Lately it has occurred to me that I’m shelling out a lot of money toward business-related products and services. According to Outright, the free service I use to keep track of my business accounting, I’ve spent about 35% of my 2012 income on deductible expenses like WordPress themes, domains, and graphics software. Considering the fact that roughly 20% of my income goes toward quarterly self-employment taxes, that means I’m living on less than half of what I make.
The budget-conscious among you might be going, “Hey, that’s great! You’re living within your means!” And while that’s true, I also look at my total income for the year so far and wonder how much I’m actually living. Entertainment costs? Axed so I could attend a blogging conference. Time with friends? Practically nonexistent because I work 7 days a week. I won’t even talk about how little I’m actually saving. All this analysis begs the question, How do I choose the best way to spend money for my business without leaving myself broke?
Step One: Know Your Actual Business Costs
Depending on what type of freelance work you do, there will always be certain associated expenses. For example, on top of my web design business, I also offer hosting to my clients (as well as the general public). It costs quite a bit of money to have my own server space. I also know that I will constantly purchase premium themes, fonts, graphic elements, etc. to complete design work, and I recently had to upgrade to the paid version of Dropbox because I use it to store backups of client files. Those costs are inevitable, but I never really took the time to add them up.
For me, the following expenses are normal and unavoidable:
- Hosting and domain registration
- Themes, fonts, graphics
- Dropbox fees
- Internet service
- Business cards, phone, etc.
However, I also incur costs that aren’t quite as necessary. For example, I’ve mentioned several times on Twitter that I’m a bit of a domain hoarder. I actually had to forbid myself from buying any more domains this year - I constantly think of new ideas, buy domains (OMG must buy before someone else does!), and then set them aside because I don’t have time to develop them. (For the record, the ban hasn’t worked out too well since I just bought a domain yesterday, though I justified it because I’m already working on the project.)
It would be easy for me to say, “Well, of course domains are part of my business! They’re in that list I just made!” But there’s a difference between paying for the domains I’m actively using and paying for ones that I end up letting expire. That doesn’t mean I shouldn’t buy domains at all; just that I should be more careful and think things through before I break out the credit card.
Step Two: Calculate the Benefits
Earlier I mentioned my website hosting service and its high costs. While the expense is a large one, especially when I look at it on an annual basis, it also brings in more than double what I pay (and growing). Obviously that makes it a worthwhile expense. I’m providing a valuable service to my clients, I enjoy running the server myself, and I’m profiting.
But what about the business costs that don’t have a measurable benefit? For example, on top of my business, I also own a personal blog. I haven’t spent a ton of money on it, but I’ve probably paid close to a thousand dollars over 2 years for promotion/advertising, themes, plugins, and the like. How do I determine if all that spending is benefitting my business when it really isn’t related to my business?
I figured it out by realizing that my blog, though separate from Nuts and Bolts Media, has everything to do with my business. When I left my career to work as a freelancer, my first clients were fellow bloggers. I gave them highly discounted rates so I could build my portfolio. Even now, most of the projects I take on are either for bloggers I know or people who saw my work on a blog I designed. By remaining active in the blogging community and completing designs, maintenance, and troubleshooting for other bloggers, I have gained a reputation for being reliable and trustworthy. Not in a fake way - I’m not using my influence as a blogger to hoodwink others - but by using my personal blog as a way to build relationships with potential clients before they hire me.
The benefits of a particular expense aren’t always so easy to see, but a good rule of thumb is this: If you can’t easily identify the ways in which a financial investment helps your business, get rid of it. Today.
Example: I’ve been paying $19 a month for access to a set of resources to increase my skills with PHP. The problem? I haven’t had time to even think about it, much less actually read the information or watch the videos. How is that benefitting me or my clients? It’s not. So a few minutes ago while writing this post, I opened a browser tab and canceled the subscription. I can always get it back if my schedule frees up, but I can’t get back the $95 I’ve already wasted by doing something because I “need to eventually” instead of because I “need to right now.”
Step Three: Put Your Business on a Budget
True story: I hate budgeting. I do it, but I don’t like it. The fact is, I can’t spend $5000 a month on gadgets and software and advertising for the business if I’m only making half that, especially when I also have to pay my personal bills and buy things like groceries with the money I earn.
I know how much my business costs to run every month. I know which expenses are necessary and which ones aren’t. From there, I have to set a limit on the optional expenses I’m able to incur. That may mean that I wait until next month to buy the latest time-tracking software - you know, the one that will totally change the way I bill for my services (because they all promise that). Or I might turn down the opportunity to co-sponsor a local event, despite the fact that it would give me some exposure, because I need to buy a new printer.
Until the day that my little solopreneur business becomes a multimillion dollar company (yeah right), I simply cannot buy everything I want. Honestly, I can’t even buy everything I need for the business at this point - I have to pick and choose based on what is most urgent/beneficial. And that starts by setting an actual dollar amount for various expenses each month. It’s annoying, but it keeps me on track for my larger goals, like finishing 2012 in the black.
