#99: Handling your Finances.
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Hello and welcome to Developing Perspective.
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Developing Perspective is a podcast discussing news of note in iOS development, Apple and the like.
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I'm your host, David Smith.
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I'm an independent iOS developer based in Herne, Virginia.
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This is show number 99, and today is Thursday, December 6th.
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Developing Perspective is never longer than 15 minutes, so let's get started.
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All right, so similar to what I did on Tuesday's show, I'm going to do a bit more of a practical show today.
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I hope trying to get down in the weeds and really work through some topics in great detail.
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That's kind of what I think I'll be doing for the next little while.
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But today I'm going to be talking about, I guess you could call it the logistics or the
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accounting or the sort of the business side of being an independent business.
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And whenever you talk about this kind of a topic, it's always worth certainly saying,
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A, this probably only applies to people who, or applies most closely to people who live
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A lot of the things I'm talking about are based on the way business works in the US.
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Many of them may even be based on how business works in Virginia, where I live.
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I'm neither your accountant nor your lawyer, but always wise to seek advice from people
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like that or to be confident in your choices based on your own research before you do anything.
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But this is kind of the experience I've had.
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I've been doing this for quite a while, so hopefully some of the insights I've had and
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kind of how I do it will be helpful.
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So without further ado, so basically when I'm talking about the sort of the financial
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side of a business.
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It's at its core, is just about how you manage the money
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of a business.
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And at the end of the day, a business is all about money.
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That's sort of what you're, you know, it's all about are you
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able to make a profit from the work you do?
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Are you able to generate more income for a smaller amount
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That's all business is at the end of the day.
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Anything that gets more complicated or sophisticated or
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thinks it's cooler or cleverer than that, it always makes me a little nervous.
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Business is just about bringing in more money than you put out.
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And so, this is kind of how you sort of approach that.
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First, I've heard from a lot of people who listen to this show who are independents or
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hobbyists, you could call them, or people who are thinking about getting into this.
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And the first thing I want to say is that it's very important that you treat your business
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like a business, because if you don't, no one else will.
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And your accountant, your lawyer, the IRS, which is the Internal Revenue Service here
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in the US, the people who come and collect the government taxes from you.
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But I say that because one of the best advice I ever got when I was first starting out was
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that you have to separate your personal finances from your business finances.
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That is an absolute essential thing in order for you to be able to be successful in business
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is to separate those two and treat your business like a business.
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It has its own set of books, it has its own accounts, it has its own philosophy and schedule
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and philosophy for managing its finances that may be different than what your personal goals,
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finances, and structure would be.
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Businesses have different goals, businesses have different needs, and so you have to treat
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them separately.
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And so the first thing you always have to do, and this is, I think generally would be
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applicable, is that you really need to create a separate account for your business that's
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separate from your personal.
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If you're special, if you're starting out, it can seem a little silly, but it's one of
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those things that I feel like was the most important thing in setting up the financial
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sort of groundwork for my business was creating its own account.
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And the primary reason for that is that it lets you very clearly see how you're doing.
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say you create, opening a business, opening a business account, or even just a separate
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personal account, the exact details don't matter as much as there being a separate place.
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What that allows you to do is, all the money that goes into that is income for your business.
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All the money that comes out is expense for your business.
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You can very easily take care of that, and you can understand it and you can look at
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Say you seed your business with whatever it is, $100, $1,000, depending on exactly what
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You seed your business with a certain amount of money.
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And then the amount you are above or below that is how well your business is doing at
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Very simple, very straightforward.
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It's not a lot of accounting, bookkeeping, fancy things like that.
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It's just how much money is in the account.
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And that's something that I found was very helpful early on to help me kind of wrap my
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head around it.
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And the second thing that really, really helps is that it makes bookkeeping so much easier
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because all I had to do initially...
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At this point now I have someone who does my books for me and I have an accountant.
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When I was starting out I was doing it all myself, just an Excel spreadsheet even.
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Basically, it was very easy for me to run my books, to categorize my income, do all
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those things, because every financial transaction that in any way was related to the business
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of my business was in that ledger.
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That made my life so much easier.
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I just go through, here's all the deposits, here's all the debits.
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And that's my books, that's my balance sheet.
