviously has to pay for your living expenses (this is why we set a budget, so you know how much you need) and should be based on what money is left after you’ve paid your business expenses and set aside money for taxes.
So let’s talk about putting aside money for your taxes. I know this can be a really big stress point for MANY massage therapists, and I’ll tell you, it’s stressful for lots of self employed people in all kinds of different careers.
You might have heard others say you should set aside 30% of your income for tax time. That’s a pretty good number for many people’s situations, but if you want better accuracy, it’s a good idea to take a look at the tax rate (both federal and provincial for you Canadians) you’ll be paying based on your net income. Then don’t forget to add on 10% for Canada Pension Plan contributions. If you’re unsure about this stuff, talk to your accountant. Whatever that number is, put at least that much aside for tax time every single month. Not just when it’s getting close to tax time and not just when you’ve got a high income month. Every month do the calculation and put some aside.
For those of you who have to pay out HST, you should also be putting that aside each month. Don’t think of it as income, as that’s just going to frustrate you. Put it in a separate account and don’t touch it until it’s time to pay it out.
Personally I find it best to put the money into a savings account that is separate from my regular spending accounts so that I’m not tempted to spend any of it until it’s time to. I use a tax free savings account for mine because I don’t usually max out my contributions (so won’t end up over contributing and having to pay tax on some of it) but of course the other big benefit is a higher interest rate. Since I’m not a financial professional I won’t get into the ins and outs of all that stuff, but if you need more info there’s plenty available online.
Save for the Future
So what else should you be saving for? Obviously if you’re still in a lower yearly income phase these things are going to be harder to do, but you should be thinking about them from early on so you’re ready when your income hits a level where you can actually do these things. If you’re already at that level, great! So what am I talking about? An emergency fund, and saving for retirement.
Emergency funds are so important for self employed people like massage therapists! If you can’t work you don’t get paid, right? The last thing you want is to get seriously injured or have a lengthy family emergency and suddenly be in a position where you can’t pay your bills. For emergency funds, the general rule I’ve heard is to save about 3 months of income in case something happens and you can’t work. For many people this is near impossible, but it’s a good idea to at least put aside a small percentage of your income each month into an account for this purpose. You’ll find if you do that consistently it won’t be long before that account actually has a liveable amount of money in there!
For retirement, in Canada your best bet (assuming you’re not already approaching retirement age) is to put your money into an RRSP. You get savings come tax time and the money is invested in a way to encourage growth over a long period of time. I won’t go into the details on this one because it’s not really my area of expertise, but there are lots of articles out there explaining how much you need to save based on your current age and expected bills and desired standard of living once you’re retired. The amount you put aside each month is really based on that, not an arbitrary percentage. All I want to make clear is you really do need to start thinking about this early, not when you hit age 50 if at all possible.
Be Smart With Credit
Phew! We’ve covered lot of things and I want to wrap this up, but one more thing that’s really important: credit cards.
As business owners sometimes we rely on our credit cards a bit too much. It’s important to remember they’re intended to be a convenient way to pay for things, NOT a way to fund a huge project like opening a new clinic or buying a bunch of new equipment. Unless you’ve saved up money to pay off that credit card right away when the bill comes due, of course! But generally speaking for those things you should get the best line of credit or loan you can get with a much lower interest rate than a credit card. The last thing anyone needs is big credit card debt - it’s not worth the stress and is only going to eat into your salary and savings at the end of the day.
Ok! That’s it for this week! Next week we’ll talk about how to increase your income without increase the number of hours you’re doing direct client work each week.