The Freelancers' Show 115 - Preparing For Freelancing: Budgeting

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The panelists talk about preparing for freelancing and budgeting.


CHUCK: Yeah, I made sure I had water because I had a coughing fit in the middle of my last podcast. REUVEN: Oh, that’s a great way to attract the listeners. CHUCK: Yeah, I'm in the middle of picks and I'm just like, “Hang on.” [Would you like to join a conversation with the Freelancers’ Show panelists and their guests? Wanna support the show? We have a form that allows you to join the conversation and support the show at the same time. Sign up at] CHUCK: Hey everybody and welcome to episode 115 of the Freelancers’ Show. This week on our panel we have Eric Davis. ERIC: Hello. CHUCK: Curtis McHale. CURTIS: Good day! CHUCK: Reuven Lerner. REUVEN: Hello, from Chicago. CHUCK: I'm Charles Max Wood from and this week we’re starting a little bit of initiative. We decided to do episodes on the things that you should know as you get started or prepare to get started. This week we’re going to be talking about budgeting and finance and give you an idea of some of the things that you can do to get ready to go freelance in those areas. I'm a little curious, were these things that you guys were doing before you went freelance? CURTIS: Nope. ERIC: I was. REUVEN: Definitely not at all. Yeah, I did little budgeting before I started my business and I've gotten better at it, but that’s not a high threshold. CHUCK: Yeah. For me, I think we’ve talked about budgets even after I went freelance for a long time we really didn’t do much with a budget, and we’re still working the kinks out of our process right now, so it’s a hard thing. Do you feel like you were very well financially prepared to go freelance when you did it? CURTIS: Yeah, we had saved 6 months of income when I went, and that was something that we had decided to do long before after listening to other freelance shows at the time that that’s what we needed to do. CHUCK: Very nice. What about you, Eric? ERIC: Not as well as we wanted. I went freelance right after we moved out of state, and so we incurred a lot of moving expenses. Got up here, my wife basically transferred her [inaudible] job, which wasn’t the greatest job. It’s kind of like a job you have in college, and so we weren’t in the best of shape. We had savings and all that because we were always stocking money away. The savings was at a low point from the move; ideally I would’ve liked to have a couple more months in savings, but it was pretty easy to get started because I actually used my previous employers, like my first client, and then stuff got started from there. CHUCK: Very nice. How about you, Reuven? REUVEN: I started my – no. I hadn’t done any budgeting and planning beforehand. Basically it was when I moved to Israel I wanted to be a freelancer. I was more or less told, “Oh, well you can just work for us. This is my last employer” so I never really transitioned. It was just, one day I was a salary employee, the next day I was a freelancer and I was more or less guaranteed income, and I just sort of hit the ground running then. CHUCK: Yeah, makes sense. When I went freelance, I just gotten laid off. I had money in the bank, but that was because I got severance and a bonus right before I was laid off. As you can imagine, we didn’t have an impressive amount of money and we lived on it for a while before we were actually making money. REUVEN: I think my sort of thinking was, “Okay, [inaudible] watch savings, but I’ll try this freelance thing and if after a month or two it doesn’t work out, fine, I’ll go get a real job.” Either way, I'm more or less guaranteed to have some sort of income. CURTIS: That’s actually how I started too. I don’t remember the exact numbers but I sold my car because my car maybe [inaudible] made it up here driving and even towing, but we didn’t really need two cars up here. And so I sold my car and took half the money from it and [inaudible] with my wife like, “Hey, I'm going to try to do and get some freelance web design, web development projects. If I can make this business investment money back within three months, I'd like to keep going. If I don’t, then I’ll use whatever’s remaining, plus the other half and use that to get a suit, get a tie, go look for a job.” It ended up, I made it back plus more on the first – basically on the first project, so like first 30, 45 days and then just grew it from there. Having that bet was a nice little fun thing to get my business started and has very, very, very little investment, and that’s why I did a lot of grassroots marketing, grassroots starting up stuff. CHUCK: Yeah, I have to say that it was kind of the same thing for me. I mean, we had that severance money and we had the bonus, and the deal that I made with my wife was at the end of the money I’ll get a job. By the time we got to the end of the money, I had made enough more to where I could stay freelance. I do wonder a little bit if things would have been a little bit easier if I'd had a bunch of money in savings. I'm curious – how important do you guys think it is to have money in savings before trying to go out on your own? CURTIS: I think it depends. I've ran into this a little bit; I had a significant amount in savings and having that in there, you have a safety net – it’s kind of the purpose – but if you have too much of a safety net, if your tightrope walking but you have a bubble suit on, you don’t really feel like, “Oh, I don’t need to really do this. I don’t need to take some risks or push myself too hard.” I think the amount that I started with was actually good because it actually – it was enough to catch me if I really fell, but it also made me really get out there and try instead of just wasting time or doing things that really weren’t important, weren’t actually going to generate sales. Right now, because I took a break for a while, I still have savings – it’s still there, but it’s a lot lower than I'm comfortable with, and so I'm actually more motivated, more, “Okay, I don’t really wanna call this person that I've never talked to but I need to make a sale, so I'm going to get on the phone and call them.” I think having too much cash can be a problem, just the same as not having any at all. REUVEN: I think having some savings is usually going to – it depends on your situation, right? If you’ve got this huge, new project – if someone, sort of like what happened with me where my employer said, “We’re willing to hire you as a consultant for – a freelancer for the next six months or a year.” It was really a big project; that gave me the cushion that I needed, and so I didn’t need to worry about learning the sales, learning the marketing, getting a pipeline going. But if I just were to decide one day, “Hm, this freelance thing sounds great; I think I'm going to do it” and I didn’t have any contacts and I hadn’t made any sales, then I think having that cushion in the bank would be pretty