People always ask:

“I’m starting to save, and it’s beginning to hurt. How do I save without feeling like I’m saving?”

At first glance, you might think: What kind of fool question is that?

But I am not guilty to admit that I thought the exact same thing when I first started!!!

When I first started budgeting and thinking about my money, I felt like saving was being in a horrible mental prison.

“I am making all of this money, 70% of it is going to debt each paycheque, WHY THE HECK DO I NEED TO SAVE THE REST? ARRRRRRRGH!”

It was torturous to see my money disappear so quickly towards debt, and then to know I had to spend another 30% of it in bills and a small, small bit of it on fun.

I didn’t see the point. I felt angry. I wanted to go on shopping binges.

I wanted to do MORE. Buy more. More of everything.

I felt like life was not fair, why didn’t I learn about money sooner, blabbedy bla bla….

*cue the waterworks and the pity-me princess routine*

After I got over myself, I realized that my focus on money, debt and saving was very negative.

So how do I do it now without throwing a mental temper tantrum at life?

My Secret: Change your focus

I needed to change what I was doing from being negative (crying about deprivation of money and stuff), to being positive.

I am doing what  I did before (actually, MUCH more), and I’m happy doing it…(which is something I never thought I’d say).

I can still buy anything I want

I tell myself all the time:

You COULD buy that if you wanted to.

But do you? Really?

Is it going to improve your life significantly?

Or do you just want it as an impulse purchase?

Think about the precious space it’ll take up in your suitcases when you move — is it worth the space & weight?

99% of the time, it’s just my inner repressed shopaholic lusting after something shiny and new, but then my saver personality takes over and is way more practical.

So yeah. I can truly buy anything I want if I set my mind to it.

I just CHOOSE not to, which is very different from not being able to.

…and saving money is the happy result!

My #1 priority is not to buy things to clutter up my life and physically tie me down anywhere (hence the aversion to home ownership), or otherwise known as “minimalism”.

I choose not to buy.

I don’t buy what I don’t need or really, really, really want.

Since I don’t buy anything I don’t want, I save the money.

And the more I save, and the more I realize how unnecessary STUFF is to make me truly happy, the happier I get thinking about and using what I already own.

It sounds so New Age-y and strange to get happier over time, but it’s true.

My top 3 happy (PG-13) buttons:

1. Great, stimulating & fun conversation (BF, Friends, Bloggers, Socializing in general)
2. Delicious food – it’s seriously orgasmic when it’s done right. Totally makes my day.
3. A really great night’s sleep

So, what are your triggers to save? Are you happy to be doing it?

I thought it’d be a fun exercise to do a comparison between working for a company and working for yourself.

Salary:

The general rule of thumb is that you work for yourself if you can make more money — at least increasing your salary by 50%.

So if you normally earned $50,000 before, you should be able to earn at least $75,000 if you go out on your own.

That extra $25,000 is to cover retirement, healthcare and whatever else you have to deal with that a company would handle otherwise.

If it’s for the same amount of money, I don’t really see the point unless you really hate being under someone else’s thumb.

From my perspective:

They used to charge $150 – $180/hour for my services.

I cut out the middleman, and went from earning $30/hour (my employee salary) to $90-$130/hour.

I make more money, and I charge the client less.

Time:

In a lot of cases, you work MORE because you have to do your job and also do all the other tasks in the company like handling the books, reading contracts and dealing with the client directly.

If you run your own business you have to handle everything from vendors to customers to your own employees.

But it’s fulfilling in the sense that you know it’s directly affecting you and your earnings, so you are more motivated to do the work happily.

From my perspective:

It is the total opposite for me.

I actually work less now, than I ever did with a consulting company.

The reason being that I used to work 50-60 hours a week with a consulting company, but was only paid for 40.

I was working all that over time for free, PLUS filling out all those performance tracking and project review debriefings, all of which took

Now, I work no more than what I am allowed to bill, which ranges from 36 – 40 hours a week.

Over time has to be approved directly by the client, or I don’t do it.

And if you don’t want to go on a project that makes you travel a lot, you can say “No, I’m not going.”

With a company, you don’t have a choice.

Healthcare:

Have to cover your own, or get your own private insurance plan.

