What will your dream life cost you?
Okay so let’s talk about what it means to reverse engineer your income. When we sit down and really look at what it would cost to live the life you’d like to live it’s important to really look at the costs.
Have you ever looked at what it would cost you if you had to do ALL the maintenance things your car requires in one year? Do you have that amount in an account ready to go at a moments notice?
Have you priced out what that dream vacation to hawaii or europe will cost you? That’s your first step. Figure out what it’s going to cost you and set a goal for when you would like to take that vacation.
Once you have all of those items now it’s time to take care of the day to day…rent, mortgage, car payment of that car you’ve been drooling over for years. The cost of that house you really want in the neighborhood you’ve been driving lazily through on the weekends just to see the lovely homes and great landscaping.
Now get that all added up and figure up what you need to earn per week, per month, and per year.
We now want to look at the cost to run your business each and every week, month, and year.
Don’t forget that you can write off a home office space and that portion of your utilities as well.
If you use your car for things related to your business make sure you calculate out how much and then add those vehicle expenses (including maintenance costs) to your business budget.
Next we want to find the totals for all of your business expenses including those mentioned above.
Pro-Hack: On this spreadsheet group the expenses that are JUST for your business in one section and those that are for your home office in another. This will come in handy later.
Pulling it all together
On either of the spreadsheets you will create a section with your totals. Make sure you are taking into account those expenses you pulled together for your business that are also home expenses. For instance if the total for your vehicle expenses, office space, and utilities is $800 per month we need to adjust the total needed on the personal side to account for that $800 business expense (by subtracting it on the personal side). Otherwise you’re going to inflate the total needed by $800.
Once you have the number you will need to account for taxes. There are so many tax calculators online for self-employed people. Click here to find one such tool. Make sure that whatever tax calculator you’re using includes both state and federal income tax or that you account for that.
For instance when I used the tool above and I used a hypothetical income of $50,000 gross after business expenses it calculated my total owed at $7065 but that didn’t include the state income tax. We have a flat tax rate of 4.95% in Utah which would make my state income tax responsibility $2475. My total tax responsibility in this scenario is $9540. Which means my total tax rate at this income level is about 19%. Yours may be different based on your state income tax rate and your income level.
Honestly, asking your tax professional to help you with this IS your best bet but those calculators can give you a rough estimate. In the meantime, this article from nerdwallet can give you a little bit more information. If you have an LLC those calculators may or may not help you. It just depends how you are getting paid in your business.
So once you know your estimated income tax amount you’re going to set up a calculation.
Your gross income – taxes – business expenses = net personal income.