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And it was so much easier to do that
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than when I first started out, it was just something,
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I ran through my own personal stuff,
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but it was a mess and definitely wanted to avoid that.
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So definitely, what I would strongly recommend
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is you create a checking account
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and probably get a credit card for your business.
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Like I said, depending on where you are,
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it will depend on how easy it is
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to create your own business entity, an LLC, or an S corp,
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or all the things that you can do.
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I don't really want to get into that.
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really up to your own situation and financial planning and things.
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But however it is, even if you're just a sole proprietor, if you're just doing your business
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on your own as yourself, create separate accounts for your business that lets you manage and
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more clearly have visibility into your financial situation.
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Second, and this is perhaps just as important, is the importance of keeping good records
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for your business.
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It's one of those things that your business is, especially from a tax compliance perspective,
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but just generally, the level of care you need to do with record keeping is, I feel,
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just higher than it would be in your own personal finances.
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No one really cares where you had lunch and how much you spent and so on.
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But for businesses, and especially for tax compliance reasons, it's very important to
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keep track of all your receipts, all your records, have all that in place so that you,
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When it comes to your taxes at the end of the year, when you're kind of looking through
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things, you have really clear documentation for this.
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Certainly it really helps that a lot of things are, you know, I do online now, and so I just,
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you know, I have a collection of receipts and things, and for me, like I've said, someone
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else does my books for me, and so I just email her all of the receipts whenever I get them,
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with a little category, with a one or two word description of what it was, if it isn't
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And that helps me sort of try to collect all the receipts.
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The goal is that for any transaction that the business has, you have a record of exactly
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what that is, when it happened, and often who was there, what it was about.
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And that really helps with your tax compliance when you're trying to justify a business expense.
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The whole concept of a business expense is a funny thing.
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I definitely hear a lot of people who have this mindset, "Oh, I want to start a business
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because then everything's a business expense," as though somehow that makes everything free.
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It certainly helps and the government picks up a portion of a lot of the expenses I incur
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as a business, which is great and I appreciate that.
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But it's sort of like mortgage interest.
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It's not free, that's tax deductible.
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It's cheaper.
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The way that works out practically is if I make a purchase for something that's business related,
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say I purchase a thousand dollars worth of widgets,
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the government is essentially going to be paying for a portion of that.
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And in the sense of a portion of that's not counted against my taxable income.
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And so the government is chipping in part of that.
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And so it's better to think about it as a discount.
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Essentially everything is whatever, 30% off, 40% off,
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depending on what your tax rates are.
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But that's how you think about it.
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It's a discount.
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It's not like the business is buying it so it's free,
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or the business is buying it so that you can go crazy.
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It's still your money. You're just purchasing that at a discount.
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That's just something that a lot of people I hear, you'll get to the end of a year and be like,
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"Oh, man, I got this extra money I don't want to have to pay tax on."
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And that's perhaps one of the most silliest things you can hear.
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It's sort of the old phrase, buying something because it's cheap that you don't need is no deal at all.
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Because something's on sale doesn't mean that it's worth buying unless you would have bought it otherwise.
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And so that's the other thing you want to keep in mind, is that your business is still your money.
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or it's you and your partner's money that you're spending.
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And so be mindful of that.
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And don't get too carried away of thinking,
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oh, it's a business expense.
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It's a business expense.
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It's still coming out of your pocket to some degree.
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And then next, I just want to talk
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about budgeting and salary and this type of thing.
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So for a while, I used to think I really
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needed to be careful about budgeting.
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And ultimately, I found that it didn't really
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fit with the way I work and the way I think
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to have a very detailed budget.
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Some people, that works great.
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Some people, it doesn't.
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You want to find what works well with you.
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But the real goal of a budget is to have
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a sense of where you are on a cash flow
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basis from my perspective.
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My goal is to say in a typical month, I spend x.
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In a typical month, I make y.
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And I'm trying to make sure that those two offset so
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that I have a profit and that that profit is going
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to be roughly what I can do.
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And so budgeting for me, I find, is
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most helpful in the sense of helping
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to determine if something is worth,
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if I can afford to do something.
