It’s time for another Money Tip! Because we all want more money but don’t always know how to get it. And when we get it, it’s tempting to use it to buy stuff. That’s kind of how the economy works, right? But, let’s face it, there are a lot of people out there who wouldn’t consider themselves to be “good with money.” Is that you? Let’s talk about that.

If you think you can’t afford to save, you need to address your budget

I want to start with a disclaimer. Nothing I say in this episode is meant as criticism. It’s not meant as judgment. I say it all from a place of compassion. I do understand that money is a bit of a touchy subject most of the time, but especially now. We are just about one year into the COVID-19 pandemic, which created and amplified financial issues for people around the world. People were suddenly without jobs, without income, relying on unemployment systems that were overwhelmed by demand, and so much more. It’s still fresh at the time of this recording, so I get that it might be triggering. But my intention is to help so we can all be better prepared in the future. We can’t do anything about what has already happened, but we can make changes in our habits that will help us in the present moment, and hopefully the future.

Okay, now that that’s out of the way, I’m going to get down to business, starting with a blunt statement. If you think you can’t afford to save, you need to address your budget. Saving should NOT be optional. It shouldn’t be where your money goes if you have any left after all of your other expenses. It should be a top priority in your budget.

I’ve heard every excuse in the world, and I don’t accept any of them. I get it. Life is expensive. You have needs. There are things you want. Things that will make your life easier, or your business run more smoothly. Emergencies come up all the time. The kids need something for school. Your car needs an expensive tune up. The water heater needs to be replaced. Your pet really needs that fancy extra plush bed with the built-in pillow she can crawl into. Yes, these things are often urgent, but the real emergency is letting yourself get to a place where you don’t have a safety net. A place where one unexpected expense throws you into a debt spiral.

No one was expecting a pandemic to come along and force everyone to stay home. We didn’t expect our businesses to be put on hold for an indefinite amount of time. Some were able to open quickly. Some still aren’t back. Most have nowhere near the volume of sales they did before, and a lot of adjustments have been made. It was terrible for many, so again, nothing I say here is meant to throw blame or in any way discredit the valid hardships anyone faced. But it was concerning to me how many people went into panic mode because they didn’t have any money saved. No emergency plan. No rainy day fund. Just relying on the check from the last job to survive.

I’m not going to harp on everything that happened, how many systems failed the general public, or how much stress everyone was under trying to figure out how to stay afloat when they couldn’t work. We all know what happened a year ago and where things are at now. I’m more interested in what we can do moving forward.

We’ve been talking about adapting a lot on this podcast because it’s so relevant to what’s been going on. Adapting is great, but it’s a reaction. The best thing you can do for yourself financially is to be proactive. Build that safety net so you know you will be okay if something like this happens again.

I know there are other factors in play here, like how many people aren’t earning a fair wage and they are working hard to support themselves and their families but are still barely getting by. It’s an unfortunate epidemic and I wish I had a solution for that. The sad truth is that sometimes we just have to make sacrifices.

Saving is an investment in yourself, your family, your business, and your peace of mind

For some background, I didn’t grow up with money. My mom opted to be a stay-home mom while my brother and I were young. I will always be grateful to her for that. But when my parents got divorced, she was thrown into a situation where she had to get a job but had no work experience. She ultimately had to start from the beginning when she was in her 30s. It wasn’t easy, but she made it work.

We always had what we needed, and it taught me some valuable lessons about work, independence, and figuring things out. Part of the reason I decided to start working so young was because I didn’t want to end up in that situation. I learned how to be frugal early on because I wanted to make sure I could always take care of myself. My grandpa often talked about the importance of having a rainy-day fund. My dad encouraged me to save 10% of everything I made. These are lessons I still follow today.

Again, saving shouldn’t be an optional “expense.” Yes, I’ve heard many people call it an expense, but to me, it’s more of an investment. In yourself, in your family if you have one, in your business, in your peace of mind. You don’t ever want to find yourself in a situation where one unexpected expense means you can’t pay your bills that month. If 2020 wasn’t eye opening about how important that is, I don’t know what would be.

Taxes, saving & investments should be included in your budget

The best place to start is by determining your budget. If you want more specifics about budgeting, please go back to episode 26: Budget isn’t a Bad Word. I go more in depth about that there and don’t want to be too repetitive. But you’re with me here now, so I’ll briefly review the 3 types of saving that need to be included in your budget – taxes, saving, & investments.

Taxes are tricky because you have to put money aside, but it’s not actually your money. So it’s not really saving, but it’s important to keep that money separate so you don’t accidentally spend it. The IRS isn’t going to care what happened in your personal life – they will get that money and you want to stay on their good side. The amount to set aside for taxes will depend on where you live. In the US you have federal taxes and, in some cases, state taxes. If you’re in another country, it might be different, too. No matter where you are, it’s best to save a percentage of your income to account for those taxes, because taxes are a percentage of your income. It’s pretty straightforward.

