02:02 - “Budgeting”

04:01 - Incentive

11:09 - Time Cost/Emotional Cost

14:47 - Approaching a Budget

21:31 - Keeping Up a Budget (Discipline)

39:14 - Amending Budgets

46:19 - Expense Division?

54:15 - Getting Started

55:56 - Default Questions

59:34 - Reconciling Accounts (Transfers)

Picks

The Positioning Manual for Technical Firms by Philip Morgan (Jonathan)
Econtalk (Reuven)
Blair Enns: 5 Reasons You Should Offer Guarantees (Eric)
YNAB (Chuck)
Serial Podcast (Chuck)
Startups For the Rest of Us (Chuck)
Aftershokz AS500 Bluez 2 Open Ear Wireless Stereo Headphones (Chuck)

 

 

Do you guys hear me?

Yeah.

We do now.

Hello? Oh god. I’ve been talking [chuckles]

Who you have been talking?

I was – [crosstalk] [laughter] Sounds like my family.

Hey everybody and welcome to episode 161 of the Freelancers’ Show. This week on our panel we have Eric Davis.

Hello.

Jonathan Stark.

Hello.

Reuven Lerner.

Hi everyone.

I'm Charles Max Wood from DevChat.tv. This week, we’re going to be talking about budgeting. So does anyone actually budget for their company? [Inaudible] not that I don’t.

I do. I've been doing it all of this year, so it’s about 6 months now. I used to do an informal and I guess for a couple of years before that.

Yeah. I think I would benefit from one but I just haven’t really – I’m always running ahead – go, go, go – and I just spend whatever I have to spend to get stuff done.

That’s what I do, too.

Let me ask that question. What do you mean by budgeting? If you mean keeping track of how much is more or less coming in and out in a general way, but I have a good sense of what’s going on. But doing an actual, shall we say, Eric, actual knowing that exact dollars and cents, [laughter] surely you jest.

Yeah. I have a bookkeeper and so I go look at the numbers throughout the month because they keep them pretty up to date. So I have a general idea of where the dollars are going but I don’t sit down at the beginning of the month and say, ‘well, I must spend this on this, and this on that, and this on the other’.

Yeah. I used to – I didn’t do that. I did that – that’s the more recent way. I use to just, at the end of the month, say, ‘where did I spend my money on? How should I adjust it for next month? Should I cut back on buying books, or my hosting fees are starting to get outrageous’ – that sort of thing. But honestly, since I started doing a real budget, it’s helped a ton.

I know I have x amount of money in savings which equates to almost 9 months of my business expenses and salary; I know I have $2,000 and 1 penny set aside to buy a new computer if my computer just crashes or gets stolen. And actually, this morning I was thinking about the show and I was thinking, ‘I go to MicroConf every year; I should put away’ – it’s about $1,200 for me to go –‘I should put away a hundred dollars a month for that. So when I have to buy flights or when the tickets go on sale, I know the money’s there; I don’t have to scramble, ‘do I have enough cash in the bank? Do I have to transfer money around?’ It’s been a really huge burden just off my shoulders.

Interesting. I’m curious. You spelled out you thinking ahead, it helps you know where the money is going to go instead of knowing where it went. I’m not sure if that’s enough for me to really go, ‘oh, I really have to do this’.

Yeah. What was the incentive to change?

I can’t remember his last name – Jesse from You Need ABudget; he’s basically the owner, the CEO.

Jesse Mecham.

Mecham. Yeah. He's the chief marketing person. He's all doing all the presentation and things like that. He’d presented at MicroConf this year, 2015, and then last year. And basically, the way he explains it is like the budget helps you – instead of your bookie comes back to you and says, ‘hey, you spent this much money and this much money’, you can be more proactive and actually fund the categories and the different things that you want your business to do.

I found I was spending a couple of hundred dollars on hosting, and hosting’s important to my business, but it’s not that important, and that hosting application is just I have a bunch of servers. I would rather make the focus of my company – the training, the high-quality education that I can benefit myself with. And so what I did is cutting off a lot of servers, downsizing them, and I was able to take the money I was spending on servers to buy books and some high end training material to actually get coaching on certain things. And so I have a good eye view of ‘ok, this is how I want my business to be. I want my business to compliment me and improve me in these areas’. So I’m actually actively putting money towards that instead of just looking back after the fact.

I do like that idea where it’s, ‘ok, do I want this company to provide for me’ and then, ‘ok, well, I’d rather spend a hundred dollars on training than a hundred dollars on hosting’.

Yeah. That’s something similar recently – I don’t know if I’d qualify it as a budget but I guess it is. I was reallocating funds, let’s say, where I went through and I was like – it’s recently tax time in the US I guess a month or a couple of months ago. And I have a bookkeeper like Chuck does, and they have a bunch of stuff that they couldn’t categorize so I had to actually categorize it.

And so I went through the – I hardly ever look at it, but when I did, I went through it and I was like, ‘oh, I’m spending money on all of these monthly services that I didn’t even remember singing up for and I’m not even using’. T-Mobile’s been charging me 30 bucks a month for years. I don’t even know what it’s for. I don’t have a T-Mobile phone. So I went through and I cleaned out all of that stuff and it was like – it was almost a thousand dollars a month. It was several hundred dollars a month. And then, I was like, ‘oh, what can I do? Where can I put this?’ And I had that – I didn’t pick something, really but I did have the thought, ‘what do I want to use this now found money on that is beneficial? Where could I invest this money back into the business in a way that it generates some income, like training or marketing or something that I’m doing more and more of?’ So maybe I can move those monthly dollars over to something like get Drip or whatever.

Right. And that’s what I've done is I've – I can get into it later but I hit a certain level where all of my business that was taken care of, I have enough in the bank for a rainy day. And now, I have x

amount a month coming in; that's extra I get through whatever. And I’m looking at, ‘ok, could I use this to hire someone to help me market? Take care of the really time-intensive, but not really valueadded marketing task. If I did that, would that actually help my revenue go up?’ And looking at my budget, I could say, ‘yeah, I can account for, say, $900 a month for that’, and so I could go to someone and say, ‘hey, here’s my budget’ and it’s actually a budget, not just a number I pulled out of the air but this is how much I’m able to spend, and I can look for value that’s more than 900.

Yeah. I've got something going on with conferences where I do a lot of speaking gigs. Historically, they’ve been very beneficial in terms of lead generation, but I’m starting to feel like the industries has shifted enough that I need to reconsider that and look and say, ‘ok, of all of the’ – I get paid to speak, but it’s not millions of dollars, and I incur a lot of expenses and I’m away from the family for sometimes 2, 3, 4 days. If I’m not getting good clients out of doing a speaking gig, the money that they're paying me isn't really worth it. It’s grieve-y. Maybe somebody pays me $3,000 to go give a keynote talk, and that’s nothing to sneeze at, but at the same time, I’m going to spend a third of that just getting there and getting back and all of the random stuff that you do when you're travelling.

I feel like in the past, I used to get a lot of clients out of that sort of thing, but these days, I don’t know if I’m getting as much benefit out of it compared to things like podcasting. So I should really do a cause-benefit analysis of those, and I might look back and say, ‘you know what, I’m basically breaking even on doing these speaking gigs. I’d rather spend that time’ – that's a lot of time you go to a speaking gig; it’s 3 days of your life. I couldn’t create an entire year of podcast in that 3 days.

I’m just generally bad with budgeting although I think I’m better than I used to be which is not hard; it’s very small threshold to get over. In terms of the bookkeeping and so forth where I just hand a large pile of papers to my accountant’s office every month and he and his bookkeepers go over my things and they say, ‘well, you're missing this and this and this’, and then probably about – I don’t know – twice a year, we have a longer strategy discussion ‘where are things’.