From my perspective:

Doesn’t really apply to me as I live in Canada. My out-of-pocket expenses are around $600/year which include seeing the dentist twice, and buying prescription pills.

I am actually saving money, because I wasn’t even taking full advantage of the company plan to begin with.

Retirement:

Have to handle it all on your own, but this was sort of what I did before as well — contributed to a retirement plan AND saved on the side.

Office Supplies:

Have to handle it all on your own, but you don’t need much if it’s just you.

And you can buy exactly what you want, instead of bitching about what they bought!

Resources:

You’re the only resource, but there’s an informal network of other freelancers who are more than willing to help you out.

Paperwork, Taxes and Deductions:

Lots of paperwork to deal with for your company is the downside, but now:

• you have control over what is being spent and what isn’t
• you don’t have to deal with someone to approve any purchases
• you benefit directly from the tax breaks, rather than the company taking them

When your laptop dies, you don’t have to ask anyone for approval to get a new one (and by new, I mean refurbished).

So if my laptop dies, I just buy another one under the company.

19% Flat Rate

I think it’s a BONUS that I only pay 19% as a flat rate in taxes for my small corporation’s earnings.

My company can earn up to $500,000 before being charged more, but under $500,000, it’s considered to be a small business.

If I were to earn that kind of money through a company, I’d be paying at least 40% in taxes.

$20,000 in dividends each year

I take the money out as dividends each year, to a maximum of $20,000 (it’s all I need anyway), and as a result, I don’t pay exorbitant personal income taxes.

$20,000 might not seem like a lot, considering that in 2009 I spent around $30,000… however, I also have some of my living expenses written off under the company.

No sales taxes paid & expenses are deducted from gross taxable income

If I buy something for the company, I don’t pay the sales tax AND it’s an expense before taxes for my company, so I save on the income tax as well.

Check out the comparison chart:

Let’s assume I buy a $100 item:

As an individual, I’d pay $113 with 13% sales tax, but under my corporation (if it’s a legitimate expense), I pay $81.

Naturally, I can’t buy anything not related to consulting, so a new wardrobe, or anything that is not used for business, cannot be claimed.

This is also not an excuse to go on a spending spree because of the savings, because you are still spending the company’s money, which is eventually YOUR money and what you buy is not “free”, it’s just cheaper.

This is also the reason why I bought a used minivan instead of a fancy new car for the company.

THE DOWNSIDES

• Fairly risky: may not work for large parts of the year (hello 2009?)
• May have to travel a lot and/or cover expenses which lowers my earnings
• No paid vacation, sick days or leave — it affects your income directly
• Managing myself & the client’s expectations
• Have to do all the work of a company by myself on my off time, for example:

• • Filing taxes and other statements quarterly
  • Bookkeeping — My budgeting spreadsheet comes in handy here
  • Analyzing my cash flow and expected income
  • Invoicing and Accounts Receivables — Making sure I get paid
  • Scheduling — If I travel, I need to make sure I am on top of the bookings

——————————————————————————

So I hope I’ve given a brief but comprehensive Pros and Cons list of both: working for a company or for yourself.

Personally, it’s a much better and easier deal to be a freelancer than to work for a company, especially as an IT consultant who works on projects rather than really being an employee.

I thought it’d be a fun exercise to do a comparison between working for a company and working for yourself.

Salary:

It’s steady income, and you can expect a paycheque deposited into your account bi-weekly like clockwork.

Time:

Sure, you may work some overtime here and there, but for the most part your workweek is pretty good.

35 – 40 hours a week, and you even get paid leave in some cases, like sick days, paid vacation, personal days, or whatever your company might offer.

In consulting, if you don’t have a project, then you’re “benched”, otherwise lovingly referred to as “beached”.. meaning that you sit at home and wait for the next project, but you’re paid to do so.

Healthcare:

Usually covered by your employer, giving you a whole range of great benefits that you otherwise may not have had the cash to pay for.

This I hear, is especially helpful if you live in the States, but not so much in Canada, as we are under the universal healthcare plan.

Retirement:

Again, an employer sometimes generously offers a 100% match!

Which means whatever you put into the retirement plan, they’ll match up to a certain percentage.

If you put in 3% of your salary, they give you 3% — it’s free money and a great perk of working for a company.

