Take Control of Your Finances: Tracking

| Budget, Finances, Small Business, Tutorial

Last time, we talked about the four steps to taking control of your finances. And today, we’re going to start down the path to financial control with Tracking.

Here’s what to do first. Gather up the last six months of your bank, credit card, and any other financial statements.

Why? Because it’s the best way to track where your money goes.

You’ll see the most results with your money if you have an understanding of your spend behavior and choices. Without it, you won’t be able to take control of your finances and make informed decisions around money. Like, you’ll just keep buying all those candles you know you don’t need and kick yourself about because you’re still in debt. Or those shoes. You get what I’m saying.

Overspending is a very real and tricky thing, and I want you to have control over it instead of it controlling you.

Once you have the last six months of your statements, we can get going.

The good news (and the bad news) is that Tracking is the most challenging part of the four steps to financial control.

That’s because sorting through six months of financial statements takes… a while, but trust me when I tell you that it will be worth it in the end.

Start with your bank statements, then follow those with your credit card statements, and end with any other transactions and miscellaneous financial statements.

Don’t forget about any ATM withdrawals. You may have to think carefully about what you spent your cash on, especially if you no longer have the receipts. It’s alright to estimate your cash purchases as long as you’re accounting for all your money.

As you look over each statement, break down your transactions into these categories modified from Gail Vaz-Oxlade:

  • Housing. Anything that has to do with your house will go here, mortgage payments, or rent and any maintenance or insurance.
  • Utilities. Electricity, cell phone bill, cable, and any other type of utility bill goes here.
  • Food. Everything you buy that’s food related. Your daily trip to the coffee shop should definitely go here.
  • Shopping. Anything and everything you buy that isn’t food.  
  • Transportation. Car payment, air travel, taxis, or bus money goes here.
  • Entertainment. Sporting events, concerts, movie tickets, and the aquarium all count.
  • Bank fees. Service charges and ATM withdrawal fees would fall here.
  • Debt payback. All student loan payments, credit card payments, and any other loan payments go here.
  • Savings. Any money that you put towards your savings should go here.

You may want to do this with a spreadsheet so you can quickly add up the columns. Some banks may even have the option to download your statements so you can easily transfer the information into your spreadsheet. But if you don’t want to do it that way, a large pad of paper and pen will do just fine.

Sorting your transactions will take the most amount of time. So go slow. You may want to set aside 30 to 45 minutes a night to complete the task, so you don’t get overwhelmed.

Choose a category for each transaction. When you’re done, add up each of the categories.

Look at those end totals. Are there any surprises?

More often than not, you may be shocked by where your money is going each month. And that’s ok because now you know.

When I suggested this to a friend of mine, she was surprised to see how much she had been spending on coffee alone, which is a common story.

Overall, this knowledge will help you get a handle on your finances and help you move forward with your money instead of backwards and in more debt.

In the next post, we’ll dive into how to target your money and help you make financial goals. I’ll offer lots of advice and tools that will help you take control of your money. So stay tuned next time and come ready to Target. (That’s the next step. It’s not an invitation to go to Target. 🙂 )

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Creative Money: An Interview with Sage Grayson, Life Editor

| Interviews

Creative Money: An Interview with Sage Grayson, Life Editor

The Creative Money Interview series exists to remind the passionate, DIY entrepreneur that she can navigate the confusing, messy world of business numbers with grace, ease, and humor.

Today, I’m speaking with Sage Grayson, a professional Life Editor who helps ambitious career women edit their habits, routines, and mindsets to balance their happiness at work and home. I love being in her Internet community because she’s always offering loving and insightful advice about how to get real with myself and my business as well as how to make the most of my limited time. Plus, she always gives great book recommendations. Thanks for sharing your story, Sage!

Interview Highlights

  • Which system Sage uses to decide when to raise her rates
  • How she earned 50k from ONE email
  • How she’s crafted her sales funnel to guide her clients along a journey
  • What she would do with an extra $10,000

LET’S TALK ABOUT MONEY

What about money most confused you when you started your business?

At my old job as a book editor, I got used to taxes being taken out of my paycheck automatically. When I quit my corporate job and created my life coaching business, I failed to research how taxes work for businesses. I didn’t understand how to pay taxes for my business throughout the year, and that led to a hefty tax bill the next year. Whoops!

How did you solve that problem?

I hired a CPA who helped me get organized, track my income and expenses, and (most importantly!) pay my taxes quarterly. No more unpleasant surprises. 🙂

What challenges are you currently having with managing money in your business?

