Back for another check-in on my finances! Prepare yourself — this entry comes with a startling revelation! (Dun, dun, DUN!)
Change: $1,561 or +4.86%
A nice continuous climb for that little line! If you look at the chart, you may notice that it’s up into the area that was the first “fall” in the chart back in 2007, when I went back to school and started taking out student loans again. But, this is where the “startling revelation” comes in…
The growth on this chart is a lie. Or, an exaggeration, anyway. And I call this a startling revelation because it really did take me by surprise, as well. It’s something I knew about, but completely underestimated until I looked at the numbers this month.
You see, I’ve been counting in my net worth the money I’ve been putting aside for taxes. As a freelancer and independent contractor, my taxes and Social Security tax payments are not withheld by an employer — I have to put them aside myself and pay it at tax time. I do pay “estimated quarterly taxes,” each quarter, but by my calculations, that amount is much lower than what I’ll really owe come tax day. I won’t be penalized because I’ve been making my quarterly payments, but… I will have to hand over a significant chunk of change.
So this chart’s growth is inflated because of the savings account I have specifically for tax savings. Which leads us to an excellent question: why did I ever include that savings account in these monthly calculations at all?
Good question. I don’t really know. I guess I thought that it wouldn’t be as big of an impact as it was. I didn’t expect to be working as a freelancer and independent contractor for so long. It was really just an oversight. However, it’s not completely wrong — after all, once I make the big payment in March or so, my net worth will drop down to what it’s supposed to be. It will all adjust at that time.
And as soon as it does adjust? At that time, if I’m still getting income from a non-W2-source, I’ll cut that savings account out of the calculation entirely.
Just be prepared for the big drop in six months or so. Believe me, I’m getting prepared for that, myself.
If you have any questions about my net worth or how it is calculated, feel free to ask them in the comments. Also, if you’d like to see how I stack up against other personal finance bloggers, be sure to check out The Wealthy Blogger List. (Spoiler alert: the name of my site is highly accurate.)
To calculate Net Worth accurately, you should have a bunch of “liabilities” accounts which balance your assets. I guess you already have some of them to include debt in the calculation. One can be add to account for future tax payments. Since the payment is not actually due but it is far in the future, it shouldn’t count at full but at a discounted rate (it’s like calculating a Net Present Value).
I use gnucash as a personal accounting software and it won’t discount future payments but count them in full, however it is a pretty good at give me the overall picture on my finances.
That’s a really good idea, Giorgio! If I had a tax liability in the liabilities column, things would be much more accurate. Again, I think it’s a little late to start (and possibly artificially drop my net worth before filing my taxes and see what the true liability will be), but it’s definitely an idea for next year!
Great idea Giorgio, must keep better account of my taxes, rather pay it as I go because it makes you feel well of having it saved and very painful to then give all your savings away!
There is nothing wrong being a freelancer or an independent contractor as long as you are doing it the right way. From what you are saying, you are still planning to pay taxes even though you have the option not to since the government does not see your income.
Well, the government does see my income, for one thing: any contract where you earn more than $600 is supposed to issue you a 1099-MISC tax form, filed with the IRS. (Mine all do.) I also put all of income on my tax form whether the government sees it via 1099 anyway, as is required by law. Not to get too preachy, of course, but seriously people – don’t try to hide money from the government. Pay your taxes, use legal, ethical tax avoidance such a deductions (not evasions!) where appropriate, and live a happier life not ducking from the IRS.
I mostly agree with Giorgio with one exception. Quarterly tax payment is a current liability and shouldn’t be discounted.
Every month, you should credit income tax expense and debit tax payable.
Hey Stephanie,
You will avoid a tax penalty if your total tax liability is below $1000 at the end of the year (after you applied your estimated tax payments).
If freelancing is your primary income you should consider creating an S-corporation or LLC to avoid paying Social Security taxes. (15.3%)
Hi The Tax Guy.
You’ve got me curious. When you say that an LLC can help save on Social Security taxes, are you referring to an LLC taxed as an S-corp? Or is there something I’m missing here?
I second the same question as Mike.
Seems like your net worth is growing. Good job.
Adjustment aside, you still have a sweet upward curve in the graph. You’re obviously doing something right.
Keep up the good work and I’m excited to see your next update which I think is pretty soon?
I believe it’s just a little past due to begin (and perhaps unnaturally decrease my personal internet really worth prior to submitting my personal taxation’s and find out exactly what the real legal responsibility is going to be), however it’s certainly a concept with regard to following 12 months!
I am thinking of doing a LLC cause saving money on taxes can really help a lot.
This is a good old post. I have to agree with Giorgio on taking it as a whole.
I too agree with Giorgio , great post.
Hi Stephanie,
Just found your post, and although it is a bit old now, I hope that the trend continues upwards 😉
Generally speaking, you can not omit ‘liabilities’ in the calculation of ‘net-worth’, but it all depends on what you consider to be your accounting period!
People who have for instance an outstanding $325,000,- mortgage but $20,000 saved in the bank generally do not walk around feeling that their ‘net worth’ is $305,000 in the red. As I said it all depends on your perspective and time horizon.
A more sensible approach is using ‘cash flow forecasts’ which will give you a projection of net worth situations both now and into the future. You can se a simplified example here (although it is a pension forecast the principles are the same):
Cash Flow Simulation
Anyway, nice idea with this blog, and I wish you success in the future.