crucial, because it’ll take time to ramp up and find the people and make the contacts.” CURTIS: Right. Yeah, it depends on what other skills or what other resources you have and it’s also how creative can you be in getting those. Are you in an area where there's a lot of entrepreneur meetups or business meetups where you can go and meet people? If you don’t know people now, you have the opportunity to – or you [inaudible] in the middle of nowhere and you don’t have that. CHUCK: Yeah. I think you have to have something, unless you're building your clientele before you go full-time, but I think it would have been a different story for me if I’d had the money. We did hit some slow times; we’ve hit some slow times since we didn’t have an emergency fund. At least a few months of expenses in the bank, which is what I call an emergency fund, and things would have been a lot easier if we’d had because we could have made it through while I still was out looking for something that I could do for work. I think even though I'm pretty well-connected and it’s pretty easy for me to find work most of the time, I mean, there's still been a few times where it’s just hard to come by work. CURTIS: Right, and there's another aspect too. For us, my wife was working a full-time job. It wasn’t a career; it paid the bills and all that, but that gave us – I don’t think it was enough for us to live off of but it was very close. We had our personal savings too, so the worst case, if I wasn’t bringing any work for three or six months, we weren’t going to go hungry versus – I know Chuck, in your situation you're the sole provider for your family. You have a lot larger family than we did at that time and so that’s a different factor. You have a different risk tolerance than we did. We were the stereotypical, just-out-of-college young people. CHUCK: Yeah, and you just had your daughter, what, a year ago or something? CURTIS: Yeah, and so this was – I started I think summer of 2007, so that was five years before our first kid. We had two cats that were our dependents. CHUCK: Yeah. Curtis, do you think having that six months of money in the bank made a difference for you, or has made a difference for you over the last – however long you’ve been freelance? CURTIS: [Inaudible] at first, I was lazy to start figuring, hey, I'm freelance. I can get up and have a coffee slowly and do a little bit of work and walk the dog for an hour, come back and it’s lunchtime, so I didn’t get a lot of work done at the beginning. When I saw the money dwindle, I realized, “Hey, I [inaudible] get going” and it gave me some time to sort out what that really meant and what it meant to have a productive day. CHUCK: Nice. The other thing we tried to mention at the beginning of the show was budgeting. I know that the budgeting – we’ve talked about budgeting on the show before but I'm curious, you know, as things have gone on, have you guys gotten better at budgeting or –? This is something that I still struggle with, I’ll admit. ERIC: Yes and no, I guess. At first I was very meticulous about different categories, like what most people think of budgeting. Over time, I kind of got to where – it didn’t matter what the categories were, so long as I stayed under a certain total expenses, because I knew what I was going to bring in in revenue and so I keep the total expenses I have with a certain amount of profit. I've since kind of gone back in – I haven't been that heavy on categories, but there are some categories that I really watch, like hosting, or advertising, where I know they can get out of hand really quick, but I still don’t have ‘this category, I need to spend this much; this category, I need to spend this much.’ I'm reading a little bit, learning a little bit about that, and we did that on our personal stuff, but for the quantity of transactions for expenses in my business, it just doesn’t seem really that useful right now. CURTIS: For us, my business, we do a yearly budget to estimate everything, and then we check in on it every quarter to see where we are. It’s totally my wife – I'm not sure that I would –. In fact, I know I wouldn’t budget if my wife wasn’t around to help me do it and do most of it, actually. REUVEN: Yeah, I must admit, I'm pretty bad at budgeting. I mean, both in my personal life and my professional life, certainly I've gotten better at it having a business. I'm certainly now at the point where I have a bunch of different clients, each then pays me different amounts at different times, and so at least being able to project what I'm getting each month – that’s something that I've certainly gotten good at. And so I can say, “Okay, we can buy x in two months” because I know that such and such a client will be playing then; or I know that we’ll have a surge of income then; or I know we can pay off various loans then. But I really haven't taken it down to the level of, ‘this is how much we pay on x, this is how much we pay on y’ mostly I think because the majority of my expenses are pretty set and fixed and unchanging. I take a flat salary every month, and then mostly other things are expenses that don’t vary that much from month to month. CHUCK: That’s interesting. I think that makes it easier to be a little bit more loose with your budget if you know that you're going to reach the watermark that covers all that stuff and doesn’t vary too much from month to month. CURTIS: I'd say I have the same expenses pretty much every month, but what we found is when my wife sat down and analyzed the budget, the one year I'd spent almost $5,000 on coffee, which is a lot, right? There was one hotel there in my entertainment budget and that’s about it, and so this year we ended up putting $75/month in a Starbucks card, which sounds like a crazy amount of coffee, but it’s cheaper than $5,000, right? CHUCK: That’s true. REUVEN: You’ve mentioned that before, and having that sort of declining balance as a limiting factor is very smart. It’s very common that I’ll go out to a client’s office, and when I'm there all the expenses are covered; they’ll even treat me to lunch in their company cafeteria, which is kind of nice. But if I'm not there, if I'm just meeting someone, then I’ll say, “Oh well, I’ll just go out to lunch” and it’s very tempting to say, “Oh, I’ll just get a big lunch or whatever and put it on the credit card. That, I think, [inaudible] really business expenses per se – because in Israel you can't expense those – but that creeps up on you very, very quickly, such that at the end of the month, you’ve had a lot of very nice lunches, but it’s also cut a big hole out of your income. CURTIS: Yeah, and that’s what I found, which is why we started tracking it that way now. [Inaudible] putting it on a card and any personal purchase I pay for in cash. ERIC: One thing that’s important that – I think all three, or at least two, of you guys have said you do something yearly. I do the same thing. I have a spreadsheet and every month I'd actually go in and fill it in and