I’m in a major growth phase for my business, and it can be complicated tracking my expenses for multiple live events, vendors, and freelancers. I’m juggling a lot of different priorities.

You don’t want to resent your clients — you want to love them!

How did you decide what to price your services?

I once had a coach who suggested that I choose the highest prices I could say without stuttering. What she meant was I had to feel ultra confident when I say my prices because if I don’t believe them, then my potential clients won’t believe them either.

I choose prices that are one step outside my comfort zone. It’s not so far that I feel scared about asking for that amount, but I’m still owning my worth through an even exchange of energy.

When I first started coaching, my prices were dirt cheap. But those were the prices I believed in (i.e., could say without stuttering)! I ignored everyone else’s advice about pricing and still don’t look at what other coaches are charging. I’m not competing against them, and there are more than enough clients to go around.

When is the last time you raised your prices / rates? What made you decide to do that?

Every 3 months, I review my prices for my products and services. If they still feel congruent, then I leave them alone. I know it’s time for me to raise my prices whenever I start to resent my clients. “Oh man, I’m doing so much work for her and she’s only paying that little bit???”

You don’t want to resent your clients–you want to love them! Inch your prices up until it feels like the energy between you and your client is balanced.

LET’S TALK ABOUT BUSINESS

What’s your current business model? In other words, how do you make money?

I make money through my well-defined sales funnel. It’s the logical path I want my potential clients to take as they move through my products and services. Whenever they reach the end of something (a blog post, a worksheet, a planner, a class, a group program, etc.), I always tell them the next step on their life editing journey. Never leave ‘em hanging!

My followers start by signing up for my free Editor’s Toolkit that has dozens of free worksheets, guidebooks, video trainings, and resources. Then they purchase one of my Editor Year Planners. Then they join my paid Life Editor Clubhouse membership site. Then they join my paid group programs such as Life Editing for Beginners or Startup In 60. Then they pay me for private coaching. Then they pay for a ticket to my live event Life Editor Weekend here in Orlando. Then they join my paid Life Editor Academy mastermind group.

These tiny baby steps through my sales funnel help build trust between me and my potential clients.

Why do you love what you do? 

I love life coaching, and it’s my “zone of genius” for those of you have read the excellent book The Big Leap by Gay Hendricks. I was a great book editor, but I’m a much better coach. This is where I truly shine.

Ding! The lightbulb turned on over my head. I quit my book editing job and devoted myself full-time to coaching.

I was a medical textbook editor for 10 years before I burned out from reading about death and disease all day long. At the time in 2012, I had a mildly successful advice blog, and I loved reading other blogs from life coaches and productivity experts. I soon realized that they were getting paid for the same advice I was giving away for free.

Ding! The lightbulb turned on over my head. I quit my book editing job and devoted myself full-time to coaching. By 2015, I was earning more than $100,000 per year from my business.

What’s one mindset shift you had to make to get to the next level of your business?

To break the 6-figure mark, I had to think BIG! Giving away free worksheets was fun, but I had a feeling that my followers were just waiting for me to offer them something ginormous that would blow their minds. They didn’t want another printable…they wanted ME!

As an extrovert, I thrive on human interaction. Watching my clients on Skype through my laptop screen wasn’t enough anymore. I wanted to give them hugs in person and hang out in our pajamas eating pizza.

By the end of the day, I had earned $50,000 from that one email.

In the summer of 2015, I created my Life Editor Academy mastermind group for 10 ambitious ladies to spend an entire year editing their lives with me. There were one-on-one coaching calls, group calls, a book club, care packages, and 4 live retreats in Orlando, Florida.

I was sweating bullets when I sent the email to my list announcing the Academy. I was so nervous! But I trusted that my Life Editors were ready to play big just like I was. By the end of the day, I had earned $50,000 from that one email.

If you want to reach the next level of your business, you have to stop doing the comfortable things at the current level and shift your focus to the things that make your heart feel like it’s going to burst out of your chest. What do you really, really, REALLY want? Trust yourself and take that leap!

AND LET’S HAVE SOME FUN

OH NO! Your creative juices are running low. What’s one thing you do to get them flowing again?

When my brain is mush and nothing’s getting done, I take my dog Skyla for a long walk around the neighborhood. The fresh air and sunshine always make me feel more hopeful and optimistic. Some people get inspired in the shower, but I’m inspired when I watch Skyla chase squirrels up trees.