Office Supplies:

Need a pen? Paper? Huge industrial photocopier? Scanner? Huge projector? For the most part, everything is available at your fingertips, and if it isn’t, you can request it.

You don’t have to worry about having an office to work at, a good desk, a locked cabinet, buying your own computer or having a chair to sit in.

Resources:

Lots of people around you to pick the brains of, and you can lean and ask for help from anyone in your department. At least, in theory.

Paperwork, Taxes and Deductions:

Automatically taken off your paycheque.

You don’t have to worry about contributing to any of it, the company has everything set up automatically, and they just deliver a summary to you at the end of the year, which makes your taxes super simple.

If you need to change something, you just call HR.

You don’t have to deal with any of the nuances of being self-employed — you get your expenses reimbursed in full with (barely) any questions asked.

THE DOWNSIDES

• Having to work overtime for free (in most cases)
• Lots of seemingly redundant & unnecessary paperwork for performance reviews
• Never having autonomy to do what you want without deferring to your manager
• Office politics are pettier, because you’re all employees jostling for raises
• Not getting reimbursed or paid on time

BF and I have been (and still are) discussing our future retirement plans.

How did this all come about? Innocently one day, as we were petting unicorns and singing Kum-ba-yah…

Okay. Seriously, he was hyperventilating slightly about making sure we have enough for when we retire, and not only that — to retire early to boot!

This freak out came about one night when he started reading an article on how less than 19% of Canadians have saved over $250,000 for their retirement, which in his world, is his MINIMUM level for retirement savings.

About 30% haven’t saved more than $25,000.

*BF starts hyperventilating with visions of cat food dancing through his head*

And the discussion began.

Factors to consider:

• Not going to retire in North America so cost of living in retirement will be lower
• May actually have family home(s) available in Europe to buy in full or rent at low cost
• If not, will probably stay renters for life — we’re not really interesting in owning homes
• Each of us will fairly contribute 50% to the retirement egg*

*Some people don’t find this fair, and want to base it on income %.

I agree if that works for you, like if one is earning $20k to someone’s $100k.

But we don’t have a high differential in our incomes, it’s all over $100k for each of us if we both manage to score contracts for a good part of the year.

Questions to ask when planning for retirement:

After you calm down your hyperventilating partner…..

1. At what age do you want to retire?
2. How much do you need to retire? (What are your plans?)
3. How long are we planning for as a lifespan?

Canadian Retirement Notes:

TFSA = Tax Free Savings Account (like a ROTH IRA? Someone correct me please.)
No tax break given now, more like a savings account, but you can save up to $5000/year under this plan and not pay any taxes on the profits.

RRSP = Registered Retirement Savings Plan (like a 401k I think)
Given a tax break on your income now, but you will pay the taxes later when you withdraw the dough.

Canadians, read here about the difference between the two.

#1 — AT WHAT AGE DO WE WANT TO RETIRE?

That’s always the #1 question in retirement planning: when do you want to call it a day?

He’d like to retire at around 50, perhaps 55.

Me, I always thought I’d work until 65, and have 40 years to save.

I am not really convinced I will (or want to) retire early, but I think to be on the safe side, I want to be uber conservative and plan for the big picture.

Put on top of that the fact that he’s also 10+ years older than me, and if he retires at 50, I’m going to have to retire at 40 to keep pace!

That is, if I want to, which I am not convinced of at the moment because I feel it’s too young.

Nevertheless, this is a good exercise for both of us to consider.

Still, I never say never.

Early retirement also poses another problem: I cannot withdraw anything from my RRSP until I am 65.

Therefore, if I retire at 50, I need to bank 15 years worth of cash and TFSAs to live, before I can release and draw upon my retirement funds.

#2 — HOW MUCH DO WE NEED TO RETIRE?

I am not taking Canada’s government pension plan into account here, because I am not expecting more than $300 a month from it, and that can just be a bonus to supplement my own personal plan.

So…. I always thought it was 75% of your salary, and in the good ol’ days, I could count on $60,000 a year.

That meant that I was aiming to be able to withdraw and spend at least $45,000 gross.

But then BF made a good point: right now, we kind of already live like pensioners (which we’re enjoying by the way, not doing as punishment or out of an OCD need to save).