But really, for the most part, it’s been convenient for me to know – I basically know what my income is over the next 6 months each month. So I’m like, ‘ok, well I know this month is great, July is fantastic, August is pretty dead at this point’. So I already have a good sense of what my cash flow is over the next few months which is already like – I feel like I stepped ahead of where I used to be. And now, I’m starting to say, ‘ok, what do I want to spend money on?’ The big thing that I was spending money on is just paying back loans for the PhD so that we’re not mired in debt which is a

nice thing to get out of and we’re doing that at a fairly reasonable quip. But every so often, I also find that I go through the things that we are spending money on and I say, ‘Really? We’re paying for that? Still?’ I know that I've never gotten to a thousand dollars a month, but they're definitely a bunch of things that I've cancelled over the years. And there's more to go, I’m sure.

Yeah. That’s another aspect. The extra money coming in from the business, I could say, ‘ok, well, the business is doing good’. There's a limit to the number of books for training I can actively be doing each month. I can’t read 20,000 books on a month. So what I can do now is I can say, ‘oh, look, it’s June’, or I’m budgeting for July – the next month – and I have an extra, we’ll say, 2 grand sitting in there; I can actually pull that out and say I’m going to give myself, personally, a bonus. And so I can take that. We can, as a family, go on vacation. Maybe I can take some time off, or more likely, we’ll start paying down our debt, and try to build up our own rainy day fund and all that stuff. I have that freedom so I can actually say, ‘is this 2,000 best invested in my business at this stage or is it best invested in our personal stuff?’

If we’re talking about budgeting, if you feel like you can’t ignore the time budgeting aspect of it, the emotional – time cost and emotional cost – if we’re specifically talking about finances here. But it does encourage you – when you're looking at your money like this, it does encourage you to think twice about how you're spending, not just your money but also your time and what your focus is.

[Inaudible] I have for many, many, many years kept up a crazy schedule. I was sleeping very little, going to sleep late, getting up early. And I decided, ‘ok, now that I’ve got enough money coming into the business each month to deal with the expenses that we have and to pay off the debts, I’m going to try’ – and this is relatively recent, last month or so – ‘I’m going to try to sleep like a normal person or something approaching it’. And it’s good for my health, good for my well-being, good for everything. And I feel like because I know where the finances stand in my company, and it’s not always ‘oh my god, oh my god, oh my god, what’s going on with my clients’, I can be more relaxed about it.

Right now, as I said, I’m worried about August to some degree, and party September. But at least I can focus my worry on something specific as to ‘oh, I really hope money comes in’ which is how it was for many years.

I think that worry is probably the most important or beneficial aspect of why a budget now is – it’s the lack of worry. Like I said earlier, I know I have 9 months in savings. I know the work I’m doing now; I’ll have the income and I’ll be budgeting that next month, and I can forecast out my expenses. I know my expenses are going to be right around this, with maybe 10%, 15% variance. So I know for a fact I’ll be in business for the rest of this year even if I don’t get any customers.

And, so I don’t have to be as hard on myself. I don’t have to go to bed sweating bullets or any of that stuff. I can kick back if I need to. When a client comes to me and they feel like a really bad client, I don’t feel like I have to take them as a client. I can wait for an ideal client or someone who’s a better fit for me. And so that worry aspect just gets – it gets minimized. It’s just a very, very tiny – I still worry, but I don’t worry about finances or anything around the finances side.

By the way, that's huge. I just had that, I think, 2 days ago. Someone who had hired me years ago emailed me and said, ‘listen, I know you do a lot of other things now but I got this guy who’s interested in the project; I’ll put you the other’. I said, ‘yeah, you never know’. Sometimes I take on consulting clients and we've got an employee who does some programming. And the guy emailed me and said, ‘well, we really need someone who use Php and MySQL’. I rolled my eyes and said, ‘you know what, I’m in a position now I can say no’, and it was a fantastic feeling. So I wrote to them and said, ‘listen, we could do it if we’re using such and such technologies, but otherwise, no, thank you’. It’s because I know where things are going because I have a sense of what the future holds that I definitely feel empowered. It’s a terrific feeling.

Yeah. And let’s be honest – I’m looking at my sheet here back in January – 5 months ago – about my bank account was looking a little low. I still had a few months in there but work wasn’t coming in because it’s a holiday slump that I ran into and I was basically draining down on the savings. But I had a budget. Basically, I knew my number of how much I had in there and how long it could last. So I got a little worried –just more of, ‘ok, I need to ramp up marketing because I know my sales cycle take a while’, but I wasn’t running around with my hair on fire taking PHP/Wordpress conversion gigs that are totally outside my specialty and taking huge cut in rates. I was able to stick it out and stick with ‘here’s the services I provide, here’s the rates I charge’.

Yeah. It [inaudible] you where the fire sale, that’s for sure.

Yup. I’d like to know – it sounds like Eric has a formal process around his budget. How exactly do you approach it? How do you write your budget up for a month?

Ok. I’m using YNAB. You can really use anything. Their software is just – I like it because I can get on to my phone too. It syncs over at Dropbox and all that. But, let’s see, I’ll walk through what I did with the software but it’s – if you're using a different one or something else, the concepts apply.

I went back to January just because I wanted a full year. I didn’t want – come tax time for 2015, I didn’t want to have to go through 2 different systems. I think I had 2 months that were before YNAB. So I imported all of the stuff, went through to categorize it, and a lot of business stuff was reoccurring, so it was like anything from –.

Did we lose you Eric?

Revenge of the budget.

I was getting excited there. He might be convinced me to try this product.

Here’s a funny thing that happens with people – while we’re waiting for Eric to come back and sell me on YNAB – since I bill in advance and for long-term projects like fixed-bids for long-term projects, it’s not uncommon for my bank account to have a hundred thousand dollars sitting in it, but that has to last me an entire year. So, you're like, ‘I’m rich!’ And you go buy [inaudible] and an Apple watch, and like, ‘oh, oh, wait a minute’. And then, right around Christmas, you're broke, which is the worst time to be broke in the US.

Totally.

I have not, definitely not been good about budgeting. I have a bookkeeper who keeps track of all my expenses and stuff and I’ll go through and clean stuff out like, ‘oh, I don’t really need this 200 domain names; I’m not using them’, but it would be – actually, it would address that specific problem where you're getting big payments upfront, but they need to last for a particular amount of time.

So you could have a lot of money in the bank but you could also be in a position where you really need to ramp up marketing because that money needs to last for x amount of months and a budget would address that.

I can walk you through – I've used YNAB off and on for a few years. Basically, the way it works is you add the account – anyway, it listed under budget accounts, so you have – on mine, I have my bank account, my American Express, and my PayPal account. I haven’t really used this for my business. My wife and I used it off and on, like I said, for my other stuff. Now, you have to manually import – so you just do a quick and I export a quick [inaudible] file and then it’ll import it. Anyway, that’s mechanical.

The real power is in the budget. The Budget screen – you basically put in all of the different categories you're going to put things in and then it automatically tallies it up.

I’m using QuickBooks Online, but this is not the same thing?

No.

Ok. So it’s something that I would import information from QuickBooks perhaps?

Possibly. I don’t know how that would all work. Anyway, you set what you budgeted for the month and then it’ll tell you where you're at with your budget as you import stuff into it. And then, you can work things from there. You can say, ‘ok, well, I’m spending this much on this, this much on that’.

And the thing is, the way my bookkeeper categorizes it, and the way that I think about it isn't always the same, and so that’s why I’m tempted to use YNAB for the business.

Gotcha.

Eric, are you here? Do you want to continue with how you're tracking your budget?

I basically import it up onto the transactions from my bank, categorize them like DigitalOcean, WP Engine – those are hosting; they're always going to be hosting. So what I actually did is I set them up as scheduled transactions like every 16th, YNAB says, ‘hey, did you get another bill from WP Engine? Was it $99? Is it hosting?’ and I just yes, and so it helps me auto-entry stuff. It saves a ton of time.

