What If I Paid for My Business Expenses With My Savings?

Photo credit: Pictures of Money, CC BY 2.0.

So I haven’t said anything about it yet, because I wanted to go through the whole month first, but increasing my savings rate from 10 percent to 15 percent—which I did because I read it in The Value of Debt in Building Wealth, of course—meant cutting back on a lot of personal expenses.

I have taken zero Lyft rides this month, for example. It’s me and the bus and my podcasts—and when I made a spreadsheet projecting my income and expenses through the next three months, I realized that saving 15 percent didn’t leave me enough money, after my current pile of business expenses, to even take a Lyft to the airport for a friend’s wedding later this summer. So I made a note to book a flight that would allow me to take a two-hour bus ride first, because I wanted to hit my savings goal.

My initial solution to “not having enough spending money” was to book more freelance work, and I’ve been reasonably successful at doing so, although some of that work won’t pay out for a while. If you don’t have enough money, I told myself, it’s time to hustle for more—and I did.

Then I got the chance to talk to Tom Anderson, author of The Value of Debt in Building Wealth, and learned a new way of looking at my business expenses.

When you’re a freelancer, money towards growing your business is an investment in the business. So, just like you put money into a stock or a mutual fund, money you put towards your business is an investment, which is a form of saving.

People tend to overestimate the future return and underestimate the risk with that, so you want to be careful. You also need to carefully and strategically evaluate your business spending, but that’s a part of savings.

So I asked myself, after this conversation: what if I paid for my business expenses out of my savings?

Previously, I had been paying both business and personal expenses out of the same pile of “income left over after taxes, savings, and overhead.” I’ve always had a little bit of trouble knowing how much of that income to spend on personal stuff because I can’t always predict which business expenses are coming my way.

Here’s an example: recently, I got an email from the New York Review of Books inviting me to submit The Biographies of Ordinary People to be featured in the Independent Press Listing of their upcoming BookExpo issue (which will be mailed to 150,000 subscribers as well as featured at BookExpo, etc. etc. etc.).

This will cost me money, because it’s advertising. But it’s also an advertising opportunity that was specifically sent my way because Biographies has been getting some good reviews. (The NYRB does not publish—or promote—crap.)

So. How do I pay for this if I didn’t budget for it and already spent part of my discretionary income replacing those bath towels that had holes in them? Should I not have bought the bath towels? Do I have to turn down this opportunity?

But let’s say I just went ahead and put it on my business credit card and paid off the credit card out of my savings account, because investing in your business counts as savings.

What would I need to change to make that work?

For starters, I’d need to save more. In theory, I’d need to save so much that, even if none of my business investments paid off, I’d still have the equivalent of my current savings rate left in my savings account.

So I did the math on that. If I assume an income of $60K this year—which is less than last year’s $88K but, you know, we talked about that yesterday too—and put 25 percent of my income in an “estimated taxes” savings account and 25 percent of my income in a “liquidity and business expenses” savings account, I could spend about as much money as I spent on my business last year and still end up with 10 percent of my income saved even if none of that business investment paid off.

That’s a little less than 15 percent, of course. But I’m guessing at least some of that investment will pay off—it certainly did last year—and I’ll end the year with the equivalent of 15 percent (or more) of my annual income in savings.

After all, some months my business spending is $0, and during those months 25 percent of my income will go straight to the “liquidity and business expenses” account and stay there.

This also means I’d be living on 50 percent of my pre-tax income, which—assuming $60K and subtracting my rent/bills/food overhead costs—gives me $500 per month of pure discretionary spending.

Knowing that I can, in theory, meet my tax obligations, my savings goals, my business expenses, my overhead, and have $500 left over every month for restaurants, haircuts, personal travel, new towels, and so on makes my personal spending calculations so much easier. I can buy shoes if I need to. (I’ll be honest: I already did.) I can take a Lyft to the airport for my friend’s wedding. Or I can take the bus and save that money for a new sofa.

I’ll have to keep an eye on this plan for a while, to make sure it works like I think it will. But I’ve already shoved the money around in my savings and checking accounts to make it work for this month, and I’ll let you know how it goes.

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