put in like, “Okay, I projected, I did this much, but I actually spent this much.” I even base that off of every week, I do my bookkeeping and accounting and figure out, “Okay well, here’s expenses” and so I look at it all the way from what happened this week with stuff and track it all the way back to the year. And that’s nice, because then I can forecast for the next. Like, “Oh, it looks like advertising’s gone up” or “How much am I spending on training over the last six months? That’s going to be my new budget,” that sort of thing. It’s kind of more, it’s like getting business intelligence around your money flows instead of actually just making wild guesses like, “Oh, I guess I spent $2,000 going to this conference. Where should I put it?” CHUCK: Now, do you use software in particular for that, or do you use a spreadsheet, or how do you manage that kind of stuff? I guess we’re heading toward bookkeeping versus budgeting, and I know the two intersect to a certain degree, because the one informs how you're doing with the other. Is there software you use, do you use a spreadsheet? ERIC: I use GnuCash for the actual bookkeeping, like log and everything. It’s just a free, open-source accounting system. Think QuickBooks, but without all the complexity. You can use anything – we’ll probably have to do a show on accounting – but for the budget, I just use a spreadsheet. I've created one a long time ago; it has two sheets – one is a projected so that I can do all of my stuff in there and then just copy into a second sheet, and that’s the actual amount, and then as the month ends I fill it in. It has calculations of each month, my total income and expenses, my tax estimate, and then it also has the yearly totals for like, “Okay, how much money I'm going to spend on [inaudible]? How much money I'm going to spend on training and all that?” It’s a simple spreadsheet; the biggest formula is like summing something up and [inaudible] percent for taxes. CHUCK: Yeah, that makes sense. I tend to do it a little bit – well, I use a different piece of software is basically what it comes down to, and I just blanked on the name of it. It’s an online system and – I should be able to find it here –. ERIC: The nice thing about spreadsheets is I actually have them going back for four, five years, so I can actually review old ones and I don’t have to worry about, “Oh, this stuff was in a different accounting system” or anything like that; it’s all in one place. CHUCK: Yeah, I've been using LessAccounting – that’s what it is – I’ll put a link in the show notes here. The thing that I like about it is that it basically gives me an interface where I can go in and I can just categorize each expense. It’ll show me the expenses so I can categorize it and then I can categorize my income and figure out where everything is coming from. I've been using them for a year or so now, and so I've got a good track record of the data there, but then what it tells me is it tells me you spent so much on this, and so much on that, and so much on this, and so then I can look at it and say, “You know, I spent quite a bit on training, or quite a bit on travel, or quite a bit on equipment.” Then I can go look at it and figure out, “Okay, well maybe I should cut back on this area because I'm not using that service anymore,” or I'm being deliberate about it because I know where the money’s going. That being said, I haven't really set a budget for the business. I just look at it and say, “Did I have to spend that?” and if not, then I have to figure out whether or not it was worth it. REUVEN: Right, that’s close to how I do it where basically I more or less know how much I'm spending on different things sometimes and I've been [inaudible] bad about this. I tried GnuCash for a while and actually I was very impressed by GnuCash, and it taught me a lot of basic accounting ideas, but I just haven't been disciplined enough to put every single expense in there. I have a pretty good idea of how much I'm spending on things, and it’s nice [inaudible] “Oh I should be able to cut back on x, y or z.” But so far, truth be told, I haven't found particular things that are truly sucking up a lot of money. It seems like, between my salary and just the day-to-day expenses, it’s covering most things. Although I’ll admit that the PhD related stuff has thrown [inaudible] wrench into the works, where every so often I just have to fly to Chicago – doesn’t matter if we can afford it or not – I gotta come here to meet with my adviser. CHUCK: Yup. CURTIS: To me, the budget helps me even track –. Like last year, my wife highlighted the software category, so whatever, iTunes apps, or – not iTunes, but App Store stuff – she highlighted that as things I should go through. She actually pulled them all up and we dug through them all and we found a bunch of things that were client-related expenses, so I even count my plugins for WordPress and software purchases, usually. We pulled out a bunch of those, but there's still a lot of stuff in there; there's probably 50% of it that was like, I just bought it because it looked cool and I never ended up using it and so this year I've been a lot tighter on my software purchases. REUVEN: Yeah, that’s very smart. There a lot of these things especially – not to offend you guys because your books are actually good – but e-books where I say, “Ugh, it doesn’t cost that much. I'm sure I’ll use it” and I would say a good two-thirds of the time I ended up just consuming space on my hard drive. CHUCK: Mm-hm. CURTIS: Yup. [Chuckles] I've got tons of them. CHUCK: I wanna turn the conversation back to people who are new to freelancing or are thinking about going freelancing. What are some of the categories of things that you put into your budget or look at as areas of expense that they should be looking at and budgeting for? CURTIS: New hardware every couple of years, probably. [Inaudible] a new computer, new monitor, keyboard – stuff like that. ERIC: Yeah, have [inaudible]. CHUCK: [Inaudible]. I have a sad story about that. I was rearranging my office one Friday and I gouged my monitor pretty good. REUVEN: Ouch. CURTIS: Ooh. CHUCK: So it’s got this big [inaudible]. Not dead pixels, it’s just a scratch that you could see. Anyway, so budget from when you move stuff from ruining your stuff. CURTIS: Yeah, accidental damage. ERIC: I actually opened my spreadsheet from 2008, which was like my first four-year freelancing. It’s [inaudible], accounting fees, education – which at that time included books and also just normal training – and then marketing website. I didn’t have this broken out, so that’d be hosting –. I think I got some designs – yeah I got some designs in that year; I was doing advertising. And then software purchases, which also includes SAS subscription stuff. That’s pretty much it; the rest was little miscellaneous stuff and all of those things were like –. I mean, marketing website, taxes and education were like the big three, and everything else was maybe