Five People, One Income, and Self-Made Success

bootstrapping real estate investor
Myth: If you’re supporting 5 people on 1 income (and it’s not a high income), you’re screwed. You’ll never become a business owner or an investor. You’ll be lucky just to pay the bills.

Fact: Ladies and gentlemen, meet success story: Rental Randy.

In my last blog post, I re-emphasized that the best way for two-income couples to turbocharge their savings and investments is to live on one persons’ income, and save 100 percent of the others’. Live like you’re a one-income couple.

This led to a great follow-up question: What if you’re already a one-income family? Specifically, what if you’re a family of 4 or 5, living on one income? What then? (And what if you’re single — a “family of 1″ living on one income?)

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Budgeting Tips for Small Business Owners

I mentioned recently that I’m self-employed, which has a huge number of benefits:

  • I work in my pajamas
  • My commute takes 30 seconds
  • I never utter the words “my boss won’t let me …”

It also means my income comes in random spurts.

Most readers of this blog grapple with sporadic income in one form or another. Some:

  • Fundraise for nonprofits or run small businesses. They must budget (at work) for unpredictable income.
  • Earn side-income.
  • Collect commission.
  • Rely on bonuses – which vary each year.
  • Livin’ la vida self-employed. (Okay, my writing’s not as cool as Ricky Martin singing about it.)

This means a lot of my readers — at work or at home —  know the major challenge to sporadic income is keeping track o’ your money.

Checks roll in at random times. Some months are fat, some are lean.

With such sporadic bursts of income, how can you create a budget?

Try This:

1. Find the least amount you earned in a given month, over the past 24 months.
2. Keep your “fixed costs” 20 percent lower than this.
3. Automatically transfer the remaining 20 percent to a savings account earmarked for taxes.

Why 20 percent? It’s a rough but reasonable estimate, given that:

  • The corporate tax rate is 15 percent of the first $50,000 of income and 25 percent on the next $25,000.
  • The individual self-employed tax rate is your standard income tax plus an extra 13.3 percent Social Security tax on the first $106,800.
  • Even charities have to pay taxes on their business-activity earnings.

4. Most months — remember, 23 out of 24 months — you earn more. Earmark this extra money for:

 

  • An emergency fund (for either yourself or your business)
  • Saving for a dream (trip to Bora Bora)
  • Annual Expenses (Christmas gifts, car registration, a Valentine’s Day dinner extravaganza)
  • Retirement (you might live to a ripe old age)

But I’m lazy. What’s the easy way to do this?

Slot certain paychecks towards certain bills. I mentally assign all the income from one client into “trip to Africa savings,” and all the income from a smaller client into “pesky cell phone bill.”

When you’re comfortably NOT living paycheck-to-paycheck and you have a nice cushion that allows you to be lazy, this is a perfectly fine way to budget. It’s simple and easy — just as money should be.

The Biggest Accounting Mistake Small Biz Owners Make


Do you run a small business?

Are you self-employed?

If so, there’s a strong chance you’re among the thousands of small business owners who make this critical accounting mistake …

… and thanks to this one simple error, they never realize how strong or weak their business is.

Yikes!

No, it’s not a mistake that will get you in trouble with the IRS … in fact, tax laws are written in a way that promotes this erroneous way of thinking.

As a result, some small business owners spend their lives never realizing they’re committing this glaring error.

Many small business owners — especially solo entrepreneurs — confuse profits with pay.

They fail to calculate profits AFTER paying themselves. They never account for their own time. They think their business is turning a profit – when in fact, it’s operating at a loss.

What do you mean?

Sally is a freelance writer for a handful of newspapers and magazines. She brought in $75,000 last year from her writing assignments. When she sat down to do her taxes, she deducted her “business expenses” as follows:

Professional association dues – $72
Conferences – $500
Smartphone  – $1200
Home Internet – $720
Postage – $500
Home office deduction – $2,000
Office Supplies – $120
Mileage – $1200
Flights – $1500
Hotels – $1800
Meals – $700
Web domain and hosting – $80
Total Yearly Expenses: $10,392

Sally subtracts this from her income of $75,000, and reasons that her “Freelance journalism” business made a pre-tax profit of $64,608. Right?

Wrong! Sally Didn’t Make a Profit At All!

But $64,608 isn’t the profit that her business made — it’s simply the pre-tax money that was left over in the business to pay herself.

Let’s imagine Sally had an assistant who earned $35,000 a year doing research for Sally’s stories. Sally would deduct that research assistant’s pay as an “expense” before calculating the profits her business made that year, right?