If you weren’t running this business and you could do anything — no limits — what would you do for work?

In my wildest dreams, I would be one of the characters at Walt Disney World posing for pictures and handing out balloons. I’m only 5 feet tall so I’m too short to be a princess, but I would have a blast being Daisy Duck!

You have 30 seconds to choose the one meal to eat every day for a full month. What do you choose?

If calories don’t count in this magical scenario, then I’d have to go with a never-ending bowl of pasta primavera with extra veggies. Nothing’s more comforting than carbs. 🙂

WHOA, someone has just given you $10,000. You have to save 20% of it, but you can do whatever you want with the rest. What do you do?

I’d hire my Happiness Guru (AKA my executive assistant). I’m currently a team of one, and it gets super lonely sometimes. I’d love to have an assistant to delegate stuff to and keep things happy around the office.

What’s one of your favorite quotes to remember when things in business get tough?

I’m a Buddhist, and I meditate and chant every morning. One of my favorite mantras is “Everything goes right for me.” I say it dozens of times to calm down and let the universe take over. Funnily enough, since I’ve started saying this affirmation, everything does go right for me. 🙂

Anything else you want to tell us about / invite us to?

Life Editor Weekend tickets are now on sale! Give me 4 days, and I’ll take you from overwhelmed to overjoyed! Spend a weekend here in sunny Orlando, Florida, with dozens of your fellow Life Editors and learn how to stop drifting through your life and start editing it. There are practical life editing sessions, goal planning, Q&A with me, roundtable discussions, tons of yummy food, relaxing by the lake, dancing like a maniac…and a pajama party! Grab your ticket before they sell out.

Be Virtual Friends with Sage

Sage hangs out on her website, makes videos on her YouTube channel, and on the social channels below. If you join her email list, she’ll give you her Editor’s Toolkit that includes resources like the Face Your Fear Digital Guidebook and From Lazy to Amazing. Say hi to her! 

 

 

 

 

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Creative Money: An Interview with Lacey Craig, A Lit Up Life

| Interviews

The Creative Money Interview series exists to remind the passionate, DIY entrepreneur that she can navigate the confusing, messy world of business numbers with grace, ease, and humor. Today, I’m speaking with Lacey Craig, business mentor, success coach, and founder of the website A Lit Up Life. I love reading her blog as it always reminds me how much is possible as a business owner and sparks ideas about how to create new connections, build relationships, and be seen. Thanks for sharing your story, Lacey!

Interview Highlights

  • What makes Lacey feel empowered when it comes to managing her money
  • How she prices her services
  • What made her decide to raise her rates
  • Which mindset shift she had to make to get more results in her business
  • What career she would choose if she couldn’t be a business mentor
  • Which two businesspeople have impacted her the most

LET’S TALK ABOUT MONEY

What about money most confused you when you started your business?

I was most confused about everything tax-related when I started my business. I didn’t know what I should be tracking, what counted as a write-off, how often to be filing taxes, etc. I have my MBA so I had a clear view of how important this was in business, but I didn’t know what applied to ME specifically. I really wanted to do it right from the beginning.

How did you solve that problem?

I invested in accounting support IMMEDIATELY in my business. I made sure I knew what I needed to know, felt equipped to track and document what I needed to, and felt supported in having a tax professional on my side.

What challenges are you currently having with managing money in your business?

Right now, I feel really empowered around my business finances. I take “CEO time” each week to look at my books, the income coming in, the money being spent, and what I want to invest in. My biggest challenge as I grow is continuing to make this a TOP weekly priority in my business and not giving into the temptation to put it to the side in favor of doing something more immediately pressing. I KNOW how important this is overall.

I take “CEO time” each week to look at my books, the income coming in, the money being spent, and what I want to invest in.

How did you decide what to price your services?

I love to use a combination of market research and intuition. It’s important to me that my price feels good to me… to say, to sell, to receive. However, it’s also important to me that it makes sense within the market.

I want my clients to feel like they received AT LEAST 5 times the value, and I know most of my clients say they received ten times the value, which feels amazing to me and tells me I’m priced right but still have room to grow.

When is the last time you raised your prices / rates? What made you decide to do that?

About four months ago. I had been full in my practice and on a waiting list for quite some time. I also saw my clients getting results that far exceeded my prices, and I knew it was time to make a shift because it felt good to me, it made sense in the market, and it felt good to my clients.

LET’S TALK ABOUT BUSINESS

What’s your current business model? In other words, how do you make money?

