I’m sure you don’t like to login to your bank account and feel dread in the pit of your stomach.
I can’t imagine a single person likes that feeling. But I know that many creative business owners feel this way frequently. I know that when I first started my business, this was a regular occurrence.
- I wanted to go to a conference, but I didn’t have the funds to attend
- I bought some new art supplies and then realized that I had very little money for food that month
- I needed a new computer because my 4-year-old laptop was dying, but knew I would have to put it on my credit card (and pay WAY more for it)
For the past two years, I’ve worked on a 27-inch Mac, but I’ve wanted the flexibility to work from other locations and to travel more. So last month, I bought a brand-spanking new MacBook Air.
I put it on my American Express, but as soon as the transaction cleared, I paid off the full amount from my bank account. When I did this, I didn’t eat into my salary or take money away from anything else. I took it out of the pool of money I have earmarked for reinvesting in my business. This year I’m also attending two conferences, I’ve made several Kiva loans, and donated to non-profits supporting entrepreneurs.
The journey from then to now wasn’t easy. But there was one change that made it all possible: every dollar that comes into my business is earmarked for a specific purpose.
Several years ago, I met an amazing woman, Beth Crittenden. And through our conversations, I started a whole new relationship with money. She introduced me to a software called You Need A Budget and taught me this concept of assigning roles to your money.
Now when I earn money, a set percentage of that amount goes into different funds.
- Salary: 41% is earmarked for my salary to pay all of my living expenses
- COGS: 4% is earmarked to cover credit card processing and PayPal fees
- Taxes: 25% is transferred to a savings account to pay my quarterly and year-end taxes
- Overhead: 15% is used to cover my malpractice insurance, the business rider on my renter’s insurance, supplies, dues, software services, transit, website hosting, and the like
- Reinvest: 15% is used to donate to non-profits that support creative entrepreneurs, random gifts, education, and equipment
Making this shift, created three ripple effects.
The first impact was that I had to evaluate my pricing. As a service provider, I only have so many hours in the day. Because of that, I needed to price my services in a way that allowed me to live on 41% and pay my overhead on 15%.
**Warning: there are some formulas below!**
I started by figuring out how much money I must earn.
- I added up my monthly living expenses and divided that number by 0.41 (Living expenses/0.41 = Money must earn).
- I then added up my overhead and divided it by 0.15 (Overhead/0.15 = Money must earn).
My overhead is small since I work out of my home, so my living expenses were really driving how much I needed to earn.
Once I knew how much I needed to earn, I needed to figure out my hourly rate. I took the amount I needed to earn to cover my living expenses and divided it by the number of hours I expected to spend on client work each month (Money must earn to pay living expenses / client work hours per month = hourly rate).
I then had an hourly rate that I could use to establish my flat rate prices. To figure out my flat rate, I took the average number of hours to complete the project times this hourly rate. (Average number hours * minimum hourly rate = minimum flat rate).
For some projects, I just rounded this number to get my rate. For others, I accounted for the value that the project has to the client’s business and adjusted the price accordingly.
After I’d established how much money I needed to make. I started thinking about what I was spending that 41% on.
I did an awesome exercise by Kate Northup. It has you examine your bank statement from last month and put a happy or sad face next to each transaction. It made me see where I could cut back my spending and not give up things that made me happy. I cut out hanging out with people who left me feeling worse. And cut back on grabbing yummy pastries so that when I did grab one, it was a treat to savor, not mindless eating.
Finally, it didn’t end my imposter complex around if I’m worth the price I charge, but it gave my logical brain something to use when asked for a discount. I’ve shared my struggle with this issue and the current version of the email I send when someone asks for a discount. The formula that I mention in this email accounts is based on accounting for each of these earmarked categories. It means that when I give a discount I’m agreeing that I won’t be earning the hourly rate I’ve promised myself.
You might be thinking that this is easy now because I’m making more money. And while that’s true, my monthly expenses have increased. Really, it’s easier now because I’ve trained my brain that only part of the money that comes into my business account is mine. The remaining 51% is there to make my business sustainable now and years from now.
I’ve made this promise to myself so that:
- I don’t have to accept a job at some law firm and work for someone else
- I can keep hanging out with fun, creative people that just happen to be my clients
- I can say yes to conferences and workshops that excite and inspire me
- I can say yes to experiences that will make me a better person and service provider
I encourage you to sit down to see if this (or a similar) formula could work in your business.
I can say from personal experience that the transition to treating your money like this will be hard. But it is totally worth it.
Do you have “funds” set up in your business? Does this idea appeal to you? Terrify you? Share your thoughts in the comments.