Step Four: Be Realistic
It seems that nearly everyone I know wants to work for themselves. There are a million books and blogs about making money online, earning passive income, escaping the cubicle, etc. And as someone who is doing those things (though certainly not on an epic “I’m a millionaire” scale), I will never tell someone that his/her dream is impossible.
That said, there comes a point where all of us must examine our skills and our ability to make money from those skills. We have to ask ourselves tough questions, such as:
- How is what I’m doing different from what others are doing? What unique qualities/skills do I bring to this niche?
- Do I have the tools/ability to do this? (Example: You cannot become a website designer using MS Paint, and you cannot be a dog groomer if you’re severely allergic to dogs.)
- Do people want to pay for what I’m offering? Are my rates in line with what they’re willing to pay?
- What problem(s) am I solving for my potential clients?
The fact is, some people are just not cut out to do certain things. I’d love to be a famous singer, but I’m not talented enough in that area. Okay, I’ll be honest. I have absolutely ZERO singing talent. So it doesn’t make sense for me to invest my time or money in a career as a singer; it’s never going to happen.
But I do have skills in copywriting and web design. So if I really wanted to get involved in the music industry (I don’t, but I’m trying to make a point), maybe I could start by offering those services to musicians or singers who need a website. Or writing songs. Or designing album artwork. It makes much more sense, both financially and otherwise, to invest in the areas where I am talented instead of trying to be something I’m not.
The Bottom Line
There is no foolproof way to decide what’s right or wrong when it comes to investing in your freelance business. I’m still learning as I go, and I’m sure I’ll continue to spend money in ways that make me shake my head from time to time. By figuring out my necessary business costs and examining all expenses for benefits, though, I’m ensuring that my business remains profitable and that my services stay relevant.
If you’re debating whether to spend money on something for your freelance venture, be honest with yourself about what you stand to gain and whether it’s worth the cost. Don’t be afraid to ask other freelancers in your niche how they achieved a particular goal or learned a certain skill - they may know of a free or cheap resource that could save you tons of money.
Most important, never allow yourself to forget why you started freelancing in the first place - to earn money. Anything that distracts you from that goal may not be worth doing, no matter how good that [insert item here] would look in your office.
a WordPress rating system
I just like spending money, and saying “it’s for the business” enables me to spend more
That’s a valid point too! It’s soooo easy to buy things when I know I can get the tax deduction. All the money I’ve spent this year is just chopping my income so I don’t owe as much in taxes. I might even end up with a return this year.
Hi, Andrea:
Came over from the CCFC group over at FB. Is it possible for a freelance to come away with a return? Lol. This is interesting and would love to hear more about it. I too need to work on my taxes and making the most of them when I file. Am sure, I am leaving plenty of money on the table at tax time, but as you mention above - time is a beast and one that gets the better of me.
Would love to hear more.
Kindly,
Missy
It’s possible! I don’t think it happens often, but I know it does happen. I’d have to get Carrie to chime in on that one as the resident tax expert. There are a number of factors that play into it, from how your business is set up to the amount you make and pay in. Hopefully Carrie will be willing to write a post (or a series). As of right now, my accountant shows me with a small return, but we’ll see how the rest of the year plays out.
Yes! would welcome more articles on self employment taxes. I know that I could probably do much better than I currently am with mine, but need the help and of course cannot pay a private accountant. But some good online tips could go a long way.
Thanks again. We shall wait to hear from Carrie.
Wheres my picture I’m a faceless blob on your blog, and what happened to website field??
I may be doing it again. Router here at home is being wonky lately with the wifi, wondering if its also slowing down my desktop (the only one in the house wired) So Im off to best buy to get an airport extreme hey its a tax deduction
You misspelled your own email address the first time. LOL
Go all out and get the Time Capsule - it’s totally worth it!
See everyone, every time I talk to her I spend more money!
Great blog. We are constantly looking at how we can bootstrap our business and evaluating the opportunity cost of our time spent on something that is not a core revenue generating activity vs paying someone else to do it. Its not always an easy or clear choice.
I agree completely! Especially in the online world, it is so hard to place a value on certain things. It’s impossible to guarantee a certain number of website visitors or social followers, for example. But there is definitely worth there; just difficult to quantify it.
I have been re-evaluating my operating costs lately too. They haven’t been rising much in monetary value, but since we are making less, the percentage is creeping up. Bleck. Good luck with figuring out what you need and what you don’t!
Be realistic…Bam! i was tempted to start out like all the others with “Blog about Blogging” but it’s so crowded that finding your Unique Selling Proposition is a bit tricky nowadays, so I went with my other love. It takes work to find how you’re different (I’m still building that) but it’s fun!
Cheers Andrea!
Been following your transition into self-employment and entrepreneur. I must say you are doing well.
I think any business (and individual for that matter) should constantly review spending to make sure that it is justified and useful. Eliminating unwanted subscriptions or memberships, re-evaluating insurance costs, etc are all part of a continual process of managing the business in order to maximize profit.
Jeff and I also have one of those domains that we just had to have, yet we have had no time to develop it. You need some friend time and some vacation time (not business related)…ooh I know! You can come visit me for a vaca!
If you’re giving me room and board for a couple days, I’m totally there! That actually wouldn’t be a bad drive.
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