a fifth of those. CURTIS: I think the big thing even to start is to realize how much expenses will take up. I've informally surveyed, but I asked a ton of different people and the number that keeps coming up as a good average is around 20% of your total income is expenses. I've had a few people who are down there, 10%, and I have few that I've [inaudible] up in here like almost 30%, sometimes. But in the 22% to 28% is what I hear probably 80% of the time people say what their total expenses are versus their income. ERIC: Yeah, that’s what mine is. I try to keep it at 20%; mine’s a bit higher because I'm a developer, so I have a lot more servers and the large cost that you really can’t get rid of easily. But yeah, 20% is what I shoot for, and that looks like that’s what it was in that year, too. CURTIS: Yeah, and by the time when you're initially starting and saving for taxes, probably saving, say, 30% - that means 50% of your income is gone, right? I know, you might even need to save more depending on how much you're earning, sometimes 40% or 45%. ERIC: Right. Right now, 35% is good for me because it covers – here in Oregon, we’ve got higher state taxes. It’s a US thing; you can talk to an accountant and figure out what your tax rates are, but [inaudible] to cover federal taxes, self-employment taxes, state taxes, and then I like to have a little bit left over in case I've completely miscalculated something or if I wanna have extra windfall at the end of the year, I shoot for 35%. REUVEN: I think it’s important though, with all these expenses – via taxes or just investments you're going to have to make in hardware, software, learning and so forth – that people getting into freelancing realize that’s why consultants charge more. Not just because of the value they're giving, but because you’ve got all these extra expenses associated with your business; it’s not just your salary. You need a computer? Well, you're going to have to pay for that. You need books? You have to pay for those. You need to travel? You need to pay for that – and it adds up rather quickly. In my case, I do a lot of training in Israel and so I'm [inaudible] on the train there – I guess that’s why it’s called training, right? Bum-bum. Anyway, [chuckling] in any event, I actually have a lot of expenses on the train each month, which of course [inaudible] expense, but that’s money that’s coming out of my pocket. ERIC: Curtis has put this in chat, but my wife’s in HR, and if you actually are working and then you know someone in your company’s HR – you just know someone. Talk to them about the real cost of an employee –. Curtis says that an employee costs 20-30% more than their salary. It’s more 50%-100%. REUVEN: I would go with that. ERIC: Mm-hm. REUVEN: [Inaudible] I would totally go with that. ERIC: If you're making say, $50,000/year – that’s what your gross salary is, not even counting taxes – the employer’s probably paying another $50,000 for their portion of your taxes to have an office, to have a desk for you, to have a computer for you, and there are some figures – depending on what job it is – where it’s even double that amount for the first year just because of your drain on everyone else in the company. That alone, I mean, that’s almost exactly the same when you're freelancing – half your budget goes to taxes and the keep-the-business-running expenses. REUVEN: Different countries have different ways of doing it. In Israel, I've got an employee, and granted he works hourly, but I have to pay – it’s mandated by law that I pay into a pension fund for him, and that I pay into a severance fund for him so that when he leaves me, he gets one month’s salary for every year he worked for me and I have to pay, obviously, my side of income taxes and health tax, and there are one or two extra benefits that just about everyone gets. I'd say it’s easily between 20%-40% of his salary, and that’s because he’s not – because he’s providing his own computer, because he’s working from home. If he were working on a computer that I bought for him at an office I was renting, it would skyrocket. CHUCK: Lucky you. ERIC: Yeah. There's a story where like –. REUVEN: [Chuckling] That’s what my accountant – my accountant is always scratching his head, like, “Why do you have this guy working for you?” But the fact is it lets me do bigger projects than I can do on my own, but it doesn’t come free. CHUCK: Mm-hm. ERIC: I'd say there's a story in startup in SAS businesses where the cost of toilet paper in a day for a Fortune500-sized company is more than what they’ll spend on the top tier for your SAS product for your entire year. When you run numbers of how much stuff cost and how much people would go through it, it makes sense. When you're freelance, you have to account for all that either out of the business stuff, if you make a business thing, or if you work at home, like wear and tear in your home, supplies you use in your home – that sort of thing. CHUCK: Yeah, let me tell you about my toilet paper bill. REUVEN: [Laughs] ERIC: Amazon Prime. REUVEN: Four kids. CURTIS: Nah, I'm okay, thanks. [Chuckling] REUVEN: Actually, that raises [inaudible] terms of expenses, which is if you work from home – again, this depends on what country you're in, and your accountant, and how much you wanna take advantage of the gray area between your personal life and your business – but you can almost certainly, basically count as a business expense a lot of the home stuff. For instance, my wife and I both work from home, and I have an actual room that’s my office and she works out of our bedroom and we often have meetings in the living room, so I think our accountant had said we can count about 25% of our home expenses as the business. That means electricity, gas, water, property tax, and a bunch of other things. CURTIS: Yup. For me, it’s 15%. My accountant says he’s had people that just say, “Tell him to write down more than that” and in very few cases hasn’t ever panned out when he decided to get audited. He’s had one or two clients that literally did the whole bottom floor of their house was their office. I do 15%. CHUCK: Yeah, I think I just go by square footage, and then you can deduct the percentage – whatever it is. CURTIS: Yeah, I could do that. We did the quick math and it was pretty – it was a couple percentage [inaudible] 15. He said he’s had people audited where it’s like it actually came out 13; the government just said, “Eh.” They didn’t really sweat that little bit. ERIC: Yeah, the same here – square footage and then whatever the square footage percentage of the house is, that’s what I get taxed, also the internet, or electricity and all that. We try to keep it simple, but still kind of not too much on the side of “I don’t wanna upset the IRS.” CURTIS: Yeah. For me, because my internet is something I require to do my job, we write that off as 100% right off, which I'm told up in Canada, that’s totally fine. My accountant says that’s what he does. I know in some places