I have a long-term coaching program, personalized intensives (both Skype and weekend), a group program, a mastermind, two retreats, and passive income products.

Why do you love what you do? 

I love this work because I know it’s the place where ALL of the things I love and care about meet. I’m obsessed with business, leadership, and strategy (and have started another business as well since I have my MBA with a concentration in ethical leadership). I’m also obsessed with psychology, mindset, and confidence (and have my M.S. in mental health counseling).

I’m obsessed with business, leadership, and strategy.

Business coaching is the place where I’m able to bring those two driving interests and passions together, integrate them, and use them to help my clients create A Lit Up Life AND business!

I started this business because after leaving what was supposed to be my “dream job” (and was actually making me terribly unhappy) I found MY OWN lit up life in entrepreneurship and I knew I could use my skills, education, and experience to help other women do the same, which ultimately creates big impact and ripple effects in this world.

What’s one mindset shift you had to make to get to the next level of your business?

Detachment has been a HUGE mindset lesson for me.

I find the more detached I am to a SPECIFIC result, the more I tend to create results. I get attached to feelings, impact, process goals, etc. and I work very hard to remain excited BUT detached about specific results in my business.

It keeps me open to all of the fun, excitement, and possibility that’s present, rather than chasing one specific goal that “has to look a certain way”.

The more I grow and the more moving parts and opportunities present themselves, the more I find detachment infinitely valuable. It’s not because I don’t care what happens in my business. It’s because it keeps me open to all of the fun, excitement, and possibility that’s present, rather than chasing one specific goal that “has to look a certain way”.

AND LET’S HAVE SOME FUN

OH NO! Your creative juices are running low. What’s one thing you do to get them flowing again?

I get my booty outside. Whether it’s for a run, walk, time with my dogs, or just laying in the grass– time outdoors always moves me into a creative space!

If you weren’t running this business and you could do anything — no limits — what would you do for work?

I’d run an animal rescue sanctuary focused on utilizing pets to help people heal from anxiety and depression.

You have 30 seconds to choose the one meal to eat every day for a full month. What do you choose?

Haha! What I had for breakfast popped into my mind! Gluten free waffles with peanut butter, fruit, and a hard boiled egg.

WHOA, someone has just given you $10,000. You have to save 20% of it, but you can do whatever you want with the rest. What do you do?

I’d donate 40% and invest the other 40% in myself and my business because, to me, that is ALWAYS the best investment.  

If you could say THANK YOU to two business mentors that you’ve never met, who would they be and why?

Yvon Chouinard: He is the founder and owner of the outdoor company, Patagonia. I am SO inspired by the leader he is, the integrity with which he runs his company, how EXPLICIT he is about his values, and how unrelenting he is about making sure his company and his actions express those. His book “Let My People Go Surfing” was really impactful to me, as is watching how he’s run and built his company.

Elon Musk: The risks he’s taken as an entrepreneur and his commitment to only being part of world-changing endeavors in the most massively innovative ways just endlessly inspires me. I’m impressed with how engaged he is in his organizations, how responsive he is to making changes, and how strong he appears as a leader.

Be Virtual Friends with Lacey

Lacey hangs out on her website, in her Facebook group Lit Up & Loaded Entrepreneur, and on the social channels below. If you join her email list, she’ll give you useful resources like 7 steps to get booked solid or the Captivating Content Challenge. Say hi to her! 

 

 

 

 

 

 

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Introduction: How to Take Control of Your Finances

| Budget, Finances, Personal

Introduction: How to Take Control of Your Finances

Does this sound like you? Do you have a hard time sticking to a budget? Does saving for your goals seem impossible? Do you pile up receipts and bank statements not knowing where your money went?

If so, it’s time to take control of your money and finances.

In this next series of blog posts, we’ll explore what is needed to get a handle on your finances and how to make sense of saving and budgeting. We’ll also explore how you can get to real financial prosperity and what it means to you.

Four Steps to Financial Prosperity

Did you know there are four steps to financial prosperity? They are:

  • Tracking
  • Targeting
  • Trimming
  • Training

All t’s! I did that on purpose. 🙂

We’ll explore each one on the way to helping you gain financial control all with the help of Canadian financial advisor Gail Vaz-Oxlade.

Gail Vaz-Oxlade, of Til Debt Do Us Part, Princess, not only has a series of TV shows, she has a plethora of books and a financial plan designed to help you with your finances. She’s made it fun to track and spend money by developing a series of steps to take and points you can earn to help you achieve financial success.