Saving is that emergency or rainy-day fund that you want to have available in case something comes up. You’ll see different rules of thumb out there, usually suggesting that you have somewhere between 3-6 months’ salary in your savings account. I would say 6 months should be the minimum, ideally working up to a year. It might sound daunting at first, but imagine how peaceful it would be knowing that you could have that much time to figure out what to do if you lost your job, your clients, or the ability to do your work. I also advise sticking with the percentage here, versus a flat amount each month, so you are able to save more in your busier months and have more flexibility in the slower ones. I think 10% is the minimum, but ideally you should consider more so you can get to your goals faster.

Investment and retirement plans are crucial when you are self-employed. We don’t have pensions and company-matched 401ks. We have to provide for our own futures. And the sooner you start, the more comfortable you will be. There’s a thing called compound interest that is your friend. Let your money make more money for you so when you’re ready to retire, it’s a comfortable option for you.

So when you’re budgeting, make sure these 3 categories are included. That way you’re looking at the bigger picture and being practical when figuring out how much you actually need to make.

My first year in business, I saved 50 of all of my income

My first year in business, I had no idea what my income would be. I didn’t even have a guess. So to be cautious, I saved a minimum of 50% of all of my income. Every time I received a payment from a client, I instantly transferred half of it into my business savings account. I figured it was approximately 35% for taxes & 15% for saving and investments. I knew my taxes wouldn’t be that high, but I wanted to be covered to be safe.

I made those transfers without fail. If at any point I didn’t have enough to cover my expenses, it wouldn’t mean I could pull it out of savings. It would mean I would need to reduce my expenses. I treated that savings account as one-way only. Money could be put in, but never taken out. No exceptions.

After my first year, I updated my saving system. I elected to start filing taxes for my LLC as an S Corp, so that changed the amount I needed to plan for taxes. And by that point, my savings account was at the level I wanted to maintain. I like to keep a minimum of one year’s income available in my accounts. Some people are fine with 3 months but I don’t feel like that’s enough. I recently transferred a chunk of my savings account to one with a higher interest rate, so it’s good to shop around sometimes to see what’s out there.

With my minimum savings met, I then focus more on investments. Every year, in the beginning of January, I make the maximum contribution to my IRA. That way, it has the whole year to earn interest. I also have a SEP IRA, which allows my business to contribute up to 25% of my payroll salary. I contribute to that quarterly, but then in December I will give myself a bonus depending on how things are looking, which allows me to then contribute more to max out that SEP IRA limit. There are also solo 401k options that can allow even higher contributions. You might prefer to invest directly in the stock market – if you understand how to do that, go for it! There are so many options out there. You just have to figure out which ones are best for your specific situation.

I’m telling you all of this for the sake of transparency. I don’t give advice unless I’ve been through a situation myself and feel like I can help by sharing what I’ve learned.

If you can’t afford it, you don’t need it

A rule I’ve always lived with is “if I can’t afford it, I don’t need it.” Debt isn’t worth it to me. The only exceptions I’ve ever made have been for a house or a car. I have taken out low interest loans for those things, but I make extra payments to make sure they’re paid off early. I do use credit cards because I like the rewards. I always pay the balance in full every month.

It’s important to be honest with yourself about what you can afford. If you can’t seem to make the numbers work, you have two options. Make more or spend less. There are short-term solutions for cutting costs – things like meal prepping at home instead of eating out, canceling some of your monthly subscriptions, or making some DIY products instead of buying them. Sometimes you can save money by making a few calls – ask your phone, cable, and insurance companies if there are any discounts or bundles available.

Keep your bookkeeping in order and talk to your CPA to make sure you’re not missing out on important deductions. Depending on how much you make, it might be beneficial to form an S Corp, or elect to have your LLC file as an S Corp like I do, so you aren’t paying that self-employment tax (again, that’s for those of you in the US – I know it’s different in other countries).

Talk to your financial advisor if you have one. If you have an investment account like an IRA, your bank might have people available to offer some guidance. I know it can be uncomfortable to talk about money sometimes, but there are professionals available who want to help.

Ideally, find ways to make more income. Are you dedicating enough of your time to getting more work? It’s another situation where you need to be honest with yourself. If you’re in a pinch, do you have anything you can sell? That might not help you in a long-term sense, but it might buy you a little more time. The answers are different for everyone, but do your best to brainstorm ideas and come up with your solutions. When it comes to money, it’s crucial to make it a priority. You have to hold yourself accountable if you’re serious about building your financial freedom.

The idea of budgeting, or saving, isn’t to give up everything you love. But if you are thoughtful with your money, it will help you do more without worrying so much about it. Yes, it might mean some sacrifices in the beginning, but the long-term rewards are worth it. It’s that idea of deferred gratification – you give something up now so you can have something even better in the future.

If you’re a business owner, chances are you are already busy and might sometimes feel overwhelmed with everything you need to do. If you’re feeling extra stress on top of that because you’re worried about money, you’re not alone. I think almost everyone has felt at one point or another that they don’t have enough time and/or money. And you might feel like it’s out of your control, but it isn’t. Look over your numbers. Make a plan. Invest in yourself. Remember that the money you save now is buying your peace of mind for the future.