by Sage Cohen
Writers who manage money well can establish a prosperous writing life that meets their short-term needs and long-term goals. This article will introduce the key financial systems, strategies, attitudes, and practices that will help you cultivate a writing life that makes the most of your resources and sustains you over time.
If you are reporting your writing business to the IRS, it is important that you keep the money that flows from this source entirely separate from your personal finances. Here’s what you’ll need to accomplish this:
When establishing your business banking and credit, shop around for the best deals, such as highest interest rates, lowest (or no) monthly service fees, and free checking. Mint.com is a good source for researching your options.
Once your bank accounts are set up, it’s time to start tracking and categorizing what you earn and spend. This will ensure that you can accurately report your income and itemize your deductions when tax time rolls around every quarter. Whether you intend to prepare your taxes yourself or have an accountant help you, immaculate financial records will be the key to speed and success in filing your taxes.
For the most effective and consistent expense tracking, I highly recommend that you use a computer program such as QuickBooks. While it may seem simpler to do accounting by hand, I assure you that it isn’t. Even a luddite such as I, who can’t comprehend the most basic principles of accounting, can use QuickBooks with great aplomb to plug in the proper categories for income and expenses, easily reconcile bank statements, and with a few clicks prepare all of the requisite reports that make it easy to prepare taxes.
While it’s certainly not imperative, you might want to check out your bank’s online bill pay option if you’re not using this already. Once you’ve set up the payee list, you can make payments in a few seconds every month or set up auto payments for expenses that are recurring. Having a digital history of bills paid can also come in handy with your accounting.
Self-employed people need to pay quarterly taxes. A quick, online search will reveal a variety of tax calculators and other online tools that can help you estimate what your payments should be. Programs such as TurboTax are popular and useful tools for automating and guiding you step-by-step through tax preparation. An accountant can also be helpful in understanding your unique tax picture, identifying and saving the right amount for taxes each quarter, and even determining SEP IRA contribution amounts (described later in this article). The more complex your finances (or antediluvian your accounting skills), the more likely that you’ll benefit from this kind of personalized expertise.
Once you have forecasted your taxes either with the help of a specialized, tax-planning program or an accountant, you can establish a plan toward saving the right amount for quarterly payments. For example, once I figured out what my tax bracket was and the approximate percentage of income that needed to be set aside as taxes, I would immediately transfer a percentage of every deposit to my savings account, where it would sit and grow a little interest until quarterly tax time came around. When I could afford to do so, I would also set aside the appropriate percentage of SEP IRA contribution from each deposit so that I’d be ready at end-of-year to deposit as much as I possibly could for retirement.
THE PRINCIPLE TO COMMIT TO IS THIS: Get that tax-earmarked cash out of your hot little hands (i.e., checking account) as soon as you can, and create whatever deterrents you need to leave the money in savings so you’ll have it when you need it.
Your writing business will require not only the investment of your time but also the investment of money. When deciding what to spend and how, consider your values and your budget in the three, key areas in the chart below: education, marketing and promotion, and keeping the wheels turning.
This is not an absolute formula for spending—just a snapshot of the types of expenses you may be considering and negotiating over time. My general rule would be: start small and modest with the one or two most urgent and/or inexpensive items in each list, and grow slowly over time as your income grows.
The good news is that these legitimate business expenses may all be deducted from your income—making your net income and tax burden less. Please keep in mind that the IRS allows losses as long as you make a profit for at least three of the first five years you are in business. Otherwise, the IRS will consider your writing a non-deductible hobby.
| EDUCATION | MARKETING AND PROMOTION | KEEPING THE WHEELS TURNING |
|---|---|---|
| Subscriptions to publications in your field | URL registration and hosting for blogs and websites | Technology and application purchase, servicing and back-up |
| Memberships to organizations in your field | Contact database subscription (such as Constant Contact) for communicating with your audiences | Office supplies and furniture |
| Books: on topics you want to learn, or in genres you are cultivating | Business cards and stationery | Insurance for you and/or your business |
| Conferences and seminars | Print promotions (such as direct mail), giveaways and schwag | Travel, gas, parking |
| Classes and workshops | Online or print ad placement costs | Phone, fax and e-mail |
As a self-employed writer, in many ways your future is in your hands. Following are some of the health and financial investments that I’d recommend you consider as you build and nurture The Enterprise of You. Please understand that these are a layperson’s suggestions. I am by no means an accountant, tax advisor, or financial planning guru. I am simply a person who has educated herself on these topics for the sake of her own writing business, made the choices I am recommending, and benefited from them. I’d like you to benefit from them, too.