you should check the lot too, like you need an actually door and it needs to be a totally separate room for it to be counted as an office? CHUCK: Yup. Here in the US, it does. Or at least in my state, it does. REUVEN: Wow. Also, there are other things that we do that the business pays for or owns. We got the morning newspaper every day – it might sound quaint, but I love getting the newspaper in the morning on paper; we’re the last few people doing that. Actually the way in Israel works is certain newspapers are considered okay for expenses because they're better newspapers or they have business sections, whereas others would not be considered that way. And our car is on [inaudible] now, as opposed to [inaudible] saying or having our own car. So we have to do the other way around where we have to pay taxes on our use of the business’s car, and that’s where I just completely headed over to my accountant and say, “Whatever you say, that's fine with me.” CURTIS: Yeah. For me, we own the car and I write off percentage of the expenses based on how much I drove for work. I actually do the sae thing for my bike as well, my bicycle, because I’ll ride it as transformation to and from meetings and that counts as a write-off, percentage-wise, which means my trip back from Portland that was a 700k ride will increase my bicycle write-off a lot this year. REUVEN: [Chuckling] Wait, okay, I curious. How do you write-off – is it wear and tear on the bike? CURTIS: Yeah, I ride enough that I spend $120 very two months on tires, and I need a new chain. REUVEN: Wow. CURTIS: I know, just wear and tear, right, that you wouldn’t even think of but I ride a lot, so. I will need new tires when I get back from my trip. I always tell my wife that because of the bike it means that I can spend more on it because it’s a write-off and she just scowls at me and I don’t spend any more [inaudible] personally, all my bike stuff. ERIC: In the US, that’s called creative accounting. CURTIS: Well I talked to my accountant about it and he said, “Oh, that’s absolutely, totally valid. It’s a –.” ERIC: No, I meant how you're pitching [crosstalk]. CURTIS: Yes [crosstalk]. Because we get to write off more, right? No. REUVEN: I think that’s creative marriage-ing more than accounting. CURTIS: I know the one year when I rode back, rode to and from Seattle a couple of times for business stuff, I wrote off 50% of all bicycle expenses, which doesn’t amount to a lot. We spend way more in maintenance on the car, right? But it still was something that assisted in the income tax department. CHUCK: Yeah, makes sense. Are there any expenses that we haven't really discussed that people should be aware of going into freelancing? REUVEN: Well, having an accountant, right? CHUCK: Yeah. REUVEN: I mean, I'm paying my accountant – I guess it’s about the equivalent of about $400/month, maybe a little more, and that’s to do all my month-to-month bookkeeping. He has an office, so I bring him this pile of papers every month with all my receipts and paperwork, and they do the bookkeeping on that, and then they deal with actually the electronic transfer of taxes to the government each month as well and they say, “[Inaudible] you have to pay x, y, z for this month.” Strangely enough I was approved it. But then there's also, an additional expense of doing a yearly audit, so I'd probably end up paying $600/month. When I looked around last year, I said, “You know, maybe there's someone cheaper.” Actually turns out my accountant is the cheapest one in town, but it’s definitely a big expense. Aside from the government, the accountant is the one person who I can’t say, “No, I'm not going to pay you” because without him, I'm really sunk. ERIC: You also can’t tell him you don’t have any money, so. [Laughter] REUVEN: Exactly. ERIC: For me, I pay a virtual assistant to keep up my complex spreadsheet, and my accountant I see once a year, really, and I've been seeing him for 10 years now and he does my taxes for me. I [inaudible] asked him, “Do I really need to upgrade my accounting system?” He says, “Nah” so I just keep my spreadsheet that we've been working on for 10 years together. CHUCK: Yeah, and see, I use LessAccounting and then I go sit down with my accountant and I take in my profit and loss statement and a handful of other papers that mean tax exemptions one way or the other, and then we sit down and they he’s, “Okay, how many miles did you drive?” I'd check my mileage logs and I tell him this and that, whatever, but having that profit and loss is 99% of the information you need, and so the rest of it is just filling in the blanks. But yeah, having a good accountant is awesome. ERIC: Yeah, for me, my accountant gets one piece of paper which is the final sheet on my spreadsheet that’s a summary of everything, and that’s it. Then he gets donation slips or whatever for my wife and I, but he does them both for us. CHUCK: Yeah, he files for the business and for our personal stuff, which, it’s all one bill when it comes out. “You owe this much, go pay the government.” REUVEN: In Israel, most people don’t fill out tax forms. The only people who do are very wealthy or own businesses. Basically, when my accountant does the annual audit and profit and loss statement for my company, and then the income tax statement to the tax authorities, so he throws in our personal taxes as well and takes care of that. CHUCK: One other question I have. We talked about hardware and software and stuff, some of the hardware and software out there is, let’s just say, not cheap. For example, I just bought a new Mac Book Pro and the Mac Book Pro cost $1300. I got it refurbished and it’s the newest model of the Mac Book Pro. It’s got the retina screen and all the nice stuff. Anyway, what I'm wondering is do you guys save up for that kind of stuff or do you just pay it out as an expense every so often when you have the money to do it. CURTIS: I set money aside all the time for it in my savings account, and then I have an emergency – if I drop my Mac Book Air, I'd just go buy a new one. I won’t even sweat it because I have enough in my emergency fund so I'd just buy it then continue to save again. ERIC: I know what I would do. I don’t put money away all the time, but I make sure my savings account has a certain amount and if I have a problem, I just go buy a new thing. I got started with Frankenstein, repurposed, old-parts [inaudible] desktops because I was on Linux, so I didn’t need fancy certified hardware. That worked for a while; I would, “Oh, RAM failed; buy another stick of RAM. Oh, hard drive failed; buy another hard drive.’ Very little expenses, and it was nice because I can even overnight stuff and it was worth it to pay an extra $40 to have a piece overnighted to me, just so I could get back to work. Now I use a laptop which – it came out during December. My accountant’s like, “You're going to have extra money” and I said, “Cool! I’ll just buy a new laptop because it’ll be right off for me this year.” Then I have a backup laptop, and then I can always get a new machine if I really have to, more as like, “Oh, this thing broke. I need to be able to work for a little while a new one’s coming along.” But I don’t set aside money for it; my stuff’s not nearly as expensive as the Apple products, so if it fails, it’s not a really deep hole in my pocket. REUVEN: Yeah, I remember we got a laptop for my wife a few years ago and she’s probably due for a new one. We actually had gotten her a Mac a number of years ago, and she despised it so this time around we got – we actually called it ‘a normal computer’ and I was pretty surprised by how much less it cost. I was like, “Really? That’s it? Oh, boy!” I don’t set aside money for it; I probably should; that’s a very smart idea because I would have set aside $50/month. I'd probably buy a computer every three to four years. Last year, I guess it was about this time, my hard drive started to fail and so I got a new hard drive like I was sort of doing a [inaudible] and then it was pretty clear [inaudible] the machine is on death store. When I came to the US in July of last year to work on the dissertation, I literally had it shipped to me next day air so that the day I arrived it would get to me. That was a fair chunk of cash, but there was no way around it. I just needed it for my business to keep on going. ERIC: Yeah, on some things I actually – I feel when I type on normal keyboards I get – I don’t know if it’s [inaudible] or whatever, but my hands start hurting. I get a lot of pain, and I used ergonomic ones and I found ones that worked for me, and it worked so well that I actually bought a second keyboard that’s still in the box, in the closet. I have a second mouse in the closest, and then because we’re doing these podcasts every week I have a second microphone in the closet. I back up equipment – it’s not if in case I break something; it’s in case something stops working or I need to jump on it and I don’t have the time to get to the store. I can lose a computer and I can be working on a different computer – that’s fine. But if I lose my keyboard, it actually hurts for me to type for more than an hour or two, so that’s actually a severe detriment. A long time ago, I did a risk assessment of what would cost my business to slow down or completely stop, and kind of figured out how to work around those risks and buying the extra peripherals for my stuff was actually very inexpensive, it gave me a lot of peace of mind about it. CHUCK: Yeah, that makes sense. CURTIS: Yeah, I went through – I don’t know – probably 10 keyboards in a year to find the one that I like. CHUCK: So you have the equipment – you guys mentioned that you set money aside, so you kinda have an emergency fund in your business and personal. Is that what I'm hearing? ERIC: Yeah. CURTIS: Yeah, we run double emergency funds. It’s a few months right now of business one and then the personal one is a few months as well that would cover full salary; not just expenses, but full salary. REUVEN: I've been doing that, I guess, in the business for about a year and a half, two years now. Every month I put aside – I'm guessing a little less than $1,000 – and then the personal as well, and I found that’s just a great, easy way to save money. Not only that is that a good idea to have for emergencies and so forth, but if and when you ever need to take a loan out from the bank, they're much, much more likely to lend you money if you actually have money in the bank than if you don’t. Suddenly becomes a no-brainer for them. CHUCK: Mm-hm. ERIC: One kind of category of expenses we didn’t cover is the startup expenses, like if you're city or state or locality needs permits, or licenses, or –. I know a lot of people spend a lot of money getting a logo, or a letter head, business cards and all that – that can add up to a thousand, a couple thousand, maybe even more, but I found, realistically –. Since I started up a lot of businesses and killed them off, I found if you need a business license, or like [inaudible] a home occupation license when you work at home, those are good and they're maybe a couple hundred. Anything more than that, you don’t need to set up a corporation, you don’t need to do an LLC – that stuff’s all optional. Same for logos and letterheads – all that stuff. Maybe you set aside some budget like how to [inaudible] your first client and your first actual check your get, like, “Okay, I'm going to get my business cards out of this one,” but don’t feel you need that the day you start up. I did that, and it was a waste of money. I could have waited a couple of months and actually put that money into marketing or something else and got started faster. CURTIS: Yeah, I didn’t get my business license for a year of running, and then I talked to someone? Maybe it was after my tax return or something, someone called me and said, “Hey, do you have a business license?” and I said, “Nope.” And they said, “Well, you should come down and get one.” It was a hundred bucks; it was not a big deal, so. I have bright pink pieces of paper sitting on my shelf because no one ever comes to my house to see them, right? CHUCK: Yeah, I think the business license in my city is $75. I've been in business here for four years, about, and I still don’t have one. CURTIS: Oh, I certainly have friends in town that run the exact, similar business as me who have never got one; they never got a call. I would never have even known to get one if they hadn’t called me. I do it now because I'm on the radar. CHUCK: I'm trying to be a better person so now I feel guilty for not following the law. CURTIS: Good. I'm glad you do. REUVEN: Well, with me it’s a little different because in Israel, because people don’t file their own taxes typically, if you get income of any sort – either self-employed – well, if you get income as someone who’s self-employed, you have to register with the government, either as someone who’s self-employed or have your own business, which is what I do, and I just pay a salary for it. [inaudible] registering with three different agencies – with income tax, with national security, which is sort of like social security, and with the VAT office – value added tax, which is sort of like sales tax. Each of those is registered with the government, and then on top of that – the registration [inaudible] would have cost back when I set up my business; that was pretty trivially cheap. But every year then I have to pay to be registered with the justice ministry, and I'm guessing it’s the equivalent of $300 or $400 each year, just to be a licensed business in the country. So if I were self-employed, it would be less, but because I have an ltd, like a limited liability company, it’s more. And of course, in Israel, because everything is negotiable and a little – things can be lax – if you don’t pay one year, they won’t say anything. Just the next year, they’ll say, “You owe for this year and for last year” and I think they have spaces on there for up to