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If I'm thinking about doing an advertising campaign,
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or I'm thinking of buying a new device,
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I can look at it and say,
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how's the business doing compared to
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the money I want to make?
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And this leads into probably the second,
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or I guess now it's up to the third,
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key thing that I find,
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is as soon as you can,
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if you're trying to do a business at all seriously,
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if you want this to replace your income,
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if you want it to be your main job,
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I think it's very, very wise
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to start paying yourself a salary from your business.
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rather than just sort of doing the somewhat simplistic version of,
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you get to the end of the month and you just write yourself a check for whatever is left at the end of the month,
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every month or something like that. I used to do that and that was kind of the way I used to do.
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I first worked it out when I was a business, but I found that on the personal side,
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that was very stressful and challenging to have these massive fluctuations. If I have a good month,
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you know, a lot of apps are selling or whatever, you know, maybe it's the Christmas rush and so you get a little burst in sales.
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And then you get this nice check, okay great,
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we're doing our personal stuff based on that,
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and you have a few dry months,
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and things get tricky and tight,
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and it's more difficult to balance that.
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I definitely found that it was a lot less stressful
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being independent when I started to just take a salary
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from the business and to gradually build up
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a buffer in the business to pay me that salary.
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And obviously that's still my money in the business,
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and I could take it out at any time,
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But by leaving it in the business and paying it out to myself in a measured way, it sort
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of smooths out all the ups and downs of the business and makes my life much simpler. It
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makes things like budgeting much easier on the business side because I know what my expenses,
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from a personnel perspective, including my own costs, are going to be every month. And
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that's what I'm basing it on.
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And then I think what I do is quarterly, I take out any extra profit that's left above
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and beyond what I need to operate the business, a reasonable cushion and margin.
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I take out quarterly as a bonus, if that makes sense.
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But I've just found that to be a tremendously helpful thing for simplifying my expenses
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and simplifying the difficulty on a personal side of being self-employed.
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As soon as you can do that, I'd highly recommend it.
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It's one of those things that certainly takes a little discipline.
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And really what you're looking for is you're hoping to find one of those nice bigs, and
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capitalize on a big spike in the business.
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Most of these businesses that I talk about here, selling apps or doing consulting, are
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very bursty.
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There tends to be good months and bad months.
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And so whenever you get a good month, try and leave something in the business, and leave
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something in the business, and leave something in the business every time you have a good
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one, and then you'll be taking it out evenly over the course of the year.
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And I said that really, really, really helps.
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Especially on a personal side with your spouse or family life,
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it's sort of like you have a job again.
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It's sort of like you just have a regular job
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that you're making an income from.
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And you can plan accordingly, and you
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can work out your mortgage, and you
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can do all those things in a way that makes a lot more sense.
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For me, I found it was really difficult
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if I had one of these big burst months,
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or I have a consulting client who finally catches up
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on their invoices or something, and I'm
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this large influx of money, to treat that as though it
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essentially needs to last a couple of months, if it wasn't actually paid to me that way.
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So that's kind of how I do it. I'm trying to think of other parts of this that are important to keep in mind.
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Probably the last one is just to make sure that you--
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and it gets back to what I was saying at the beginning--that if you don't treat your business like a business, no one else will.
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will. And what I mean by that is that you have to take your finances very seriously
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when you're a business. It's a different level of responsibility. It's a different level
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of accountability. And often the amount of money that you're talking about is more than
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what you would typically have to deal with if you were a salaried employee. A lot of
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the overhead costs, the benefits, expenses, taxes and stuff your employer was paying for
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you that you never saw, it's your own company, you're responsible for that. And the classic
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example is you're going to be responsible for, you know, sort of payroll taxes and stuff
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often, depending on your situation, whatever. But you know, there's often times when you'll
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have money in the business that isn't actually yours, that'll ultimately be owed to the government
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or ultimately owed to some regulatory body or whatever. And you have to be very careful
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as you don't get sloppy about that and take money out that turns out wasn't actually yours.
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All right, so that's it for today's show. As always, if you have questions, comments,
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concerns or complaints, I'm on Twitter @_davidsmith, I'm on AppNet @davidsmith, and otherwise I
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hope you guys have a great weekend, happy coding, and I'll talk to you next week. Bye.