We spend about $20,000 – $30,000 a year on net expenses which includes traveling, fun stuff like entertainment, renting a place, and splitting everything in half.

In total, $40,000 – $60,000 together as a couple.

So let’s just assume what we’re spending now is generally what we’d spend when we’re retired, around $20,000 each if we’re traveling a bit and sharing in the expenses 50/50.

BF: But I wanted to upgrade our lifestyle!

Me: Upgrade? By buying a fighter jet? Eating foie gras daily? What are we upgrading on?

BF: Well.. I mean what are we going to do when we’re retired? I wanted to travel more.

Me: I wasn’t planning on sitting around at home staring at each other 24/7! Of course we’re going to travel. How much more did you want to travel?

BF: Like take a month off. It’s going to cost around $4000 just for a trip for a month.

Me: But we’re not spending $4000 every month on a trip in your upgrade scenario right? We already do that on our current budget.

BF: True. Maybe we just stick to our monthly budget and travel more by traveling on the cheap to cities around where we’re retired.

Note: What about having those rug rats?

We are not taking kids or a family into account here, because I am assuming that my future offspring will NOT need to support me and vice versa.

This is just retirement planning for the two of us, not the whole family, and we are going to make more than $30,000 a year each on average, to be able to pay all the extra expenses that will eventually come with having a family.

#3 — HOW LONG DO WE PLAN ON LIVING?

Well, taking statistics into hand, women live longer than men and I am 10+ years younger than BF.

Chances are, I am going to need a lot more money saved than he does.

On the bright side, I also have 10+ extra years to save and plan for this eventuality.

If we retire early, let’s say BF at 60 and me at 50. I should expect to live until 90 based on my current lifestyle and family history.

That means I have to have enough banked for 40 years.

BF is probably going to live unusually long for a man, until at least 80 with his family history and current lifestyle.

He needs to bank 20 years of savings, and I think he’s already got that more than covered from what I gather.

He’s just being a worrywart.

With all that in mind….

HERE ARE MY CALCULATIONS

With my handy dandy retirement calculator in my budgeting sheet, have come up with these numbers:

Notes:

• Rate of Return: 5% — very, VERY conservative
• Years to live: 40 because I am retiring at 50, living until 90 as my best case scenario)
• Years I have to save: 23

I need to save at least $1600/month at least which is $19,200 a year.

Still, if I can save more, I’m going to do it.

But.. DAMN!!

MY ORIGINAL PLAN VERSUS MY NEW PLAN

Originally, I wanted to save about $1000 a month, or $12,000/year, but I was also assuming I had 40 years to save! Not the hypothetical 23 years.

I did not foresee NOT working for all of 2009, so I had no fresh income coming in.

That being said, I still managed to sock aside these amounts from my savings:

$5000 = TFSA 2009
$3553 = RRSP
Total: $8553

For me, it was a pretty good showing, albeit pitiful in comparison to my original goal.

Since I need to start ramping up on the savings just to get to my comfort zone, I need to make a new plan:

$5000 = TFSA 2010
$5200 = Cash & Equivalents*
$9000 = RRSP**

$19,200 to be saved

* Cash: I need this to be my hefty emergency fund as well in case I run into a repeat of 2009 with $0 in income.

** RRSP: I don’t actually know the exact amount as my taxes aren’t filed yet, but ballparking it, I think that’s what I will be allowed next year. Hopefully more.

STEP #1: ALLOCATING THE $20,000 DIVIDENDS

I need to make sure I keep enough cash flow in the business to operate as well as enough cash in my emergency fund.

I can’t put everything into retirement accounts that I cannot touch until I’m 65.

I need large amounts of money saved because I’m a freelancer without a steady cheque.

$5000 = TFSA 2010 in full
$12,000 = Cash & Equivalents saved in full*
$3000 = RRSP

$20,000 to allocate

*I need to replenish a large chunk of what I drained for 2009 in living expenses.

STEP #2: FIGURE OUT WHAT TO DO WITH THE EXCESS

Any money I make above and beyond will go towards:

• Topping off my RRSP (now that I think about it, I think it’s $11,000)
• Putting the rest into cash equivalents for my emergency fund
• Bank the rest and wait for the next fiscal year to top off my plans again

Wash, rinse, repeat x 23 years.

