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.
by Alan on November 23, 2009
Now that we’ve covered some of the basics, I’d like to start focusing these posts on personal finance hurdles specific to freelancers. Don’t worry, if you work a “regular job” you’ll still get a lot out of this site, but my goal here is to help those who own their own business or freelance online.
One of the biggest initial adjustments to make when you’re freelancing is learning to live and budget on an income that varies every month. Unlike the working stiffs, we usually can’t write down at the beginning of the month exactly how much we’ll be bringing home that month. After you freelance long enough, you should be able to make a pretty good guestimation, or use a six to twelve month average, but those numbers still won’t be as precise as a steady paycheck would.
One of the goals I set and achieved before leaving my full time job was to build up a one-month cushion in my checking account. Now, I basically pay this month’s bills with last month’s income. That way I can plan my monthly budget with an accurate income, because I already know what that amount is, I earned it last month.
If you’re able to work a bit of overtime, or drastically reduce your spending before leaving your day job, I am a huge fan of the one-month cushion. This cushion is in addition to my emergency fund. The emergency fund is in a separate account and should not be left in your checking account, that makes it way too easy to spend.
If you are living month to month, or paycheck to paycheck, setting small earnings goals may be a good way to go as well. When I first started freelancing I set daily goals. I would tell myself I have to earn $75 per day to cover my bills. So if the first day I earned $100 on a small project, then I only had to earn $50 the following day. Or, if I earned $100 the first day, I had an extra $25 to save or spend at the end of the month.
After the first six months, I was able to better estimate and plan my income for each month, and I stopped with the daily or weekly goals, they just weren’t needed any longer. But when you first start out, they’re a great way to keep yourself motivated and on track so there are no surprises at the end of the month.
Freelancers also have some pretty unique expenses, from office equipment and software that we can write off, to self-employment tax and our own health insurance. I’ll run down some freelancing expenses in tomorrow’s post. If you’re currently budgeting on a variable income, let me know in the comments if you have any additional tips.
