March is here: the birds are chirping, the grass is growing, and it’s time for me to write the latest installment of my Investing 100 Percent of My Income pledge.
In case you’re new to this website: last December I pledged to invest every penny I earn in 2012. My partner Will and I are going to live off his income while investing mine. I’m self-employed, so my income fluctuates, but Will and I estimate that we’ll earn roughly the same amount, which means we’ll be investing approximately 50 percent of our joint income.
Please note that I’m investing my income, which means we need to save a good chunk of Will’s income for short-term saving goals: car repairs, vacations, etc.
I write a monthly update on this site to help keep myself accountable. How did I do in February 2012?
Cash vs. Accrual
First, some background: When you work for yourself, your “income” isn’t as simple as seeing what’s in your paycheck. There are two ways to figure out how much you make:
#1: You can measure how much your customers/clients owe you, even if you haven’t received the money yet.
– or –
#2: You can measure how much cash got deposited into your bank account, regardless of how many I.O.U.’s are floating around.
The first method is called the “accrual” basis, since it measures how much money you’ve accrued, or earned. The second method is called the “cash” basis, since it measures the amount you’ve received. (A friend of mine refers to this as “A.F.C.” – actual friggin’ cash.)
I track both, but for obvious reasons, I can only invest money that I’ve received. I can’t invest money my clients owe me.
How Did I Do In February?
In January I threw almost every penny into my Roth IRA, which you can read about here. In February, on an “accrual” basis, I earned more than enough to max out the rest of my Roth IRA, plus a few thousand extra that I can invest in my two businesses: buying/fixing rental houses and building/running websites.
However, on a “cash” basis – the money that’s reached my bank account – I’m $500 shy of maxing out my Roth IRA. Grrr!
It’s frustrating to be this close to crossing “Roth IRA” off the list. On the upside, I’ll certainly be finished funding my Roth by the time I write my next monthly report.
Admittedly, I would be finished funding the Roth already if it weren’t for the fact that I spent 18 percent of last month’s income on business-related expenses.
Some of these were costs that I couldn’t postpone: I needed to renew my membership in the Society of Professional Journalists, for example. I sit on one of their national committees, so having a lapsed membership would be embarrassing.
But other expenses were expansions of my business that I chose not to postpone. I’m eager to gain momentum and I don’t want to wait around for another month.
Seeing how my business affects my income probably contributes to that impatience. Until November 2011, the vast majority of my income – more than 90 percent – came from freelance writing.
In December, things shifted. Two-thirds of my income came from freelance journalism. The other one-third of my income came from my websites. That same pattern held true in both January and February.
In March I’m looking forward to putting the last $500 in my Roth IRA and directing the rest into fueling my two businesses. I’m hungry for more real estate, and I need to develop a plan that guides how I can make the most of these bargain-basement housing prices. I think (hope?) that March will be an exciting month. Stay tuned!
Thanks to Matteo Catanese for today’s photo.