We’ll partly follow along with her approach outlined in My Money, My Choices to assist us on our financial journey. This is a great place to start, especially if you’re not ready to hire a financial planner. (But when you are, you can contact me.)

To begin, we’ll track six months of spending. I know that sounds like a loooong time but stick with me.

By doing this, you’ll get a clear picture of where your money goes each and every month. If you don’t want to wait that long, it’s just as useful to review your past six month’s worth of banks statements.

By examining the past six months of statements, we’ll calculate what you spend, and you’ll have a better idea of where your money goes and how much you have left each and every month.

This is a major step in figuring out a budget. But we’re not going to use that word.

Don’t call it a budget

The word budget has a negative connotation, especially if you’re already worried about money and unsure of how to get yourself on the right track. So we’re going to banish it from our vocabulary.

In the next blog post, we’ll dive into how to track your money and how best to review it to make sense of where you can target and then trim.

Excited? Me too. We’ll have lots of advice and tools to use that will help you take control of your money.

So stay tuned next time and come ready with six months of your financial statements.

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{Small Business Tutorial} How to Set Up Tax Rates in Xero

| Small Business, Taxes, Tutorial

{Small Business Tutorial}: How to Set Up Tax Rates in Xero

 

 

 

 

 

 

 

 

 

 

Xero is a fantastic cloud-based accounting software for small businesses, but if you’re not an accountant or a bookkeeper, it can get confusing really fast.

And if you really want to be able to use it to benefit your business, you’ll want to make sure it’s set up correctly. That way, your sales are accurately recording and you’re not overpaying at the end of the year in taxes.

One of the things I see small business owners struggle with when they’re managing their books DIY is setting up their tax rates in Xero.

This is something you MUST do before report your good and services tax (GST) and your harmonized sales tax (HST). Luckily, it only takes six steps to get it set up correctly. After that, we’ll go through how to fill out the government form for GST and HST step-by-step.

How to Set a Default Tax Rate

Before reporting GST/HST,  you must first set up your tax rates in Xero.

1) From the Dashboard, go to General Settings

2) In General Settings, click on Tax Rates

3) Click on New Tax Rate

4) A popup will appear where you can enter your tax rate. In this example, I’ve written GST 5% which is Canada’s Goods and Services Tax at 5%. Click Save.

TIP: If your business is in the US, you can enter your State and Federal taxes the same way.

5) What I like to do for myself is create separate tax rates for my purchases and sales. It will help when you look at reports. Stay tuned!

How to Look at a Sales Tax Report

6) From the Dashboard again, let’s take a look at the Sales Tax Report!

7) Here’s a Sales Tax Report for US and Canadian companies. The numbers on the far right are the ones that will go on the Sales Tax report (Canada).

Positive numbers are the tax attributed to sales. Negative numbers are tax attributed to purchases.  To lessen the confusion, I entered the tax rate for purchases and sales separately, so you can see them more clearly on the report.

How to Fill Out the Government Form

Click here to view the government form. It may be different for your province or territory. If you’re in a different country, like New Zealand or the US, I recommend consulting your accountant about this form.

1) Find out your total sales for the period. In this example, it would be Jan 1, 2017 to March 31, 2017. That number goes on line 101. You can find your total sales in the Profit & Loss Report

2) From the sales tax report, tally up all the GST/HST collected from Sales.  In this example, $73.06.  Enter that on line 103.

3) Enter any adjustments to tax on line 104.

4) Add lines 103 and 104.

5) From the sales tax report, tally up all the GST/HST from purchases (amounts in brackets). In this example, $14.02. Enter that on line 106.

6) Enter any adjustments to tax on line 107.

7) Add lines 106 and 107.

8) Subtract line 108 from line 105. $73.06-$14.02 = $59.04

9) If you have other credits applicable, enter them on lines 110 and 110. Add those amounts and enter it on line 112.

10) Subtract line 112 from line 109. Enter on line 113A. In this example, $59.04

11) If you have other debit applicable, enter them on line 205 and 405. Add them together and enter on line 113B.

12) Add lines 113A and 113B. In this example, $59.04.

13) For lines 114 and 115, if your amount is positive, like in my example, you owe the government $59.04. If it were negative, then you would be owed the balance. To have a balance owing to you, you would need to have more input tax credits, tax attributed to purchases for your business, that is greater than the amount you collected for your sales.  

