by Alan on February 27, 2010
When I started Freelance Finances, I focused on being as general as possible with posts and advice, because I realized a good portion of my traffic was coming from google searches, and my specific audience (over 60% of which are 13-24 yr olds) don’t typically search “personal finance tips” on google.
I realize now that was a mistake, and why I quickly lost motivation to keep this updated. According to YouTube 47% of my online audience is 17 years old or younger. And seeing as how high schools don’t teach you how to balance check books, calculate finance charges on credit cards, or teach you about retirement accounts, I’m going to stop being general, and I’m going to start focusing on what’s going to help you.
Fortunately for you, I’ve already been in your shoes. In fact, I’m twenty-six years old, so I’ve already grown out of your shoes. The advice I’m going to offer here isn’t theoretical, it’s practical. And it comes from someone who knows what happens when you make the mistakes you’re likely to make, and what it takes to fix them.
So let’s relaunch this blog with the first mistake, the biggest mistake, and the one mistake that costs the most to correct… fortunately for my word count, all of those mistakes are the same: spending more money than you earn.
Right out of high school I wanted a digital camera. I couldn’t afford one. So I signed up for a Best Buy credit card and “bought” one. Then I wanted a new computer, so I called Dell and financed one. I wanted a car too, so I went to my credit union and took out a loan and got a car. Before the end of the year I graduated high school in, I was in debt by over $10,000 – and I was only working at a grocery store for $8.61/hour!
It took me seven years to pay for that digital camera, computer and car. And after all of the interest, finance charges and late fees, I ended up paying close to $16,000 for that original $10,000 I borrowed.
This is not the way to be successful with money.
It’s hard to think about tomorrow, next week, next year, when the world is in instant gratification mode. And retailers are more than happy to give you the money, at 30% interest, so you can buy the things you can’t afford. But if there is one thing you take away from all the things I ever write on the internet, it is this: do not spend money you don’t have.
If I would have just been patient and saved, I could have paid cash for that camera. I could have paid cash for that computer. And I could have at least put some kind of down payment on that car. And then, those $10,000 worth of items, would not have cost me seven years and $16,000 total to buy.
Money is scary to talk about sometimes. Some people hate even thinking about it. If you have any questions about money, credit cards, savings, checking, investing, retirement accounts, loans, anything, please send me an email at freelancefinances@gmail.com and I will answer your question. Do it anonymously, set up a fake free gmail account if you’re embarrassed to ask. Once you start talking about it and thinking about it, it isn’t so scary anymore. And if you have a money mistake that you’ve made, and want to share in the comments so others don’t make the same mistake, please do.
Stay tuned tomorrow.
by Alan on November 30, 2009
I’m a fifteen-year-old Canadian. I have just under eight hundred dollars stashed away in cash. Most of it is Christmas and birthday money from the past few years. I also have an on-and-off job tutoring, so I have a little bit of regular income. My question is, what should I do with my money? I spend very little. I plan on getting a checking account soon, but I feel like I shouldn’t just let that money sit in there. Interest rates on savings accounts in brick-and-mortar banks seem so low I’d only get change every year, and unfortunately, as a Canadian citizen I can’t use SmartyPig and such. I know this is a lot of information, but do you have any advice for me? As you mentioned, you have a lot of teenage readers, so I can’t be the only one in this situation.
First, very good job saving some money! I wish all of my teenage readers were in your situation. It’s difficult to realize the importance of savings when you’re too young to have bills and other financial obligations.
Second, I would recommend you don’t do anything with that money, yet, and here’s why:
Interest rates stink right now, we all know that. But the only way to get a better return on this money, would be some sort of long-term investment. But you can’t think long-term right now. You have graduation, and college, and your first car, and your first “real” job all coming up in the next three or four years, not to mention all of the stuff that no one can plan for… you know, life.
Locking that money into an investment would only cause you to pay penalties (CDs and Bonds) should you need to cash them out before maturity, or the chance that the mutual funds or stocks you might invest in could be down at the time you need that money.
While it’s boring and won’t bring in much of a return, a savings account is the best place for your savings right now.
Think of this money as your emergency fund. Your emergency fund is a stash of cash that won’t earn you much of a return, but is there when you need it. I recommend everyone have three to six months worth of expenses in a savings account before investing, because, as you’ll soon find out, tires go flat, windshields get cracked, you get sick, water heaters stop heating, and anything else that could cost you money, will.
My goal, if I were in your shoes, would be to save up as much cash as possible over the next three years. You’re at a great advantage being as young as you are and being interested in taking charge of your money instead of your money taking charge of you. I can tell you from personal experience that having a cushion, even if it’s in cash earning little interest, hell, especially when it’s in cash, removes the majority of stress from your adult life.
Good luck, and thanks for writing.
by Alan on November 25, 2009
Two of the expenses that surprised me a bit when I decided to go freelance were quarterly estimated taxes and self-employment taxes. Because taxes aren’t withheld when you’re self-employed, you have to pay quarterly estimated taxes.
Estimated taxes are a percentage of your income paid to the government based on what you think your tax liability will be for the year. Before working freelance, I visited my local H&R Block for a little advice on just how much to set aside. Given my expected income and business expenses, I was told to set 20% of my income aside for estimated taxes. This means for every $100 I make, I have to set $20 aside for taxes.
You can pay estimated taxes by sending a check to the IRS, or electronically online. If you pay estimated taxes online, you can even pay monthly, to avoid a large tax bill every three months. I currently pay my estimated taxes online monthly, though for the first year I freelanced, I paid quarterly by check.
Self-employment taxes. When you work for a corporation, and they withhold taxes, they also pay a portion of your social security and other taxes. When you work for yourself, you’re picking up the tab that your company normally would. These are called self-employment taxes and almost double your tax liability from what you owed while working for a corporation.
Half the total amount of your self-employment taxes can be written off when you file your personal taxes though, so be sure to ask your tax professional about that. You can also reduce your tax liability by writing off software you purchase to use for your freelancing and any new computer equipment or other office equipment you purchase for your home business. If the home office you’re using for your work is only used for work, you can also write off the rent you’d pay for that room as a business expense.
So while your tax liability practically doubles when you decide to go into business for yourself, many of these new expenses can be offset by deductions.
Some people find it difficult to separate their tax money from their spending money. I would suggest if you aren’t good at ear-marking money that you open a second savings account. In this account, you can deposit the money you’re setting aside for your taxes, and you’ll be sure not to spend it.
One last tip, if you have a high-interest online savings account, paying your estimated taxes every three months rather than every month means that money earns interest for you, not the IRS.