I put all of those in and basically gave me January to February what I spent as far as budget-wise. And so [inaudible] March now, I can look at those 2 months and there's a couple of options I can pick where I can say, ‘hey, average up the last, in this case, 2 months but maybe 3 months, maybe 6 months’, and that’s going to be what the hosting amount’s going to be for this month. It’s like a running amount. If it’s going up and up and up, I can budget more this next coming month, or I can say ‘no, it’s going to be this exact amount’, or I can say actually a whole bunch of options.

And some of the stuff you can set it, so if you actually over-budget, it will roll stuff over – it’s weird, but the idea is come March, I can say, ‘ok, well, here’s what I spent in the past 2 months, here’s what I’m thinking I’m going to spend’. There might be – maybe I have some travel or some other audit expenses; I can put those in. Basically, that’s how you make your budget.

There's a bit more on the income side and it’s hard to do that in the first month, but I think in the second and third month, it becomes pretty easy. The idea is if I collect income – so June – I don’t actually get to spend that income until July. So you actually have a floating 30 day of waiting to make sure the income’s there. You're not waiting on ‘I need this check from clients because I know that’s going to help me make my budget match up and if they don’t ever pay’ – but that’s basically all it is. I just started with ‘ok, what did I spend over the past 2 months’ and then, slowly, over time, updated it and corrected it, or tax time came up and so I knew I had a huge chunk of money I had to put aside for taxes.

But this is not an accounting replacement. This is something separate from that, right? You also use QuickBooks or something like that?

No. That’s the thing. Accounting and bookkeeping is basically tracking where you're spending your money, especially for our businesses. For other businesses, like [inaudible] a lot of differences, lots of variations especially depreciation – all that. But at least for me, I found just using YNAB, or even a basic not-a-double-entry accounting system, those work fine for business because at the end of the quarters, end of the year, I just send my accountant ‘here’s what I spend on hosting, here’s what I spent on reference material, here’s computer assets I bought’. It is good for a line-by-line breakdown of what I spent and then she puts it into her QuickBooks for accountants and does all the tax stuff.

You don’t have a bookkeeper who does monthly entries for you?

No. I do that. And [inaudible] every weekend, I’ll do our personal and business bookkeeping stuff, but with YNAB, a lot of that – the reoccurring stuff comes through pretty good, and then so she’s one off things. And that’s why I said earlier, if I go to the bookstore and buy a book in my business credit card, I can punch in the receipt on my phone and it’s done. My bookkeeping’s there. I just had to check my credit card statement and then say it’s clear and all that when I’m just double – to double-check the prices and everything were correct.

Here’s my big question with this. Several times, even maybe go so far as say many times over the last 15 years, I said, ‘you know, I really should do budgeting’, and I've done things that are – it sounds like not even as fancy as the stuff you're describing which is not so fancy. I find that I get it set up, and I start to use it, and after 2 months, 3 months, whatever happens and I just stop.

First of all, I feel like an irresponsible person but beyond that I feel like it just requires your daily or weekly discipline that I don’t have. I’m wondering what – just in general, Eric, you just strike me like a very disciplined person, but what suggestions would you give to make it easier on keeping on track so that I can do this?

Yeah. Discipline’s going to be a big part. I think you can build discipline or you can do stuff to discipline yourself. If you set a calendar of things so every Friday at 4:00 in the afternoon or whatever, right before you finish up for the week, you spend 20, 30 minutes to do your bookkeeping for that week. Do that and keep that appointment and make it a habit, and it’s – it builds on itself. Nowadays, it’s not so much discipline as it’s just something that I do. Especially with bookkeeping, it’s one of those things if you do it every week, it’s not that much. If you let it wait a month or 6 months, then it becomes this overwhelming task.

And you always have to do it at the very – you have to do a minimum amount of bookkeeping just to be in business. Even if you're sending everything off to your accountant, you got to know what to send them and they're going to come back to you and ask you what stuff is. So there's minimum level of effort but if you can put in that minimum level of effort once a week instead of at tax time when your hair’s on fire and you're scrambling and trying to – and you're worried, it’s just so much easier to just build a habit around it.

So set an appointment even if you can’t do it all – I don’t have a lot of transactions; I have a smaller business than a lot of other freelancers. Maybe just do, like I said, do 30 minutes, and if you can’t do them all, ok, that’s fine; leave it for your accountant to do, or maybe you do it; try to catch up if you have a slow week or something.

I guess it just feels like I have – I actually have a lot of – when you say, ‘oh, I must be keeping track of it to hand it to the accountant’, but that’s only partly true because basically anything comes in, I say ‘uh huh, uh huh, uh huh’, stick it in the accountant drawer, and then at the beginning of each month, I put things in the accountant drawer, or I take the accountant drawer and I bring it to the accountant’s office, and that’s my bookkeeping until right when they ask me questions, then – but even that, I know – even if I have a lot of paperwork, I know what I spent money on.

Just yesterday, they sent me an Excel spreadsheet saying, ‘please tell us what these 20, 25 credit card expenses were’. I said, ‘ok, this is a book, this is hosting, this is Github, this is that’ – the things that are obvious to me, but not obvious to them.

This is raising an interesting point for me mentally which is that I do not pay cash for anything at all ever in my business. Everything is on either my business checking account debit card or a particular credit card that I use for business. So those 2 accounts are linked to my QuickBooks Online, they are automatically imported into QuickBooks. And then my bookkeeper, on a monthly basis, goes through and makes sure that everything is categorized, and if it’s not, they send me this spreadsheet like Reuven gets but I almost never get one.

It’s very automated but the thing about that is that it’s all happening behind my back, in a way. I’m the one who made all the purchases but I never get that dashboard view of ‘holy macro! I spent $4,500 on Uber last month? I could’ve bought a car’ – that's an exaggeration, but I'm sure I’m spending some crazy money on something that’s totally not worth it to me. I typically only look at it annually where they give me a profit-and-loss statement that I review, and I look at it and I've spent $2,000 on domain names that I’m squatting on or something like that.

That brings up something I mentioned in another one – in another podcast, but it’s worth bringing up here. Back when I actually have a degree in business finance, which my – link to why I like doing this, but we had to take 2 classes on accounting; it’s part of the degree. One was financial accounting, and the other is managerial accounting – I can’t even say that.

Financial accounting is what most people think about when you think about bookkeeping; and accounting – that’s like debits, credits, make sure things balanced, processing thousands and thousands of transactions – it’s the mechanics of what we’ve been talking about. Managerial accounting, on the other hand, is someone does that processing and gives you the different business reports like casual statement, income statement, general ledgers, all that. You actually look at it and make decisions; that’s the management part of it. Like you just said, you spent $45,000 on Uber last year, ok, we shouldn’t be doing – [crosstalk]

Something we've got up by in order of magnitude.

Yeah. We should now go and buy a car, lease a car, and that’s going to give us some – an asset’s going to give a tax right on. I think that’s an important thing with budgeting is it’s not just to appease a tax man or even to just get your accountant off your back if you have an adverse relationship with them; you should do budgeting so that you actually have a better understanding of how the money in your business works.

And let’s be honest, not many of us are doing businesses just for charity. We’re not doing it to feel good. We’re doing it to make money while probably doing something we love. But if we weren’t making money at this, we couldn’t do this. We would have to either be a charity or we’d have to go get a job. And so putting the money stuff aside and thinking, ‘whoa, I’m going to have this other person, like an accountant, deal with my money’. That seems like a huge amount of knowledge that your business is generating and a lot good decisions you can make that you just pass in the bucket to someone else, or just put it in a shoebox, literally.

Yeah. You're a hundred percent right about that, and I had the same opinion for a long time, and I used to do exactly what you said which was the: I had it in my calendar the first 4 hours of every Friday morning, I would go through my numbers and enter everything in, make sure it was all categorized and all that, and I love the sense it gave me about how the money was flowing. I would totally pick up on stuff like, ‘oh, I signed up for this services, a trial, and they started billing me and I

never even noticed it’, and it felt way more in touch with the cash flow, and then for some reason, however, I got kicked off of that trend. I probably had a busy couple of months. And in fact, I used to look forward to that; it was relaxing. I would go to Starbucks and I would go through my numbers, and like you said, it only took – it probably didn’t even take an hour after I got rolling. And I got kicked off of the routine, like Reuven said, and then I was like, ‘oh, I need to get back to that’, but I didn’t get back to it for a year and a half, during which time I was like, ‘I’m not going to hire a bookkeeper because I’m going to get back to this because I really should’, and then things just got really messy, and then I had – tax time goes around and it’s like, ‘oh, ok, now I have to go through 5,000 transactions’ and trying to remember what is $45 and 95 cents was from January of last year.

