First off: THANK YOU for your tremendously supportive response to yesterday's post. You're all gems, and I’m glad to hear these numbers are helpful to see in the rough.
Second: there were (as I'd hoped!) some great questions about how this all works, which I wanted to elaborate on.
Panels and blog posts about financial life as a freelancer often do this infuriating thing where they'll talk about "a fare wage" or say things like "2016 was a really 'good' year for me" without giving any numerical context for what that looks like. There's a reason for this, of course. Once you start talking about hard numbers it's really hard to stop until you've counted all the variables. But I figure the least I can do is be upfront about what this looks like from the inside for me. You may have student loans! You may have a wealthy spouse! You may have a health condition! You may have a totally rad day job that allows you to make art on the side!
All of this is normal. All of us are doing it differently (though many of us struggle with similarly erratic cash flow).
As someone who's only ever freelanced, I feel really good about 2016. I brought in a bunch of money, I moved a bunch of books into the world, and I made things I was really proud of. This wasn't even a Kickstarter year! (Looking at the images above: Kickstarter years were 2012 and 2015—you can tell, right?)
But that 2016 profit margin? Yeesh, yeah. Super tight. So here's question #1:
"How the hell did you keep a roof over you head and food on the table? Do you pay yourself?"
The easy answer is: if I hadn't had a chunk of profit to carry over from 2015, I would've sunk way far into debt. The biggest omission in my current setup is that I don't pay myself. An embarrassingly few number of freelancers do. Our money comes in, and then goes straight back out again. Why bother putting it in your personal account if all your expenses are business expenses?
Even if it's a token gesture, I do think it's really important to have some kind of separation of church and state. Aside from making accounting much cleaner, paying yourself helps reinforce the notion that you're worth a salary, even if you're independent.
So one of my biggest goals for this year is to give myself a paycheck. Every month.
As it was I'd ended 2015 with a $25,000 profit, so I used that to wrangle expenses like rent, taxes, groceries, and anything I couldn't deduct as a business expense. That’s $12,500 a year for 2015 and 2016, if you split it up.
The good news is my annual chunk for rent, groceries, and my Roth IRA (a savings account I use to invest money for retirement), clocks in around $11,000.
But something's missing:
"How much did you pay in taxes?"
I generally budget expecting to pay 30% in taxes (NEWSFLASH: FREELANCING IN OREGON IS ROUGH), but there are also lots of deductions you can make as a small business. In the last three years I've paid anywhere from $2,000 to $8,000 in taxes (that's factoring in federal, state, city, etc.). I pay my taxes via Quarterly Estimated Tax payments. This allows me to split up payments through the year, rather than having to part with many thousands of dollars come tax season and feel totally bereft.
This next year might look REALLY different, numbers-wise, because you're always basing the payments on the previous year's income and expenses, and as you've seen 2016 was a very different kind of year for me. We'll see.
Which brings me to our big graphic today! I realized that sharing 2016's income and expenses in isolation isn't very helpful, since day job thinking encourages the idea that every year looks the same. To contextualize what I'm saying about freelancing, here's the numbers on all the years I've been doing full-time* freelance work.
(*2012 is technically only six months of freelance, since I didn't graduate college till May, but I was also taking jobs during the first part of that year, and I ran my first Kickstarter in April—figured it was useful to have more data rather than less.)
"What's COGs? Why is it your biggest expense?"
COGs stands for Cost of Goods Sold. It's an accounting term that applies to costs associated with producing the goods you sell as a business. The money I pay to have my books printed, the paper stock I buy to make minicomics with, and any other expense associated with the production of goods goes into that category.
"So, it's a business expense! You can write all that off?"
Unfortunately, no. The IRS sets things up so you need to calculate the production cost per item, and then only deduct the value of the goods you've actually sold. Here's how that shakes out: I made these box set minicomic collections from my 100-Day Life in Objects series. Between printing the booklets, working with a local letterpress printer to make the boxes, and buying special paper stock for the endpapers, the cost-per-unit shook out to $6.57. I purchased 500 units, so I spent $3,285. I sold 264 box sets in 2016, which means I can deduct $1,734.48 when tax time comes around.
Make sense? (It's okay if it doesn't. It took me a couple years to fully wrap my head around the whole thing.)
Obviously years where I’m producing a new book will have a much higher COGs value than years when I’m not, so it’s good to keep in mind that creative careers have seasons. Sometimes you’re holed up, saving every penny and drawing every day. Other times you’re throwing it all out there trying to make something, build something, and share your hard work with the world.
We’re engaged in a cyclical process, and while the income may be totally variable in either season, a little planning and intention can go a long way towards fostering stability in the long term.
Here’s to oiling that machine in 2017.