So now you know how to set up the tax rates and how to fill out the form, but you may be wondering what kind of purchases you can claim for your business. If that’s where you’re at, enter your email address below and you’ll get access to an exclusive tax guide where I highlight common (and some little-known) deductions for lowering your tax bill at the end of the year. You’ll also get access to a worksheet for figuring out what to pay yourself.



 

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Why You Need to Know the Difference Between Sales Tax & Income Tax

| Business, Business Basics, Small Business, Taxes

Why You Need to Know the Difference Between Sales Tax and Income Tax

As tax season approaches, I bet your list of questions has been growing. How much am I going to owe the government? What deductions can I take advantage of? WHY IS THERE SO MUCH TO DO?

I hear you. But let’s take it back a few steps because there are some things to know when it comes to taxes.

First, there are two major kinds to know about: sales and income. What are the differences between them, and why do you have to know them?

Before I jump into the nitty-gritty of what they are, knowing the difference between these two can help you make much better decisions for your business. That way, you charge enough for your products and services and you’re not surprised when tax time rolls around, forcing you to charge your credit cards to cover what you haven’t saved.

For the most part, this advice applies to Canada, but there are some resources for the United States. Okay, enough chatter. Let’s talk taxes.

What to Know About Sales Tax

Sales tax is the tax associated with goods and services.

For example, tax added to groceries, all of your candles and jewelry from online shops like Etsy and Ebay, or services like getting the plumbing fixed. We pay extra for almost every purchase we make every day.

For most people, that’s where it ends.

However, once you begin a business, you’re also responsible for charging Sales tax and giving it back to the government. That’s why I mentioned in the post about how much to pay yourself that not all the money you receive in business is your money.

If you make over $30,000/year in Canada, then you must charge %5 GST (goods & services tax).  

Depending on your province, either PST (provincial sales tax) or HST (harmonized sales tax). I know, lots of acronyms. Stick with me here.

I live in Quebec, so I charge %5 GST and %9.975 PST.

You can check if your province has harmonized sales rates by clicking here.

If you live in the United States, check out this resource from the Tax Foundation.

What about digital products?

Because the number of people doing business online is expanding so quickly, many countries around the world are still catching up and haven’t created tax laws for digital goods yet.

If you sell digital products in Canada, then digital products are subject to tax and follow the same rules as if you were selling a tangible product. You can learn more about that here.

In the US, it depends on your state. For example, a state like Nevada considers digital goods tax-exempt while a state like Colorado considers the products taxable. Take a look at this list to check your state.

What to Know About Income Tax

Income tax is based on your total gross sales for the year, which are the sales before your expenses.

We pay those at the end of the year, and they’re determined by percentages set out by the government. Find your tax rate by clicking here.

In an employee situation, those income taxes are deducted right off your paycheck. You don’t really have to worry about it.

In your business, though, you are once again responsible for paying those taxes. (II know, it’s the price we pay for being able to work in pajamas and eat out of the Nutella jar whenever we feel like it.)

If you don’t pay it, the government will start charging you interest the day after taxes are due (April 30). That’s not a situation you want to find yourself in, so plan ahead.

If you operate a business in Canada, you can estimate how much taxes you will be owed here: Simple Tax Calculator

If you operate a business in the US, you can use this calculator: Self-Employment Tax Calculator

Now, here’s the most important piece of advice I can give you in this article.

Once you have an estimate, start saving portions of your income every month. That way you’ll be prepared at tax time. I recommend opening a separate bank account just for taxes. You can read more about that here: 3 Must-Have Financial Pieces to Run Your Online Business

If you want ideas on how to reduce your tax owing, check out the tax guide by signing up for the free bookkeeping resources library.

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How Much Should You Pay Yourself?

| Business, Business Basics, Small Business, Tutorial

How Much Should You Pay Yourself?

How much should you pay yourself?

So many entrepreneurs falter here and end up paying themselves less thinking that it’s better for the business or that they’re being greedy by taking too much.

The truth is that too many entrepreneurs are underpaying themselves. Here’s what I mean. If you’re paying yourself $2,000 a month and you really should be paying yourself $3000, you’re missing out on $12,000 a year. That’s a couple family vacations or a significant amount of savings!

Business owners are way over-complicating this. Here’s how you can think about this.

Paying yourself is not all that different from getting paid by an employer. When you get your paycheck, you distribute your income between bills, food, fun, and savings if there’s anything left over.

The main difference when you own a business? You have to pay your own taxes.