I guess what I’m saying is I can see both sides of it which is Eric’s right and Reuven’s right. Everyone should be doing what Eric says, but it’s harder than it sounds. So there needs to be some kind of middle-ground – oh, oh, sorry – the managerial accounting was the brilliant part. It would be great – I think everybody would actually dig doing managerial accounting, but they don’t want to do the dull entry accounting part of it – the mechanical part of it. Are those two things separable? Could you have your bookkeeper doing all the manual part and then you set an appointment with yourself on Fridays for 45 minutes to just read it?

Yeah. That’s why there are actually separate classes. It’s usually different people that do it. You actually have the bookkeeper who prepares the books. They're the ones that’s typing all that in; that’s the financial part. And then typically, it’s the accountant – so accountant and bookkeeper are different roles. An accountant would come in and they would – we do that, not a full audit, but just auditing and seeing how stuff was. And then if there's an accounting manager, they’d be the kind of person that’d be like, ‘ok, well, here’s what we need to change things around or shift priorities and all that’.

There are actually multiple roles. What I was going to say – you can have someone type in all your stuff, and if you have a high volume of transactions, that in itself is not valuable for your business, so you can outsource that to whoever you want. But the thinking about what these transactions represent and what the amounts represent, that’s something that you need to put some thought on.

That’s actually strategic level work.

To my credit, and I meant that I don’t get a lot here in terms of financial responsibility; my bank is a really good website. So I’m constantly going in there and seeing what’s going on and I can go in and look at certainly cash flow in terms of in and out but also credit cards and what we’ve been spending on, and like you guys said, basically, everything I do –not even basically – everything I do for the business, I do in a credit card partly because it’s just the accountant would kill me otherwise. Partly because then it’s a business expense rather than a personal expense.

Basically, if I have to pay for it personally, then it really should be something that is personal. You cannot expense meals in Israel, so my meals are always either my personal credit card or cash. But anything, anything that has to do with the business is on the business credit card.

So I do feel like I have a good sense of what my business is up to which is part of – I might be just loaning myself into a false sense of security, but that’s something part of what’s been making me lazy over the years. I don’t feel like I absolutely positively need to be going over everything every week.

One interesting thing I hadn’t really brought up, but it happened I think at the very beginning of this month – someone that I've been following online since before I even started my business; we’re talking 10 years, probably. They do coaching and they had not a [inaudible], but they had a cell because they're basically redoing a lot of stuff, and it was like you can get their coaching sessions for extremely cheap, and I've spent probably 10,000 or more dollars with them just on their products, but I’m like, ‘ooh, if they're rid of their coaching, then it’s not going to be in my price range anymore. If they're selling it, this is the last chance I have to really get one-on-one advice from them’. And so what I did, I opened up my budgeting program, saw I didn’t budget for training, but I had extra for the month. I’m like, ‘you know what, I’m going to do it, and I’m just going to scale down my training budget for the next 4 or 5 months’.

But it wasn’t ‘where do I find the money?’ It was just, ‘let’s just take some out of this one bucket that I’m not using this month and put it over here on this other’. And so I was actually able to take advantage of an opportunity that literally is probably once in a decade because I don’t think they're going to ever go back to the older way. So having my finances in order, knowing that stuff, I could do it without having the buyer’s remorse or any of that stuff later on.

Right.

Yeah. It sounds like it just – I know this is true, but I haven’t – I've fallen out of practice, so it’s good to have this conversation. It just takes the superstition out of the finances. Finances are not a good thing to go by gut instinct because you can have the wrong feeling; you can have a lot of cash on hand, but actually, you need it for an abnormally long amount of time, so it gives a false sense of security.

I’ll say a worse way, and I've seen this happen a lot is you’re working crazy for a client and have, say, a hundred thousand in accounts receivables, but you don’t have any cash and you got to shut down your business.

Yeah. I don’t work like that. [Chuckles] I don’t appeal in arrears. But yes, I'm sure a lot of people listening do.

Right. I have been in this situation – I think it was a few years ago, I worked in a big project and the client didn’t pay for a few months. I keep calling them and bugging them; they cried poverty, they cried this, they cried that, and I finally managed to convince them to pay. But during that time, my business had expenses; this was the main project that I was working on and I had an employee with salary I was paying, and it was just – it was just terrible. It’s not directly associated with budgeting but having a cushion is a great thing.

This might be an Israel-only thing, or mostly Israel thing but banking here is very personal. I go to my bank, or I call my bank, and I have my bankers, and they totally know me. They know my account number by heart, they know the status of my account, they’ll call me up sometimes and say, ‘look, you got this going on with your account; maybe you want to try x, y, and z’ And basically, I put something inside in savings every month – both of my business account and my personal account, but I have them in separate banks, so it doesn’t really affect things. But that has given me a lot of political capital so that when I need to go in – and I have a need to do this in a few occasions over the last few years especially with the PhD – when I go in and I say, ‘I’m going to need a loan’, they’re like, ‘oh, yeah. We know what your business is like. We can do that’. And because I've been putting money aside, they trust me more. And now that I've been paying loans back, it might be 5 times, 10 times the rate, I should – it helps even more.

Yeah. That’s definitely not the case in the US. Maybe if you're using a Credit Union or something, you could do that, but it’s not like that at all in my experience in the US. But I have [crosstalk].

My US bank is online, and I think I've spoken to their help once.

Yeah. [Inaudible] started doing deposit checks via the cellphone – via smartphone. I haven’t gone into the bank in maybe a year. I haven’t been going into the banks since Bank of America started sporting check deposits on my phone.

But I do have a customer – I have a coaching student in Greece and their economy’s completely just not moving. And he was explaining to me that he has tapped into an entire ecosystem there just working for free on the expectation that eventually, someone will pay back all the – basically, everyone’s working off of [inaudible], and eventually, they assumed that someday they will all be paid. We’re talking about not just months but years of people continuing to offer service based on promises instead of some kind of currency.

Wait, wait. You're saying that the whole country – is that exaggeration – there are many people in Greece who are now operating [inaudible] systems. It’s like this intertwined everyone owes each other now.

Yeah. My exact quote to the guy was ‘why does anybody keep working if no one’s getting paid?’ and he's like, ‘well, they just assume that someday they’ll get paid for the work they're doing today, so they keep doing it’.

It’s musical chairs – just finance the whole – [crosstalk]

Yeah, exactly.

That's crazy.

Take away is it sounds like a bad time to be living in Greece.

A good time to be working for foreign – I have a guy in my Mastermind who’s from Greece, and he works for an American company, and I’m sure that’s a real nice island of financial stability in the city.

Yeah. But he's the most popular guy in town. [Chuckles] so make it [inaudible]. Oh I’m actually going to pay for my coffee. [Chuckles]

That’s just not – I think that benefit that I’m seeing is just getting an overall view of where my money is going, and then being able to make decisions based on what I’m dealing with.

One thing that I did notice when I was going through my bookkeeping was that I’m still paying for a few services that I’m not using anymore. I've switched to hosting companies and I could probably save 50 bucks a month or something by switching – by moving stuff over from Linode to

DigitalOcean – just stuff like that. If you look at it like if I need to turn off AWeber, which is 30 bucks a month, then I need to move stuff over, like I said, for hosting – just those; 80 bucks a month, that doesn’t sound like a lot. But if you aggregate it over a year, two, or three, it starts to make a difference.