ALTERNATIVELY: CONSIDER PASSIVE INCOME

BF’s strategy is just to save as much as possible and live off the interest.

To get $25,000 in interest, giving at least 5% a year, you need to have half a million banked.

Assuming interest rates are at rock bottom – 3% – you need at least $700,000 banked to get $21,000 in interest a year.

Maybe if I can really bank away lots of cash now into a savings account I could foresee being able to live off part of the interest.

The only thing nagging at me is all that money for no real enjoyable reason. I mean, if I saved half a million, I am selfish enough to want to spend some of it on myself during my retirement years and life, rather than just split it among my kids upon my death.

So, that’s the new FB Retirement Plan that I’ve hashed out so far: to save around $20,000 a year.

Thanks to Mint.com Blog

My notes:

Thanks to Bucksome Boomer for kicking my ass into gear to write this:

I am not surprised by the numbers, although there are factors that contribute to this:

1. Women’s work is not LESS valued, they’re just cheaper, and as a result, in more demand than we think, just based on cost alone.

Managers are smart, rational people.

If they see a woman at $40,000 a year, and a man asking for $60,000 a year, they won’t just pick on gender alone.

Sometimes it’s just economics and what will save the company money, considering that women can and will do the same job as a men.

2. Women don’t tend to enter fields that pay more money – they shy away from IT, math, sciences, engineering, finance… all things that are typically considered “male” occupations.

They’re encouraged to become teachers, designers, nurses, go into marketing, etc. I am not saying those are bad occupations or that they cannot make good money there, it’s just reality.

3. Women aren’t expected to be career women, and/or they’re out of the workforce for quite long and have to start at the bottom rung again.

It’s just that men are expected to work their whole lives and not take time off to care for their kids. I am not saying it’s a bad thing if a man stays at home, or if a woman stays at home, but boys grow up with the expectation of working their whole lives.

4. Along the lines of not being career women, we also don’t put in the hours it takes at a job.

Simply put, we don’t want to and would value our time more than money, and it isn’t our priority.

5. We don’t know how to negotiate or fight.

I had to learn all of that very quickly in the past 5 years on how to ask for more money, be more assertive, confident and to feel valued — because I am. That is not something that is taught to girls at a young age, because you always hear something like: “And what man will want you for a wife if you are going to act like that?”

Along the same lines, we aren’t expected to negotiate or fight.

I always get guff from brokers (mostly men, actually) who feel that I should just be happy getting what I get per hour, even if it’s $20/hour less than what a man would charge.

Not only because I’m a woman, but because I am young.

I don’t buy or subscribe to that stereotypical BS, and I stay firm on what I expect as a rate.

If they want me, they’ll take me, and most of the time when I’ve asked for what I wanted and was not persuaded or swayed to take less money, I’ve gotten it.

So to be honest, we kind of get what we deserve.

If we don’t ask for anything, we won’t be given raises.

If we don’t want to put in the hours to make it at that job, then we don’t deserve the salary that goes with it.

(It can be a choice too, because when I worked for a company, I CHOSE not to be a manager whose work consumes her life. I specifically did not want to rise in the ranks.)

If we decide to stay at home, we cannot expect to pop back into the workforce after 15 years at the same salary and value. We start at the bottom, just like any PERSON would, being out of the workforce for so long.

If we decide to work and try to do the work-life balance thing, we cannot expect to earn more money if we don’t ask our husbands and partners don’t help out as well, to balance the workload, or if we simply feel like we should be able to do it all.

That being said, I know women do get paid $0.75 on the $1.00, but it makes me wonder if any of the above factors don’t help contribute significantly to WHY we get paid less.

I also don’t believe in getting the job just because of race/ethnicity and gender, to fulfill some silly diversity quota.

As a manager, I’d want the person who is the best for the job, and if a man has been working his whole life, putting in the hours (and perhaps neglecting his family), asking for raises, and doing what it takes, I am going to pick his resume and his skills over a woman who hasn’t done the same thing.

It may not seem fair at first glance, but take out the gender-specific pronouns or swap them, and see if you feel differently about the above situation.

Even just looking at the graph, you can see the salary differences between races of a single gender, so gender isn’t the biggest factor in why we get paid less.

A very interesting topic indeed.