I know it’s tough to part with your hard-earned cash, so the first mindset shift I want you to take is that not all of your hard-earned cash belongs to you.

I know, I know. I don’t like it either. I’m only here to help guide you along.

Formula: How to Pay Yourself

To make this easy, I have a formula you can use to figure out how much to pay yourself. (If you want, you can download the worksheet I have for free here in my resource library.)

Take this example: You’re making $10,000 per month (congrats!).

In Canada, that means your marginal tax rate is %26. (You can reference this list for tax rates in America.) So, I would distribute income like this:

  • %1 profit – $100
  • %23 expenses – $2300
  • %26 tax – $2600
  • %50 payroll – $5000

To keep things organized, each of the lines above should have their own bank accounts. My favorite is Tangerine.ca. (If you open an account before April 30, 2017 with a minimum of $100, you’ll earn $50. Just use my Orange Key {16898465S1}. Yay for free money!)

Why did I write 1% towards profit?

Mike Michalowicz, author of the book Profit First, explains this best. He says, and I’m paraphrasing, that we’ve learned to pay ourselves first — before bills — so we can relate that lesson to the profit we earn in our businesses.

He says that most businesses don’t make a profit, but this percentage system ensure one because you’re taking your profit out before paying bills and payroll. By following this system, you always have a profit at the end of the year, which you’ll clearly see when you close your books.

While 50% towards payroll may seem very generous, it’s reasonable if you compare it to an average wage of middle-income earners in the US.

Then you’re looking at between 2,000 – 3,000 take home pay each month. If you have contractors. you’ll be looking at another 1,000 – 2,000 in expenses.

So, like so many things in life, how much you decide to pay yourself is subjective. My biggest piece of advice is to make sure you think about taxes all year long, instead of just at the end of the year. I know so many business owners who spend, spend, spend and wonder why they don’t have a profit or enough saved up for taxes.

To sum it all up: First, determine how much you’re spending on expenses (not including subcontractors), find your tax bracket, always put away 1% profit, and work up to take %50 for payroll.

Now, this may take awhile, so be patient with yourself. Learning how to manage your money as a business owner is definitely a journey, but you wouldn’t be here reading this if you weren’t up to the challenge. 🙂

Click here to get free access to my library of financial resources so you can download the worksheet that will help you figure out how much to pay yourself, too.

Have questions about a more specific case or business? Let me know in the comments below.

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How to Close Your Books: “Zero” Temporary Accounts

| Bookkeeping, Small Business

How to Close Your Books: “Zero” Temporary Accounts
In our final part of the How to Close Your Books series, you’ll learn how to “zero” temporary accounts. What are those? Temporary accounts include expenses, contra-expenses, gains, revenue, contra-revenue, and losses. (“Contra” means opposite, so for example, a contra-revenue account would include Refunds and Discounts.) These accounts get set back to zero for the new year.

This way, reports prepared will only have data for the current year. The amounts are totaled together and are either debited or credited to the Owner’s Equity account. Below, you’ll see an example. We’ll close out the expense accounts and sales accounts using the numbers from your trial balance.

TRIAL BALANCE
Account Debit Credit
Bank Checking 1000
Paypal 2050
Accounts Receivable 0
Advertising 520
Delivery 1580
Insurance 6540
Purchases 8740
Telephone 520
Rent 12000
Utilities 6580
Other Expense 0
Credit Card 65214
Accounts Payable 0
Sales Tax 37500
Sales 250413
Owner Investment 0
Owner Withdrawals 0
Owner’s Equity 0

1) Add amount of expenses

Add up the amounts in the expenses account, and mark it in the debit column.

2) Add amount of sales

3) Subtract

Add up the amounts in the sales account, and mark it in the credit column.

Subtract the smaller number from the big number. If there is more credit, then that is positive Net Income, whereas if there were more debit, that is a Net Loss. Whatever the case, the debit goes to the debit column for Owner’s Equity and the credit goes to the credit column of Owners Equity.

Total Debit Credit
 Step 1 36480
Step 2 250413
Step 3   213933

 

Adjusted TRIAL BALANCE
Account Debit Credit
Bank Checking 1000
Paypal 2050
Accounts Receivable 0
Advertising 0
Delivery 0
Insurance 0
Purchases 0
Telephone 0
Rent 0
Utilities 0
Other Expense 0
Credit Card 65214
Accounts Payable 0
Sales Tax 37500
Sales
Owner Investment 0
Owner Withdrawals 0
Owner’s Equity 213933


How do you do that online?