five or six years of delinquency before they really start getting angry. ERIC: Yeah, and I wanna make it clear – paying for business licenses for your city versus paying for corporation registration or LLC registration, the rules are different. While I'm not an attorney, none of us are; this isn’t legal advice, but if you do –. You could skip your city one and there's not really that any ramifications; if you skip your LLC or corporation payment and someone sues you, they could do what's called piercing the corporate veil, which instead of them just suing your corporation and killing your business, they can actually reach through and hit your personal assets – your house, your car, any wages you're going to make, retirement accounts. So if you have to not pay something, make sure it’s city or something that’s not really that important. Always pay your corporation LLC stuff, even if it’s late. That gives any people who are suing, or attorneys, a lot of ammunition against you that you are “not a professional” and a whole bunch of other stuff. I didn’t pay some city licensing, and I didn’t pay a home occupancy one before my businesses and it wasn’t a big deal, but I made sure to pay all my tax fees and all that stuff. CHUCK: Yup, makes sense. So do you have any other advice for people who are getting ready to go freelance or who have just started as far as managing their finances that we haven't talked about yet? ERIC: One thing – we were talking about expenses on the income side of it, and unless you actually have a client and you're sending invoices and you're getting checks from them right now, if you're trying to forecast, like I had this lead and we’re about to sign, pretty much [inaudible] how long you think it’s going to take –. If you think it’s going to take three weeks to get this project started and closed, it’s going to actually take six weeks before you actually see the money. Double all of your estimates because that puts it on the conservative side. Most businesses, they don’t really go out of business because they don’t have revenue; they go out of business because they ran out of cash. They might have cash coming in, but they didn’t have enough to pay their salary or keep their lights on, that sort of thing. It’s deep financial stuff that’s cash flow forecasting versus income state stuff. Keep your estimates on the conservative side as far as income, and keep them on the aggressive side, like my expenses are going to be higher than I think. That’s a good, helpful thing to start, and if you're wrong – if your income comes right away and your expenses are a lot lower than you thought, that’s kind of a bonus windfall you can take advantage of. REUVEN: I agree 100%, and you should expect clients to pay late. If they don’t, that’s wonderful. I mean, I have different clients who pay on different schedules; it’s very typical in Israel for people to pay net + 30, which means if I invoice them on May 31st, I will see that money July 1st. And so keeping that sort of cash flow going and being able to know, “Oh, I'm going to get this amount of money in July and this amount of money in August several months in advance” is crucial. And of course, then, the people who just don’t pay, and you have to go and nag them – that takes away from your time as well as it then raises the question of, “Well, when are you going to see that money?” CHUCK: Yeah, I just wanna point out that we have done other shows on value-based marketing, or value-based pricing, and the weekly pricing one that we did with Curtis where basically they get paid part or entirely up front, so those are options. I've also gotten deposits, and what that does is that pushes that timeline for getting cash to the end of the project, and so you have to pick up something quicker at the end. It is definitely something to consider and be aware of as it happens. REUVEN: Yeah, and I would say, some of these things, if you do them early on, if you start doing weekly billing where you get paid in advance – if you can pull that off from the start of your business, you're going to be in so much better shape than someone like me. I've been working with so many people for so many years, hourly, or daily now, more and more; we’re switching things around. It’s not only hard for me, but I have to go to clients and start to explain it, so it’s going to be a longer process. CHUCK: Yup. Alright, any other pearls of wisdom here, or should we get to the picks? CURTIS: Just oysters here. [Chuckling] CHUCK: Alright. Curtis, do you wanna start us with picks? CURTIS: Sure. I'm going to pick Dave Ramsey’s Total Money Makeover book, which you probably mentioned before; I'm just probably going to be chucked to it too. For my keyboard, after trying 10, I'm going to pick Dave. I'm always going to pick Dave in general. And for my keyboard where [inaudible] I've been through 10, I actually have a kinesis Freestyle Solo. I have a version 1.0; they have a version 2.0 out that’s slightly different, and they have a Mac version. If you type [inaudible] like I do and you let them know, for $5 they’ll actually reprogram the keys on the mother board, on the board, on top so that it actually were, because I don’t have any of the fancy keys on the left side that work, like the arrow keys or anything, or the fancy, whatever they are. Undo commands, they do other things. That’s an excellent keyboard that I've had for I guess two years now. CHUCK: I have to ask, did you start out with a qwerty keyboard, and then switched to the dvorak, or –? CURTIS: Yup. I started out qwerty and then I switched to dvorak two years ago. I probably got the keyboard, and then three months later I was still having some wrist issues that was way better, and I switched to dvorak. I actually switched on a Friday, so I practiced all weekend figuring on Monday I'd go back and then I'd practice one more weekend, then on Monday I was like, “I can’t type either way.” So I just dove straight into the dvorak on Monday. It probably took three months to really get all the way back up to where I was, but I was, say, at 80% of my productivity and speed by the end of the week, so no wrist pain at all. It’s like extra security, because no one can type with my keyboards. CHUCK: Very cool. Eric, what are your picks? ERIC: I got two picks today – one’s an app I've been using. It’s for iPhone, iPad; it’s called 30/30. It’s basically like a to-do, task manager type thing where you have different tasks, you slide it off, and there's a timer and all that. I'm actually using it as a Pomodoro timer so I have two tasks that reoccur – it’s Pomodoro for 25 minutes and then break for 5 minutes. It’s nice because I have it on an old iPad that’s full-screen, so it’s telling me [inaudible] to do; it’s has the ding-y when it’s done; I can pause, I can add time, remove time, finish early. I've tried a bunch of Pomodoro apps and all of them are too restrictive; they actually don’t follow what the method allows you to do, but this 30/30 app actually