The other thing is that what if I find a few hundred other dollars that I’m spending that I don’t need to. And that’s where the budgeting seems to make a lot of sense to me. And the issue that I’m seeing with the budget versus the bookkeeping is that the bookkeeping categorizes to what the tax code says and the budget’s going to categorize things according to what I care about.

Right. And what I've actually done with my accountant is I've worked with her to figure out what they're called on the tax code or she has a lot of additions that she does for my – what’s it – scheduled [inaudible] or whatever.

Basically, I have an expense that’s called ‘website operations’ which would include hosting, domain names – stuff keeping websites on. So I worked with her to figure out what she’s calling things, what the IRS calls things and adapted my system to do that. It’s actually matching, so if I go to her, I don’t have to mentally change what it’s called. I can just say, ‘hey, I spent this much in training, or I spent this much in office equipment’, and it just works right across the board, and most things map pretty reasonably well. And you can actually put a note, so you could have website operations and then [inaudible] have a note for yourself ‘this is hosting and servers and whatever’.

Yeah. That makes sense.

That remind me actually, Chuck, that I've been planning for I think now 6 months to move away from my hosting company and move my site on to DigitalOcean. I did the first part which was moving mail hosting off under [inaudible], but that added an expense. The whole point was to get rid of my dedicated server in favor of a 5-buck a month server and save literally a $90 a month, and that's a thousand dollars a year. That’s not [inaudible].

One another thing to I think about because I’m going to head this off before it gets set is if you're billing at a certain rate, is it worth trying to save $20 on hosting? Are you going to spend 5 hours to save 20? And that’s a valid concern, and that’s what you should use budgeting as a decision making of ‘yes, I’m spending a little too much on hosting or on my cellphone, but the time and effort to get stuff changed to be a lower cost, it’s not worth it’.

But another thing is, like Chuck you’re saying, 80 bucks a month, so we’ll just say 960 a year; could you pay someone 2 or 300 bucks to go and move it all for you? It’s actually a project of you have a cost of $300, your return is going to be 660 less in expenses, your ROI is x, y, z. And now you're thinking it’s as a business owner, like ‘how could I get this done without even using my time?’

The other thing that comes up a lot when I talk to people about budgets is that they basically say, ‘yeah, well, I put the numbers in and then it turns out that I have to spend money on something that’s not in the budget’. Do you just amend the budget?

Yeah. And that’s what YNAB and a lot of them say, ‘your budget’ – I’ll make a budget for July which is the month from right now. I’ll make it – that’s a guess – I don’t know what’s going to happen in July and I’m just basically putting money in different pockets. Like I said with my training example is if I need to take some money out of one bucket to put in another because, say, my 50,000 domain names renewed that month. You can do that. You’ve got to adjust something else.

You might get into a situation where you actually spent too much just because of all that. One thing I've found – we actually do this on our personal stuff, and I do it in my business is I set aside a buffer category, and I’m just putting in a hundred dollars into that each month, and it’s just like if stuff just can’t bounce enough, I just take it out of the buffer and put it in there. It’s a nice easy way so you don’t have to throw all the balls up in the air and try to catch them at once. It gives you a bit of a smoothing effect, and if you don’t spend all the money in the buffer or some of your accounts like hosting where it might go up and down like for domain stuff where it’s once a year, you can roll it over. So if you budget to 500, you spent 400, that hundred dollars would go into August. So if you have a lot of stuff coming due in August, you can account for that or two.

And one thing that I should point is in YNAB is if you put money into a category and you don’t spend it, it carries over to the next month. So when Eric’s saying ‘I’m putting a hundred dollars toward it every month’, what he means is that if he doesn’t touch his buffer, then in 12 months, he’s going to have $1,200.

Yeah. And that’s a point that Jesse made during his presentation. A lot of the things that really mess people up with budgeting is these crazy events, like these emergency events, and there are some, like you get hurt, you go to the hospital – that sort of stuff – but people also consider Christmas, or a birthday or, say, the family’s annual summer vacation as emergency events.

But really, you’ve known about it. Your vacation is always in July; you always go to Costa Rica, it always cost you x amount; and so for those kinds of things, like for business taxes, you always have taxes. Your accountant should be giving you how much you need to save and you're going to spend in your estimated taxes. That’s always going to happen.

So what you should do is you should figure out when’s it due, how much do you need to pay, and split it up, so that you can save either a twelfth of it each month for a year, or 1/6 for 6 months or whatever in it as being save that money now. It’s just a little bit of putting money into that special buffer category for taxes. And then when taxes come due, you just clear out the buffer and move on. There's no huge tax bill; you already have the money set aside and earmarked.

Yup.

It works a little differently for us in Israel where we don’t have one annual tax bill, but I’m paying taxes every month. But because they're not basically the number go up and down each month depending on income, and then works out for the whole year. So what’ll happen is in September, my accountant will say, ‘ok, how much do you think you're going to make between now and December 31st’, and then based on that, he can say, ‘well, you should have more expenses, [inaudible] on the income’; the difference is we can do or we’re just going to pay more taxes now so that we shouldn’t have any bad surprises because it’s a bad feeling and it’s bad in general.

Yeah. My accountant – I don’t remember what the US law is, but you have to do, I think, 80% of your estimates from last year unless there's a significant change or something rather – but she basically says it like ‘are you expecting anything really massive changing this next year?’ and I say no. She gives me the estimates, and then I think usually around the 6th month time, and then 9 month and the 11 month, she’ll check back in and basically say, ‘hey, do we need to revise stuff that I have a better year than I expected? Did I have a worse year?’ and so she’ll revise it, and so we end up – close into December, we pretty much know how much we’re going to spend, and if we need to make emergency purchases of a whole much of laptops or iPads or whatever just to play with the tax burden, that’s there.

Yeah. I’m getting this [inaudible] Eric. I’ve had a couple of situations where I got a crazy amount of money paid in advance at the end of a tax year, and my financial advisor would be like, ‘well, if you want to contribute a bunch of money to your [inaudible] – my health savings account, or if you need to buy new laptop equipment or anything like that, then now’s the time to do it because you basically – you almost get it for 30% discount’ and that's the greatest conversation I've had – ‘sweet, I have, for $20,000 to go out and just go on a shopping spree for stuff for work’, but that only happens once a year at the most. But if you're constantly tracking this stuff, then like the coaching story that you’ve told Eric, it’s like you can do that thing throughout the year in a way that feels to me like it would be much more beneficial for your business and not Christmas.

The money isn't there, so it’s not just during that. I've [inaudible] called business mass. Basically, after Christmas before the New Year’s where all businesses just start clearing out as much cash as they can for taxes, but if you set it like I have $2,000 set aside for a laptop, mine can start getting long in the [inaudible] and I can wait and look for ‘ok, Lenovo’s having a huge sale. It’s a Black Friday sale’. I can say, ‘ok, I got the money for it. I’m going to get a new laptop. I’m going to save 40% on that, and it’s going to be a tax right off, so I’m going to get 30% off there, I just got a new laptop for about half the price’.

My accountant actually sends out email toward the end of every calendar year saying, ‘please remember Israeli accounting law says that if you buy something at the end of the year, it’s still only going to – you don’t get the full tax credit at the end of the year. It’s going to be – I don’t know – depreciated over 3 years or something. So it doesn’t matter if you're buying in December or in January’. Clearly, a lot of his clients think that this would work and thus, buy things.

Although, to be honest, a lot of companies, stores with inventory, want to get rid of their inventory so that they don’t have to do the [inaudible] counted and deal with the stocking accounting – whatever they need to do – so they actually give you good sales at the end of the year. So [inaudible] buy things anyway.

Yeah. A lot of this is US specific. It might be – talk to an accountant. My business equipment, it should be depreciated like what you're saying, but I fall under – I think at Section 179, I’m a small enough company, I don’t buy a lot of equipment, so instead of having to write off my laptop, say, $2,000 over 3 years, I can write it off in one year. I take depreciation expenses as an expense.