Lucky for us Xero and Wave do this automatically! This step is completely internal and if you don’t believe me, go check out a Balance Sheet report for Dec 31, 201X and compare the report for Jan 1, 201X and you should notice that the Owner’s Equity account has changed and all temporary accounts, like expenses and sales, are now ZERO.

You have now successfully closed out your accounts!

Congratulations. This means you’re ready to start the new year off right. You now know how to track your expenses and invoices and perhaps do them at least once a month to keep on top of them. But even if you leave it until the end of the year, you now know what you need to do to close out your books for the year. Thank you for following along!

If you want to get the full guide on How to Close Your Books for the year in one handy PDF, sign up below.



 

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How to Close Your Books: Trial Balances

| Bookkeeping, Business, Finances, Small Business, Tutorial

How to Close Your Books: Trial Balances

In this next post in the How to Close Your Books Series, we’re going to make sure all of your accounts balance. Once you know that, you can prepare your taxes or send the files to an accountant who can prepare your taxes for you.

Before we start, make sure all of your expenses and invoices are entered. See the corresponding tutorials and do that work before moving ahead. You’ll then need to have all of the bank reconciliations done and ensure that any missing transactions are added. Once you have all that complete, you can start your trial balance as you’ll need to reference the master spreadsheet to get these numbers.

Write down all the accounts in order

Write down all the accounts in order of

1) Assets

2) Expenses

3) Liabilities

4) Revenues

5) Equity

You’ll do this for each of your accounts (bank checking, PayPal, etc.), and it can be alphabetical if needed. Usually, these accounts are assigned numbers in accounting software. For example, Assets will have 1000-1999, Liabilities 2000-2999, Equity 3000-3999, Revenues 4000-4999, Expenses 6000-6999. You may want to implement a similar numbering system for your spreadsheet as it makes it easier to find an account if a new bookkeeper is looking things over.

What are assets, expenses, liabilities, revenues, and equity?

Assets are things of value that are owned by your company. For example, cash accounts, accounts receivables, any land, equipment, or inventory. Your expenses are the costs associated with doing business such as advertising, materials, fees, etc. Your liabilities are obligations to pay later. For example, credit cards, any bank loans, or personal loans.

Revenues are any fees earned from providing services and the amounts of merchandise sold. An example of this are sales of products or consulting/coaching revenue. Equity is the amount of ownership or profit in a company. For example, the owner’s equity in a Sole Proprietorship refers to the amount of profit at year end.

You should have these numbers from your totals throughout the year, as you’ve gone through and added your expenses, invoices and then reconciled your bank accounts. Take the totals of each account from the spreadsheet and add them in the proper column like in the example below, with debits on the left and credits on the right.

There is a rule of thumb, if every account is positive, then the balances will go in the respective debit or credit column. Assets and Expenses are in normal/positive DEBIT balance and Revenues, Liabilities and Equity are in normal/positive CREDIT Balance.

To make it easy, I have the spreadsheet calculate account Totals per month, per account, and then a Grand Total for the Year.


Want the tutorial of how to close your books in one easy-to-use PDF with free spreadsheet templates? Click here to access my Bookkeeping Resources library to get the entire How to Close Your Books series as a PDF.


Example:

TRIAL BALANCE
Account Debit Credit
Bank Checking 0.0
Paypal 0.0
Accounts Receivable 0.0
Advertising 0.0
Delivery 0.0
Insurance 0.0
Purchases 0.0
Telephone 0.0
Rent 0.0
Utilities 0.0
Other Expense 0.0
Credit Card 0.0
Accounts Payable 0.0
Sales Tax 0.0
Sales 0.0
Owner Investment 0.0
Owner Withdrawals 0.0
Owner’s Equity 0.0

 

For online accounting software Once you have this done, you’ll use these numbers for your taxes, and if necessary, a Balance Sheet and Income Statement.

Trial Balances are all done automatically. Software is set up for double entry bookkeeping and makes the user enter amounts only once unless there is a manual journey but even then the system won’t let you save it until your Debits equal Credits.

For Xero

Go to Reports >> All Reports >> Detailed Reports >> click on Trial Balance. You can publish the report, which means that the report is saved with those particular numbers and can be printed or exported.

For Wave

Go to Reports >> Trial Balance. You can also export this to Excel, CSV or PDF.


If you want to get the full guide on How to Close Your Books for the year in one handy PDF, sign up below.

 

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