works really good and I've been using it for a couple of weeks now pretty consistently. The second to be kind of on topic, at Microconf there is a presenter Jesse – he’s the founder/CEO of YouNeedABudget, so They make personal finance software that does heavy budgeting. If you’ve heard of the envelop method – it’s based on that. I don’t know if it’s a new thing they're doing, but they have an email course about doing budgeting for business and it’s nice because he actually has an accounting degree, he had a CPA license, all that stuff, and so he knows accounting. In his email course, he basically gets on accounting in quickbooks, about how bad it is and how it basically doesn’t help your business at all. I have a finance background and I subscribe to him and I learned some stuff from that that I'm going to actually apply to my business, using budgeting, accounting, finance, to actually drive my business instead of just looking back at how much I spend. The email course looks like it’s nine days. It’s free, you can sign up. Here’s some pretty cool rules, and if you follow Dave Ramsey or any kind of modern, personal finance you'll see a lot of similarities between it. CHUCK: Very nice. My wife and I use YNAB or You Need A Budget for our personal budget, and it’s a really terrific program. ERIC: Yeah, and I would –. Before, I'm on Linux, so I can’t use it – it’s a desktop app. Although, there are rumors that there might be a different style or format of it coming out soon, so if you get on that list, I heard they will actually announce it on there. CHUCK: Very nice. Reuven, what are your picks? REUVEN: Okay, I've got a few picks for this week. First of all, I found this wonderful blog post about pre-qualifying clients where this – I think he’s a developer, might be a designer, says, “This is what we do before we speak to a client; these are the questions that we ask them.” It was a really, really nicely laid out way to go through things with a client. What is your budget? What do you plan to do? How many people are going to be working on this? And it gives you both a good picture of what the client is doing and how serious they are, and whether it’s a good match, whether they really are prepared to pay what you might be interested in charging them, or if they're willing to pay what will probably be necessary to get it done, so I thought that was very good. Secondly, econtalk is this great podcast with this economist, Russ Roberts. Just the most recent one I was listening to this morning is with Marc Andreessen – famous from Netscape and a bunch of other companies, and now a pretty well-known venture capitalists in Silicon Valley. I thought it was very interesting to hear him talk about both the future of technology companies and venture capital – not that I really have any day-to-day workings with VC firms, or I'm interested in getting in some sort of investment – it’s interesting for me to hear what someone involved in that has to say about the future of technology companies. And then there's also this great, great site that I've seen mentioned on Facebook and other places – tylervigen. I'm not sure if that’s a person or a place or something, but it’s this website that lists spurious correlations. It’s just wonderful stuff. For instance, it shows that there's a really, really tight correlation between the number of people who tripped over their own two feet and died, and the number of lawyers in Nevada. And if you look over time, it’s a pretty close correlation there, and of course the whole idea is to show you that you can have two numbers that, or two measures, that are really, really closely aligned, but just because they're correlated doesn’t mean they're causal. You can have a lot of fun, way too much fun with this sight, just looking for the correlations that other people have found, let alone find new ones. I feel obligated then too also mention [inaudible] the xkcd comic about correlation and causation. If you haven't seen that before, well, that’s why you're not laughing. Anyway, those are my picks for this week. ERIC: And there's one I heard where it’s someone looked at the data of deaths from shark attack and amount of ice creams sold, and there's actually a really, really good trend there and people were thinking about banning ice cream to prevent the deaths from sharks. [Laughter] CHUCK: Nice. Alright, I've got a couple of picks. The first pick, I just finished Dave Ramsey’s book, EntreLeadership. When you said you were going to pick one of his books, I was like, “Yup, beat me again.” But I picked a different one; I think you picked it in the past, Curtis. EntreLeadership has a lot of good information in there; I'm seriously considering building a consultancy so I have other freelancers and folks working for me, and I'm really considering implementing a lot of this stuff. Another book that I've been listening to that is – it’s somebody else and they're talking about how they ran their business. It’s Jack Welch, the way he ran GE. It’s a little bit bigger company than Dave Ramsey’s company. His book is called Winning, and it’s got a lot of good stuff in there too. I also have been playing a lot of game called Hearthstone, which is a card like Magic or Pokemon game, except it’s on the computer. It’s got Warcraft-type characters in it; it’s built by Blizzard; you get it on Battlenet. It’s been kind of fun; I can usually play a game in 10-20 minutes, so anyway, I've been enjoying that. If you want to – I don’t know if there's a way to actually find other people you know on there and play against them, but really, really liking that. One other pick I have: I rearranged my office. My father-in-law came in and helped me move things around. I've got this – it’s basically a cubicle, which is kinda funny because I never had a cubicle until I went freelance, but it’s basically a cubicle. On my right here are full-height walls, so they're five, five and a half feet tall, and then on my left, they're the four-foot tall walls that –. Are they four feet? They might be three, three and a half feet. Anyway, the full-height walls were in front of my window [chuckles] and so in my office I really couldn’t see out the window; I couldn’t open it. It was kind of a pain, and now that it’s all moved around, I can see outside and the sun can shine in and it’s really nice. I know that some programmers and some people that work from home, the sunlight makes them melt or something. Anyway, it’s nice to have all this natural light in here and it just makes my day better. I can’t quantify why, but it does. Anyway, that’s my other pick – sunlight. Anyway, I think that’s it; I think we’re done. I wanna thank everybody for listening and we’ll catch you all next week. [Hosting and bandwidth provided by the Blue Box Group. Check them out at] [Bandwidth for this segment is provided by CacheFly, the world’s fastest CDN.  Deliver your content fast with CacheFly. Visit to learn more]

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