That’s why you have – it pays to have a really good tax accountant who knows his stuff. I don’t really have that many depreciating assets because I can put a lot of stuff under there. But if you can’t buy any laptop, you can buy books or you can do a lot of other things that are actually real expenses, not like a depreciating where you have to fall under this certain thing. You might even be able to pre-pay for some things depending on your tax [inaudible]. I pre-pay for my phone, throw in a couple hundred dollars into it and I don’t have to pay for my phone bill all of next year, but I get the tax right off for this year.

One other thing that I want to go after here really quickly that I've ran across is some of my expenses go toward multiple things. Just as an example, Mandy who had [inaudible] this podcast – I want to keep track of what I’m spending on the podcast, I want to keep track of what I’m spending for general assistant which is some of the stuff that she does. She’s helped me with RubeRemoteConf and it would be nice to know how much is going toward that, and that means that I have to go through her invoice and split it up. Do you do that kind of thing or am I creating too much work for myself?

I used to do it for – I had – I called it my consulting division, and I had my freelancer training division, and so product income on outside of product expenses, and then consulting income, consulting expenses. It was a headache. [Inaudible] like Drip – email marketing – they're both in it. It’s probably more accurate towards my freelance business, but my consulting one uses it and my consulting one is made of revenues, so it’s an expense through there.

I've got it to now where I really don’t care. I never really did a lot of ‘what’s the expenses of this division?’ and that goes back to the managerial stuff. I was putting in a ton of time, but not making any decisions based on that split up. So when I into YNAB, I just put it all together all in one – I’ll categorize product income as a separate category so it’s different from consulting income but that’s just because I could see the differences of ‘I make this much in products versus consulting’.

Especially in your case, if you have Mandy doing what – 14 podcast now, 14 conferences; splitting that up, I don’t know if there's a lot of benefit in that unless you're looking at selling something; you want to get stuff, pack yourself to sell to an investor or something like that.

Yeah. It also seems to me that it might matter if I really, really care how much of it’s going toward whatever. And selling is one reason why I would care, but it seems like there may be other things that come up that it’s like I really do need to just – I need to send out a report or I feel like I need to be more transparent about this or that or whatever.

Yeah. If you can think of a business decision or a business question that you have that you want to ask your finances and get an answer back from, then yeah, adjust yourself so it supports that. That’s the whole point of it.

I started the SaaS while I can go and actually split its hosting cost and a couple of its cost into different categories; there’s subcategories that is still rolled up. But I did that because I want to see how much the SaaS is burning as far as cash like, ‘ok, it’s burning this much. I need to bring in this many customers’. And eventually, I decided it’s burning – I don’t remember – we’ll say 500 a month, and it’s not bringing in any revenue. It’s not worth it. I’m going to kill off that division or that product and put that $500 to work somewhere else in my business.

Those sorts of things are good. You can use categories for it, or most stuff have a Notes field or a Comments field. You can even make your own internal system and say, ‘this is for the Freelancers’ Show podcast’, and if you can do a search of all your transactions, you can do adhoc reporting too. So you don’t have to go and split things up into 50 different categories. You can just do adhoc, like ‘what is it actually cost to do this sort of thing’.

Yeah. I’m totally convinced that it’s worth putting, personally for me, to put in some – a little bit more effort to, like you said, create that managerial accounting –it is hard to say – on top of the bookkeeping to help me make decisions about what things I should kill, what things I should pour some money on.

But now, the thing in my mind is, alright, if I've already got these numbers in QuickBooks, so should I maybe do an adhoc thing inside QuickBooks like you just described, or should I have a system that’s specifically for the decision-making process stuff where I can just go nuts and – maybe I just download all the information from QuickBooks and I just do pivot tables in Excel – I don’t know. Is YNAB something that I should even be considering as a QuickBooks user? I can’t go off QuickBooks because my bookkeeper uses it.

Honestly, if you can’t go off it, but if you can make it work for you, it’s like with a – the software is software. I like YNAB. It was better than the one I was using and I picked the one I was using because it was better than the one before that. I've used spreadsheet before. So whatever is easy for you to get the data in to figure out what the data actually represents, and then if you have other people, like an accountant or bookkeeper, whatever they can use. I think some of them, you can talk with them and it might be flexible. They might do QuickBooks, but they’d be open to use any different system or whatever.

That’s what I do with my accountant. She’s very much a QuickBooks person, but what I do is I just send her, basically, a report of ‘here’s my profit and loss statement for the period we’re talking about’, and it’s literally just I did a report, I printed it to a PDF, sent her the PDF, and half of the time, in email, I just type in ‘here’s my total income, here’s my total expenses’, and she just does her stuff from there.

If something works for you and it can answer all the questions you want, stick with it; you don’t need to switch. But if you feel like it’s not working for you or personally, I think QuickBooks is overkill and just really a pain in the butt. I would look at switching or trying to find something that would work, and it could be YNAB, it could be Ukash, it could be Less Accounting, it could be anything else.

So would you say that YNAB is specifically geared toward people who are in the kind of business we’re in and that’s why it’s your favorite right now?

YNAB is geared very much for personal finance. It’s geared for – if you have ever heard or done stuff with Dave Ramsey’s system where you have envelopes or whatever, or – envelope system, it comes before Dave Ramsey, but it’s basically software for that. Myself and I think about 4 or 5 people – you actually know some of them, Jonathan – we’ve all started using YNAB recently for business stuff and been loving it because it’s so simple.

I guess it is really like all you're doing is keeping track of what you spent money on and where, and so, like I said, even a spreadsheet can work for that. It’s a pain in the butt to do reports on it but if you're moonlighting or you're doing something just with a day job, you might not even need an accounting system. You can just write it all down. General ledgers were originally just paperbooks paper wrote in.

What’s that? Paperbook? What’s a paperbook? [Laughter]

I’m going to give it a try because you're absolutely right. QuickBooks is like my eyes [inaudible] so bad. As a software developer, even the online version of it is just like – for real, I can’t do this, I can’t do that, I just want to flip these numbers around – oh, I can’t do that. It’s daunting. And it’s well worth the pretty penny I pay people to do the data entry there for me, so if I could have something on the side that either I import data into or if it’s so easy I can just double entry basically – just basically redo their work, then it’s worth trying because I would love to get back to that place where I had my finger on the poles of the finances instead of just trying to have as much money as possible at all times.

Yeah. And this actually – having two books, not in the illegal sense, but having two systems for it is actually common. One of the jobs I worked back in high school – it was a manufacturing company, small business, probably 20, 30 employees; they had their accountant who use QuickBooks and she would come in, I think every quarter, to do their books, but their main accounting was done in this very specialized for their industry system because it had their accounting, it had their supplier stuff, it would let them do job bidding, estimates. It was basically the software that ran their business. So their accounting was in there.

What the accountant would is she would come in, export all that, figure out if there's any stuff in the petty cash or any weird transactions, check everything go off, put everything in QuickBooks, come back, double check everything, and then she would give the CEO and the top managers the actual report of, ‘here’s what it looks like for this year’, whatever. And so they had to do the double-entry. They pay the accountant and do all that extra typing because they got a ton more value out of having that really specialized software over QuickBooks. One of the managers who I worked under, he cussed a lot. He also always cuss into Quickbooks and cuss at all the stuff he was doing and screaming at his accountants and all that. This was the early 2000, so it hasn’t changed much.

So if people want to get started, should they just pick up something like YNAB then?

Yeah, especially if you have even an interest in doing it on your personal. I’m not going to quote the price of YNAB because I don’t remember exactly, but you can buy it and you can use it with however many – I think they're called budgets – you can do however many budgets. We have one copy and I use it for my business and then my personal stuff. It’s a really good software. It’s on Windows, on Mac; it’s sadly not on Linux, but I just remote it into my Mac to do it, and they have iPad and iPhone versions. I don’t know if they have an Android one, but most of the mobile ones is basically built around you're on and about, your shopping you just spent money. How quickly can you punch it in and get it updated into Dropbox so we could sync everywhere. Or you need to see how much – do you have enough money to get groceries in your grocery category, or can you go out to eat? It’s very optimized for the state that you're in with that device versus the desktop one; it’s very much the planning kind of device.

