I had a bit of push back on my article last week about 6 Figure Consulting. Specifically around my expenses.
In that article I said that I pay about 25% in taxes and save 5% for a rainy day. Then about 20% goes to business expenses.
For me that’s tracked for the last 3 years (according to my wife who does my budgeting because she enjoys it). Last year when I made around $52k gross I had expenses of about 20%. This year grossing around $100k I have expenses around 20%.
But what exactly are those expenses.
Expense Break Down
Taking a look at my accounting I’ve currently invoiced and been paid for $96k.
$96k – taxes – savings = $67.2k
Right now I figure my taxes at 25% which might be a bit higher than I should be paying. Next year I’ll incorporpate and that should drop my tax burden between $5 – 10k my accountant says. The business setup change just didn’t make any sense until I was grossing around $100k.
Out of the $67.2k that’s left I currently have $18k in expenses.
$67.2 – 18 = 49.2
My expenses break down roughly to:
- $1134 – Entertainment (going out for dinner as a company event or Starbucks for remote working)
- $798 – Internet
- $6000 – Software (WordPress Plugins, Hosting – $1000, Google Apps, Evernote, Adobe Cloud… )
- $3000 – Hardware (bought a new Mac Mini and 24" Dell which accounts for most)
- $450 – Office supplies (paper, pens…)
- $582 – Advertising (sponsoring WordCamp Vancouver is the big one here)
- $850 – Cell Phone (you US readers have way better plans than us Canadians)
- $2100 – Bank Fees (PayPal fees, Bank charges…)
- $1100 – Education (Books, WPSessions…)
- $3000 – Other (domain names, Business License, Office Air Conditioner, Paying contractors invoices)
When I look at the numbers I think that my expenses seem high. I mean I doubled my income from last year why on earth does that mean I double my expenses? I expect an increase but double???
My biggest increase this year was in software. Last year was around $2500 but last year I wasn’t paying for Adobe Cloud, FreeAgent (Ronin to start the year), and my Hosting was around $200 instead of $1000 on WPEngine.
I did manage to cut $3000 out of my ‘Entertainment’ though. That meant less company lunches, less working in a coffee shop…
I don’t even rent an office
Did you notice that I don’t even rent an office? If I did that locally I’d need an extra $750/month for rent. The company does add $75/month to a Starbucks card for me to use when working remote which I count as office rent (at least in my head not to the government). $75/month on coffee seems crazy to me, but it’s way cheaper than renting an office.
The point to my original article was not actually to break down my expenses, it was to talk about all the things that starting freelancers don’t think about. Just because you gross $100k doesn’t mean you’re bringing home $70k like you might on a salary.
On top of the taxes you need to save you need to account for paying all your business expenses. We didn’t even talk about taking a paid vacation, that means you need to work extra and save money to be able to take the vacation and still get paid.
Unlike a normal development job that would have a few weeks paid vacation.
If you’re getting started and don’t account for all those expenses you will be in for a crazy surprise when you gross $50k and end up actually bringing home closer to $25 – 30k.