Take 25% of every dollar and put it into a separate savings account for your taxes.
It’s good advice right?
But how do you know whether 25% is enough (or way too much)?
Honestly, it’s a tricky thing to figure out especially when you have no real idea of what your income is going to be in the coming year.
I don’t know how much you should be saving… but here are few ways to think about it:
1. Use last year as a guide
A good place to start is with what you already know. Look at your tax return and find the number that shows you what your gross business earnings were last year. Be careful not to pick the ‘net income’ number or even the ‘taxable income’ number. Those are your business earnings after a bunch of deductions are taken off.
Instead, find the gross business earnings which is the total amount of money you made last year.
Now, find the amount of tax you owed.
Divide the amount of tax you owed by the gross business earnings and you’ll get a good working percentage.
The question then becomes: is it reasonable to think that this year will be like last year?
2. Harness the power of your fear to oversave for your taxes
I’m a big fan of fear savings. I use my terror of the Canada Revenue Agency to pick a percent that I know will be more than I need. The nice thing about that is that at tax time I get to give myself a refund. Yay!
It’s a great thing to do IF you can afford it, but of course for lots of you … that’s not possible.
3. Think through your upcoming year and play around with a tax calculator
If past numbers aren’t a good guide for you, sit down and think through your income goals for the year (or map out your income with THIS TOOL). If you don’t have any income goals… now’s a great time to play around with them.
This doesn’t have to look fancy. Just open up a TAX CALCULATOR and punch in numbers to see what kind of tax you might owe. It’s a good way to get a rough idea of what a good percentage is for you.
4. Set Milestones and times of year to check in
The truth for lots of us is that the year is a giant question mark. We could scrape by with the bare minimum or get a windfall of work and make more than we ever have before.
The best method to manage that kind of variability is to make a plan… and then check in periodicially to see if you’re still on track.
Let’s say in January you decide that 20% is more than enough to cover your taxes for the year. Mark your calendar in April, July and October to check in and make sure that this still work. Track your income and use that TAX CALC again to see if you’re still putting away enough.
Remember this finance stuff isn’t a ‘one size fits all’ situation.
Your life is variable, and so your finances are going to have to stay flexible to keep up. The game changer is staying ahead of those changes instead of looking in the rear view mirror and knowing exactly what you ’should have done’.
The important thing is that we practice our technique. That we practise setting aside some amount and check in often to make sure that we’re on track.
You’ve got this!!
Want to start getting control of your money? How can I help?
Financial Planner/Opera Singer
Money never came naturally to me. In fact... I was a bit of a disaster. I remember (very clearly) what it feels like to be 'financially out of control'.
And honestly, I still get stressed about money... that doesn't stop... the difference is that now I have the tools to deal with that stress.
And those tools are what's made it possible for me to build a life full of the things I want: art, creativity, travel, family and more.