Editor’s Note: We invited Chris Enns from Rags to Reasonable, Because Money, and Spring Financial Planning to guest post for us this month, sharing his ideas on how to make your income just a little more manageable. We hope you enjoy it!
I’m a bit of a curmudgeon when it comes to ‘tips and apps’.
I think that’s largely because I think ‘tips and apps’ are an amplifier. They can help you do what you’re already doing better, but I doubt any of them will help you get started in the first place.
And there are a lot of entrepreneurs who are struggling to find a few dollars that they can honestly call ‘savings’.
I want to talk about why that is, and how you might be able to get started. I promise I’ll throw some tips and apps into the mix along the way.
Saving money as an entrepreneur is a whole different kettle of fish
I specialize in work with non-traditional income streams - that means I almost exclusively live in the world of entrepreneurs, artists, creatives, and digital nomads - and lots of us are struggling to save.
Reasons are diverse, but I wanted to focus on a few:
- Variable income makes it really hard to know when money is ‘extra’.
- Unstable cashflow makes automation difficult.
- Businesses eat all the money.
How are you supposed to ‘automate your savings’ when some months you’re not sure there will be cash coming into your bank account?
How can you confidently set money aside when you’re not sure when the next big payday is coming in?
And if we do come into an unexpected windfall, there’s an unending list of business investments that we ‘need’…. because our business is our everything.
Knowing your numbers is key to successfully saving
Savings come from having ‘extra’ money. Money that you don’t need to cover the basic costs of your life or business. But defining when you have ‘extra’ money is not a simple task when you’re a variable-income-earning entrepreneur.
The trap I frequently see people falling into is that they ‘save’ on high income months, but then they need to withdraw the money shortly after, during low income months, to cover expenses.
It’s the kind of pattern that can convince someone that they’re not capable of saving.
The first step to mastering savings is understanding your expenses. If you don’t know how much you need to maintain your life (both personal and business), you can’t know when you actually have extra money to save.
Tips and Apps to help:
Tip: Don’t jump right into trying to make a budget if you haven’t done it before. Spend a month gathering information and writing down income and expenses (I’ve got a simple Tracking Spreadsheet here).
Tip: Don’t think this is just for beginners. Knowing your numbers is a fundamental skill that needs to be revisited regularly. The better you know what you need, the better you’ll be able to save.
App: YNAB (You Need A Budget) is what I use to manage my personal and business cashflow, it’s great for variable income earners because it allows you to only budget what you actually have and to project expenses into the future.
App: If you’re looking for more of a business solution, Freshbooks is a Canadian company that allows you to track income and expenses (it even has invoicing and time tracking tools).
Tip/App: If you hate tracking that stuff yourself, or if you need an actual accounting solution, Admin Slayer provides bookkeeping services, using QuickBooks Online, and can create customized reporting that will help you determine what your numbers really are.
Solving the automation problem
Automating your finances is great advice, but I’ve found that it’s difficult to commit to monthly savings automation when both my income and expenses are variable.
That being said, it’s not impossible.
If you’re able to save a liquid cash buffer that sits in your account and serves as a barrier against variability, it’s pretty easy to set that automation just like a normal income earner would.
But if you can save a liquid cash buffer, you probably know how to save already.
I believe that we need to focus on automating behaviour until technology catches up to us (and it will; there’s some cool stuff already in development).
Tips and Apps to help:
Tip: Start building a habit of putting a percentage of every cheque aside into savings. If you feel crunched for cash (and who doesn’t), start at just 1% of every deposit. As the author of Profit First Mike Michalowicz says “If you can run a business on 100% you can do it on 99%”. In the beginning, it’s about automating the habit.
App: It’s been helpful for me to have a financial dashboard (budgeting app) to sort this 1% out so I can keep it separate, but don’t have to do a bank transfer every time. For that I use YNAB.
Tip: Just because you can’t automate a ton of savings, doesn’t mean you can’t automate some. I have a monthly automation coming out of my account for an amount that I know won’t bounce even on a zero income month.
App: Automations can be set up with your bank; it’s not hard to do and you’ll save without thinking.
How to invest in your business AND save for the future
Businesses are cash eating monsters. This is a fact.
I’m not going to tell you not to invest in your business. That would be crazy. But I want to call you out on the belief that you can keep putting every penny into your business now, and save later…. because you probably won’t.
This is where I can’t recommend the book Profit First enough. It’s a great breakdown of managing cashflow for entrepreneurs. Author Mike Michalowicz encourages us to cap the amount of money we’re putting into the business at a certain percentage of revenue.
What percentage? Well that depends on your business, but he insists that putting a cap on available business funds doesn’t stop growth, but forces us to be creative about how we want to accomplish our short and long term goals.
Tips and Apps:
Tip: Read Profit First
Tip: Know your numbers. It’s going to help you make an educated decision about what your monthly business cap should be.
Tip: Challenge every expense. Force yourself to be creative. Be ruthlessly honest with yourself.
Saving means not spending all your money now
That seems like a simple sentence, but let me remind you that tips and apps are just an amplifier.
And you know what else is an amplifier… more money.
The answer to most of our savings problems isn’t more money. If you’re spending 100% of what you have right now, you’ll probably spend 100% of what you have 2 years from now when you’re making twice as much.
Too often the personal finance world gets a little over complicated and muddy, and we all need to bring ourselves back to the earth.
If you’ve got something you want to save for, whether it’s a vacation, a new house, or the last 30 years of your life… you, the human in charge of your life, need to figure out where that money is coming from.
And to my knowledge… there’s no app for that.
Chris Enns helps people with non-traditional income sort their financial lives at Rags to Reasonable. He’s also a professional opera singer, co-host of the Because Money podcast and an Associate Planner at Spring Financial Planning.