I would recommend it. I've been using it for the business, like I said, for 3 or 4 months, I think. I use it for personal at least a year. I bought it after I heard Jesse talk at MicroConf in 2014. At least a year, maybe close to 18 months, and from the second I got it, I used it. I loved it and my wife loves it too. And she is completely opposite me as far as budgeting, finances and all that. She gets around it and she’s actually logging transactions herself, so it’s actually a good one there.

Oh, it’s 60 bucks and I’m buying it right now. So they should probably send us commissions [chuckles]. It looks great. This is the first point in the conversation that I realized it’s not an online software service. It’s an actual desktop application, or an actual iPhone, Android application. I’m totally doing this right now.

Alright. The other question I really have is looking at this, how do I know – it seems like if I have a question ‘is this worth it?’ or ‘am I spending too much to get this outcome that the budget’s a good tool?’ or the bookkeeping is a good tool or however you want to look at it. The question I have is ‘are there other questions that you should be asking that are just general’ – I guess, is there a default set of questions that you should be asking in addition to your specific business questions?

There's the obvious of ‘are you spending more than you are bringing in?’ That’s bad; that’s called a loss, and your business will probably shut down eventually. I don’t know [crosstalk].

One that’s I think more important for freelancers and stuff is – I don’t know if YNAB does it, but a

cash flow statement where it’s like an income statement of how much you made, how much you spent, but it’s centered around cash, so how much cash did you bring in – literally cash deposited or checks deposited that you can go and spend, and how much did you actually [inaudible]. And the big difference is if you put stuff on a credit card, those expenses don’t show up until you pay off your credit card or if you do work for a client and send them an invoice, that invoice amounts doesn’t get counted as income until it shows up in your bank account. Your business – that’s the idea – your business can have millions of revenue, but it closes because you don’t have enough cash to pay your employees. But for most people, that’s important, but you're going to get that from an income statement and you can watch your bank accounts for that.

One thing that I really hit on myself a lot is I spend a lot on books in training and stuff like that and they don’t actually do it. I don’t have the time to get to them so that’s been a good deciding factor. I set aside a hundred dollars for books this month, but realistically, I have a lot of other books I still need to read. I have books I've already read that I haven’t put the concepts in practice, so maybe I should lower that and actually do something more automated, like I said, where I actually bought coaching, so someone’s going to sit down and tell me what to do and work with me to do something versus just learning something. And I found it was eye opening to see how much I’m spending on domain names and hosting and all that stuff – stuff that doesn’t directly drive revenue for my business, and I've taken steps to reduce that or kill off services.

This isn't for me, but another thing that might be interesting is if you track how much you spend for contractors and started noticing that you're spending a significant amount there, it might be time to think about hiring an actual employee to do the work too, or instead of –.

It also can help. This is something that I've seen that when you hire a contractor, when you hire someone to work for you, you should be really careful that it’s not reducing your income because it could be that they're bringing money but you're spending time managing them.

And so one thing that I do know how to break out of my budgeting, of my income, is ‘how much am I bringing per month, how much is my employee bringing per month’, and I can say, ‘well, is it worth it or is it not worth it?’ For now, it’s definitely worth it; for now, I’m really happy to have them around, but there is a nonzero amount of time that I’m spending each month looking over my shoulder and talking to him and just managing him and dealing with the accounting having to do with him.

Yeah, that makes sense.

When you get into the later stages, a good question that I like to ask is, ‘do I have enough extra income and actual cash in the bank to do some kind of investment’ whether it’s taking time off to build on your product or to write a new book, or even basic stuff like investing myself – take a vacation for a week or two. And I’m actually been really focused on that recently; that’s been a big driving motivating factor is doing a bunch of almost full time client-work for some people right now to build it up so I can take some time off to focus on my next product; maybe take some time off, get some sleep, that sort of thing.

One other thing I'm curious about having now looked at my budget or looked at my ledger – whatever you want to call it – is that – for example, I have payments for my bank account to my American Express, and then I have stuff that comes in and out from PayPal, and so if I put those accounts in there, how do I reconcile them?

If it’s an account you own and you're basically transferring money and you're making a payment, that’s just a transfer. In the accounting, the way it works is it’s just you're keeping it balanced. A hundred dollars from your checking to pay down your credit card is it’s a transfer transaction of money coming in or money going out to what your business controls. It’s like people paying through PayPal, or you paying someone else through PayPal – those are income or expense depending on which way it goes.

Ok. So if I –.

[Crosstalk] where all your checking accounts, savings accounts, PayPal, Union credit cards like American Express, all of those are actual accounts that you put transactions in.

For example, if I pay my American Express, then I should remove those from my bank account, and if I make a payment to somebody through PayPal and it deducts some from my bank account, then I should remove that from my bank account as well and just account it through PayPal?

Yeah. Say, you wrote a check, a piece of paper check which must be [inaudible] doing more from your checking account to a contractor, that would be an expense in your checking account for a hundred dollars categorized as contractors. Say you wrote another check from your checking account to pay your credit card bill – I’m saying checks because you could actually, very clearly, see the flow – your checking to your credit card for a thousand dollars. Because the credit card is still your account, that’s a transfer of a thousand dollars in cash, so that would be – I think it’s a debit in accounting – I don’t remember. That’s a thousand dollars that leaves your checking account, but it goes into your Am Ex account, and so that’s an internal transaction; it’s not actually categorized, but you’d have the transaction show up in both of the accounts because it’s money flowing.

Oh, I just don’t put a category on it?

Yeah, and YNAB does this for you. I actually say category; not recommend it. You don’t do that. You could – in theory, you could transfer money between checkings, savings, and credit card, or checkings, savings, and PayPal. You could transfer money between all of those all day long and do all that; those don’t actually generate you any kind of expenses; it’s just money moving around. You're almost money laundering, in a way. That’s the way you look at it. If it’s someone pays you in PayPal, that’s income in PayPal; you take that extra income and put it into your checking account.

That’s just a tran – yeah.

But to Chuck’s point, PayPal is actually really, really hard to deal with accounting-wise from a mental standpoint because I use it to take in a lot of one-off payments, so I use PayPal. But I also use it to pay for junkie little things on the internet sometimes. So what ends up happening is I’ll have this recurring donations I give to a podcast or something, and my PayPal account will be empty. I try and keep it empty, but occasionally, there’ll be a few bucks in it. So what ends up happening is this recurring fee for 3 dollars and 99 cents would go to this podcast that I support on a monthly basis, there's no money in PayPal, so it transfers money from my bank account automatically; it pays for it, or worse is there’s a dollar in my PayPal account, so a dollar comes out of PayPal, 2.99 comes out of my checking account. And then at the end of the month, there's a $30 PayPal fee because I have a business PayPal. It gets super confusing.

Oh, god.

Let me tell you I've got it figured out for me and it works relatively well. The $30 PayPal fee because you have a business account is just an expense. Maybe the category is software or whatever. What I do is if I have – say, I buy something; I buy a book for 10 bucks and I use PayPal. I put it into my PayPal account as ‘bought a book from Jonathan’, it goes into the reference material category for 10 bucks. And all of a sudden, PayPal is negative 10 because I sent money out, but that’s it. A PayPal behind the scene, like you said, actually goes and connects to your bank account to fund it. So then I make a second transaction – and I just call mine PayPal charge, and that is a transfer from my checking into PayPal. And since the transfer doesn’t get categorized, that $10 going into PayPal zeroes it out. And then what I do is every week, I put all those in and then it’s a pain in the butt just because of how PayPal is, but if I have extra money in there, what I’ll do is I’ll transfer everything out of PayPal and clear it out. And that’s, once again, a transfer, but it’s just the other way – money out of PayPal into checking.

