How much money do you need to make in 2008? How much do you want to make? Have you budgeted for expenses? Have you planned for vacation time away from work?
I just finished and filed my taxes. Yeah me! But the cooler part of that equation was that I took the tax software for 2007, and ran a few numbers for fun. Yes, I said “for fun.”
I hate taxes and bookkeeping more than the average joe… probably a lot more… but I found this process quite enjoyable. Why? Because it gave me a perspective that all the personal business planning to date hasn’t managed to offer.
How so? Let me explain…
After my taxes were complete, I saved that file for posterity (and for future reference, if needed) and renamed the file so I could play, without re-entering all the information.
First I gave some serious thought to the larger purchases I need to make for the business this year. For instance, going from a two-monitor system to a single one with my new Linux computer has been difficult. Within the next two months I plan to purchase two wide-screen monitors and a graphics card to push them to improve my efficiency when I’m online (and to eliminate any of that pesky extra deskspace I might otherwise enjoy.)
I reviewed my expenses for 2007 and determined which ones would be about the same and which ones would increase and which ones I could whittle down. I plugged my best estimations onto each category. (Which also gives me a de facto operating budget for 2008 neatly organized into tax categories, now printed out in my budget notebook!)
The next thing I did was max out my retirement contribution for 2008. (Note that IRA contributions will increase from $4000 in 2007 to $5000 in 2008, and take that into account with your final numbers.) With my expenses and my investments calculated, I then tweaked some of the other numbers to determine exactly how much money I need to make in 2008 to meet my income and savings goals without increasing my taxable income dramatically.
There are a few little spots in the income category that really bump up your taxes – to the tune of 30%+. Personally, I don’t want to work to make an extra 10K, if that means that the federal government will take $3300 of that off the top. I’d rather have a little more time to call my own.
You can also use this tool to determine how much you should put into your IRA contribution… for 2007. I found the “sweet spot” in my own contributions by plugging in various IRA contributions until I found the amount that benefited me the most in taxes without breaking my budget. Since you have until April 15th to fund that IRA, it’s crazy to pay more taxes than you must, if you can pay yourself instead!
I decided this year that rather than simply trying to make as much money as possible, I would employ the 80/20 rule. I determined the optimum income for my personal situation. I’ve been working as an independent, remote professional for eight years now. I wanted to get a bit smarter about it. I love my business, but I’m tired of it constantly encroaching on my life. I’m ready to have my cake and eat it too! Being self-employed is a tough balancing act, but your income is still merely a tool to live – even if you adore your work.
So, I decided how much time I wanted to take off this year for personal days, vacations, etc. In 2007, I took off the entire month of December. Granted, I had to move from the city back to the country during that month, but I also enjoyed a cruise vacation. As a result, I’ve decided that vacations are wonderful! Yes, I should have known that before, but I only managed to take “working” vacations in the past. I’ll not make that mistake again. Live and learn.
I deducted the number of weeks I wanted to take off this year from the available 52 to determine the number of working weeks for me in 2008. I even padded that figure a little for personal illness days, personal mental health days and days when the kids may be sick or other members of the family may need my help.
I took the number of dollars I wanted to make this year (from the tweaked numbers on the tax program) and divided that by number of work weeks I determined I would have to give me the amount of money I needed to make per week.
Then, dividing that figure by my hourly rate, I knew how many hours I needed to bill per week to meet my goals. I was surprised at the figure… and thrilled.
I also was honest enough with myself to know that I work 2-3 hours for every billable hour. Yes, I should be more efficient, but I spend many “non-billable” hours writing articles, doing research and staying on top of the industries I serve and the technologies they use. I also have an unquenchable personal thirst for such things, so I’m not as disciplined as I should be. Knowing your weaknesses and working those into your budget will make your numbers more accurate.
Now, I know how many hours I need to work per week, how many need to be billable and how many days off I can take this year without impacting my bottom line. It’s a liberating feeling. It takes the guess work out of being self-employed.
This year, I’m not going to spend my life at the computer and I’m probably going to actually enjoy more of the money I make. Yes, the software I used is based on 2007, not 2008, but it’s probably the best tool readily (and inexpensively) available to make these determinations for the small business owner.
You may want to give it a whirl yourself… after your taxes are filed.
Personally, I use TaxAct… it’s about half the cost of the leading software, it’s downloadable for immediate gratification, and I find it simple to use.
(It also keeps a running total of taxes in the top right hand corner which helps for “comparison” planning for the new year.)
Once this year is winding down, I’ll order the 2008 version and plug in my numbers to make sure I’m on track. I’ve planned my work so I can determine in October how much more I need to make, if I should invest in any additional equipment, and what needs to happen to keep me on track even with the changes in tax law. I’m actually looking forward to doing my taxes for 2008 to see how well this planning works. Me… looking forward to doing my taxes! Will wonders never cease?