Individual Retirement Accounts (IRAs) are investment accounts designed to help individuals save for retirement. But I do recommend that you educate yourself about the Simplified Employee Pension Individual Retirement Account (SEP IRA) and consider opening one if you don’t have one already.
A SEP IRA is a special type of IRA that is particularly beneficial to self-employed people. Whereas a Roth IRA has a contribution cap of $5,000 or $6,000, depending on your age, the contribution limit for self-employed people in 2011 is approximately 20% of adjusted earned income, with a maximum contribution of $49,000. Contributions for a SEP IRA are generally 100% tax deductible and investments grow tax deferred. Let’s say your adjusted earned income this year is $50,000. This means you’d be able to contribute $10,000 to your retirement account. I encourage you to do some research online or ask your accountant if a SEP IRA makes sense for you.
When you’re living month-to-month, you are extremely vulnerable to fluctuation in the economy, client budget changes, life emergencies and every other wrench that could turn a good working groove into a frightening financial rut. The best way to prepare for the unexpected is to start (or continue) developing a savings buffer. The experts these days are suggesting that we accumulate nine months of living expenses to help us navigate transition in a way that we feel empowered rather than scared and desperate to take the next thing that comes along.
I started creating my savings buffer by opening the highest-interest money market account I could find and setting up a modest, monthly automatic transfer from my checking account. Then, when I paid off my car after five years of monthly payments, I added my car payment amount to the monthly transfer. (I’d been paying that amount for five years, so I was pretty sure I could continue to pay it to myself.) When I paid off one of my credit cards in full, I added that monthly payment to the monthly savings transfer. Within a year, I had a hefty sum going to savings every month before I had time to think about it, all based on expenses I was accustomed to paying, with money that had never been anticipated in the monthly cash flow.
What can you do today—and tomorrow—to put your money to work for your life, and start being as creative with your savings as you are with language?
If writing is your livelihood, what happens if you become unable to write? I have writing friends who have become incapacitated and unable to work due to injuries to their brains, backs, hands and eyes. Disability insurance is one way to protect against such emergencies and ensure that you have an income in the unlikely event that you’re not physically able to earn one yourself.
Depending on your health, age, and budget, monthly disability insurance payments may or may not be within your means or priorities. But you won’t know until you learn more about your coverage options. I encourage you to investigate this possibility with several highly rated insurance companies to get the lay of the land for your unique, personal profile and make an informed decision.
Self-employed writers face tough decisions about health insurance. If you’re lucky, there’s someone in your family with health coverage also available to you. Without the benefit of group health insurance, chances are that self-costs are high and coverage is low. As in disability insurance, age and health status are significant variables in costs and availability.
Ideally, of course, you’ll have reasonably-priced health insurance that helps make preventive care and health maintenance more accessible and protects you in case of a major medical emergency. The following are a few possibilities to check out that could reduce costs and improve access to health coverage:
Establishing effective financial systems for your writing business will take some time and energy at the front end. I suggest that you pace yourself by taking an achievable step or two each week until you have a baseline of financial management that works for you. Then, you can start moving toward some of your bigger, longer-term goals. Once it’s established, your solid financial foundation will pay you in dividends of greater efficiency, insight, and peace of mind for the rest of your writing career.
SAGE COHEN is the author of The Productive Writer and Writing the Life Poetic, both from Writer’s Digest Books. She’s been nominated for a Pushcart Prize, won first prize in the Ghost Road Press Poetry contest and published dozens of poems, essays and articles on the writing life. Sage holds an MFA in creative writing from New York University and a BA from Brown University. Since 1997, she has been a freelance writer serving clients including Intuit, Blue Shield, Adobe, and Kaiser Permanente.