So why wouldn’t she value her own time?

This is where freelancers and other small business owners so often get it wrong — they fail to value their own time in the same way they would value an employee’s time.

How Much Is My Time Worth?

Let’s imagine that Sally were to decide freelancing is no longer the life she wants. She applies for a job. During the interview, HR asks for her salary requirements. Without hesitation, Sally says: “$70,000 a year.”

She’s making a statement that $70,000 per year is what she feels her time is worth.

Why wouldn’t she make that same demand on her own company?

Sally is an employee — the ONLY employee — at her writing business.

So what if Sally were to “pay herself” as though she were her own employee? Then she would realize that she didn’t make a “profit” of $64,608 last year.

In fact, after paying herself $70,000, her freelance writing business actually LOST money, to the tune of $5,392. Her business isn’t in the black (profits); it’s in the red (debts).

How can she pay herself more than she earned?

But if Sally were to put herself on a salary of $70,000 a year, how could she pay herself $5,392 more than her business earned?

Her business would need to borrow money in order to pay its one employee, Sally.

If Sally doesn’t want to go to a bank (they’re not keen on lending to solopreneurs), she’ll have to borrow money from herself in order to pay herself.

Borrow Money from Yourself?

Borrowing money from yourself, in order to pay yourself, is a strange mental hurdle.

“What’s the point?,” you might ask. “It ultimately comes to me.”

Yes. But you need to keep your business finances separate from your personal finances. You deserve to be earning a salary. Your business needs to pay you.

Your business might not have the money to pay its best employee (you). It needs a lender or an investor. Enter: You.

When you pay yourself, you separate Owner You from Worker You.

On one hand, you feel great — look, you’re earning a monthly salary! On the other hand, your business feels broke — it’s constantly in the red and can’t even keep up with paying its employees (you).

Borrowing money from yourself, in order to pay yourself, is the best way to value your time. You’ll keep the company’s financials in clear perspective.

One final note: Charge your business a reasonable interest rate, like 5 percent, on the loan that you issue. After all, you deserve to be compensated for your risk.

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Three Mantras for Small Biz Owners

Remember this when starting your business ...

I took part in a pretty dynamic, thought-provoking Twitter chat tonight in which a lot of small business owners shared ideas about how to take the leap to starting your own business.

I want to share 3 of the best quotes from that chat, and accompany them with a sentence or two about how you can apply that advice to your own small business (whether it’s an actual “business” that sells a product, or a side gig like tutoring, for which you still have to promote your service, manage your time, demand payment from clients, etc.).

These 3 brilliant snippets of wisdom were all said by @caroljsroth, author of The Entrepreneur Equation, carolroth.com:

If a few people aren’t laughing, you’re not dreaming big enough.

SO TRUE!!!! Now can I make a confession? I am embarrassed to call myself a blogger — because I don’t make a living from it yet. I feel like an imposter. (Who calls themselves an “aspiring blogger,” anyway?) I’m afraid that if someone asks what I do and I reply, “I write Afford-Anything.com,” they’ll laugh.

But you know what? My dream is for this blog to become big. HUGE. My dream is to start an entire Afford Anything movement. I want 1,000,000 readers to this blog. I want 200,000 email subscribers. I want this to spawn books, magazine articles, a television show. I want nothing short of a cultural phenomenon.

Are you laughing? Good. That means I’m daring to dream big. And so should you.

Be willing to take a couple steps backwards to make a huge leap forward.

Again, this is entirely true. The biggest barrier to risk-taking is comfort. If you’ve got a comfortable life, with a comfy job, comfy income, comfy home, comfy shoes, you’re at risk of not taking risks.

USA Today recently reported that the Great Recession and layoffs spawned record numbers of people to start businesses. Why? Because with 10 percent unemployment, and an even greater percent of underemployment and low wages, people stopped feeling comfortable. And that’s when the real fun began.

Your time is valuable — if you don’t think so, no one will.

Small business owners who sell a service — such as freelance writing — often charge extremely low rates, which they justify by telling themselves that they’re in a business with very little overhead. After all, a freelance writer just needs a laptop and an internet connection, right? And some incidental office supplies?

What that freelance writer isn’t considering is his or her time — hours of her life which she’ll never get back. Hours which could have been devoted to doing something else, whether it was pursuing more highly-paid work or relaxing and enjoying life.

Our lives are short and our time is valuable — so value it.