Yeah. In QuickBooks, I actually have a pay E called – they're both [inaudible] from PayPal. I have – it’s almost like a fake customer or a fake vendor where I pay – and it’s called PayPal transfer to bank account or pay – bank account transfer to PayPal, which is why people like us or software developers can’t stand QuickBooks because it doesn’t make any sense. It forces you to do workarounds.

QuickBooks, they have made it visible, but that’s double-entry bookkeeping in general. To keep everything balanced, you have to have those transactions in there. [Crosstalk]

I'm not sure I completely –.

The terminology is so confusing, though.

I’m not sure I completely followed what you do there then. I have all these PayPal transactions that show up in my bank account, so do I just remove them and put a transfer in instead?

Ok. So when it shows up in your bank account – PayPal, when they pull money out for, say, for Jonathan’s book, they change the memo so your bank will say ‘PayPal Jonathan’, Mobile Awesomeness is the title – that is the transfer transaction. That’s the second transaction you put in. So I’ll just mark it as clear to that point. You don’t re-categorize it in your checking because if you do a second category, you have $10 in books in PayPal and then another $10 in checking for books, and so you would be double accounting for it.

In YNAB, I don’t assign it a category, and then what do I do with it?

Say, you assign a category once in PayPal, and then the transfer from checking or from – I use my credit card for either of those into PayPal; that’s a transfer. That’s actually – there's no category.

It’s showing up as a transaction which it is on my checking account. And then it’s warning me ‘you need a category’.

In which you do for that case because I did this too. Because YNAB doesn’t understand that that is a link to this other account yet, you need to go on and say ‘this is categorized as a transfer to PayPal’, and then it will do it and you might have to clear up some doubles because it might double stuff up for you, but it took me, I think, under an hour to do all that and it actually – it looks pretty sane once you have it all done.

Another thing I do is I don’t keep track of PayPal fees. Someone pays me 20 bucks with PayPal, it takes the $2 fee, I put it as 18. I get sick of having these little sense in getting ‘oh, I can’t get this split transaction’. I put in the net to me because that’s how Stripe works. Stripe doesn’t give me the full amount and then take money away from me. They just give me what I’m netting. That’s actually made a huge, huge time saving this year long.

Yeah, that’s a major problem with PayPal for me accounting-wise is that it makes reconciliation impossible.

Yeah. In theory, you might want to look at that and be like, ‘ok, well, PayPal fees are higher. I’m going to go look around’, but I found myself – I've never asked myself that business question, and the cost of putting in all the PayPal fees was too high, so that’s where I actually change it based on the date I had in my previous accounting system.

So if I do – sometimes I’ll do a transaction for 5 or $10,000 through PayPal so the fee is significant, so I have to actually deal with it.

And you can do that. What I've done for my book sales and stuff like that, I don’t put in every book sale; I put in what’s sold this week, and in the notes I’ll say, ‘from this date to this date’, and so instead of saying a 39, 49, 39, 49, 49, and all the fees associated and all the transfers in the bank account, I’ll just say, ‘book sales for this week: $420’ or whatever.

That was one of it for me – the nice things of moving from DPD [inaudible] to Gumroad because DPD was sending me a PayPal transfer for every single book. And so I needed to account for every single one, and then this question of ‘well, is it coming from the person, is it coming from PayPal’, and I work something with my accountant, but Gumroad just sends me every 2 weeks a block of ‘hey, here’s your income from the last 2 weeks’. I’m sure they're not doing it out of altruism, but they're doing it because they got some discount on block transfers or book transfers every 2 weeks, but it’s definitely made it easier for me in that sense.

I still need to give my accountant – basically, I treat it like another account, and so I give my accountant, every month along with my bank statements, I give them my PayPal statement of what transfers I've done over the last month.

Alright. Well, I don’t know if I have any other question. I think you pretty well sold – at least, you sold me on doing a budget, Eric.

Like I said earlier, all I want to see if this is hard or complex, you can pay a bookkeeper to settle all of this stuff up or to do it, or just sit down if he can train you. It’s a skill; like anything else, you can learn it. And it might be a headache of doing the financial accounting part of it might just be too much, and you just say, ‘I’d rather just pay someone $200 a month to give me the report’, but I think taking the time to look it over and do the management – it can be called management accounting – to do ‘what is this actually my business wants to do? Is this cutting – if my finance is helping me go where I want to take my business or other opportunities I have’ – that sort of thing – that’s something I think everyone needs to do. Whoever prepares it, you need to do that as the business owner.

Yeah. It makes a lot of sense.

Alright. Well, let’s go ahead and do some picks. Jonathan, you want to start us off with picks?

Sure. I just have one this week. It’s an update pick. We had Philip Morgan on the show – I don’t know if it’s – it’s probably gone live by now, and he wrote The Positioning Manual. This week, he released the epub and .mobi versions of The Positioning Manual also with the updated content.

So this book, The Positioning Manual for Technical Firms, is my number one must-read book on my reading list for coaching students. It’s the workbook for the first month of work that we do together. It’s the best business book I've ever read in the last year, and if people are big Kindle fans, or they like to read books on their phones, and they were putting off the perks because it was only available as PDF, now you can finally get it on your phone in a way that is like [inaudible] your Kindle application on your Kindle in a way that it’s pretty convenient. So that’s my pick.

Alright. Reuven, do you have some picks for us?

I've mentioned a few times in the past in the podcast about a podcast called Econtalk which is just a weekly long interview – an hour and a half –Russ Roberts I think is his name. He’s an economist who interviews different interesting people, both academics and people in business.

The latest edition as of a recording now of Econtalk is with a journalist Adam Davidson who works for NPR and the New York Times magazine. And he’s been doing a lot of investigation into different ways that people work. He's done a lot of work at factories and what factory jobs are like nowadays and how they're different and how the American and world economies have changed a lot. And he recently was an advisor to a movie that’s being made about Michael – what’s his name – Michael Lewis’ book The Big Short. And so he talks about, in this latest episode, how work is more becoming like Hollywood where everyone is becoming a short-term contractor. Everyone is getting the business signals of ‘is their work more important, less important, happening, not happening; what do they need to change in their skills’ and it sounded a heck of a lot like the sort of work that consultants do.

In fact, we talk a lot here about how important it is to specialize. Last week, we spoke a lot with Philip Morgan about how important it is to specialize. And he said that he was speaking to the makeup people on the movie, and the makeup person was saying, ‘well, you know, it’s the subspecialty in makeup to do zombie makeup’. And for a long time, that was a really small subspecialty that no one really cared about, but now, with all the zombie movies, people specialize in zombie makeup is like – they're hugely in demand. And so it turns out specializing is not just something for computer consultants.

Anyway, it was a very interesting, very entertaining interview, and I think it’s definitely useful for people who are freelancing to hear what he has to say.

Alright. Eric, what are your picks?

My pick is – it’s a post on [inaudible] on pitching. It’s 5 Reasons You Should Offer Guarantees. Actually, I caught this from Philip Morgan on Twitter last week; started reading through it, and Blair actually makes some good cases where having what he calls a satisfaction guarantee that I’m actually considering putting into my business. I haven’t forgot the details yet; I've literally been too busy, but it’s very interesting and I think it might be a good way to differentiate myself as far as against other consultants. Although I’m picking it, I don’t want you to follow this advice if you're a competitor of mine.

[Chuckles] Alright, well, I just want to give a shout-out to YNAB. I know we've talked about it on the show, but it is a pretty awesome program. I’m also going to pick a few podcast. I’m not sure if I picked it on the show before, but Serial is awesome. I think it got mentioned a little earlier as a podcast. And then one other one that’s one of my favorites, and I know this has been picked; it’s Startups For the Rest of Us.

And then, I got to set a Bluetooth bone conduction headphones, and they're really awesome. I’m trying to remember what their AfterShokz – AfterShokzBluez 2 – but I’m really enjoying those as well. They sound great and they're awesome. So those are my picks.

And I guess with that, we’ll wrap up. Catch you everyone next week.