If you are a VIPKID teacher and you are spending your entire paycheck, life can get very stressful when that first tax season comes around. I love helping teachers get through that first tax season (check out this video if this is your first tax season as an online ESL teacher) but this year I want to offer some additional food for thought about how I spend my paycheck. The accounting method that I used is based on the book Profit First. Make sure you grab your FREE income and expenses organizer below to help you set your business up for success this year.
STEP ONE
Payday for me is Friday because I have weekly pay at VIPKID. On Friday mornings I do some quick accounting for my business and then I pay bills for the family. It feels great to start the weekend with all of the mail and finances in order.
My business banking happens at a separate bank from our family banking. We keep our money completely separate. At our business bank, I have 4 different accounts and we also have our personal checking account at the second bank. On Fridays, I will check in with all of these accounts. It may sound overwhelming, but it only takes a few moments since I do it every single Friday.
Any income I made for the week goes to a bank account I call the “Income Plate”. This might be my VIPKID pay, it might be a check from YouTube, it might be a check from Teachers Pay Teachers or Shopify, or it might be income from a course like this one on ESL foundational skills.
5% of that income number gets moved to an account called “Profit”. If I make a lot of money, I get a lot of money as a reward. If I only make a small amount, then I get a small amount of money. Every Friday, SOME money goes into our Profit account and I cannot tell you how motivating that is. We will talk later about how and when that money gets spent.
15% of that income number gets moved to an account called “Taxes”. We know that taxes are very individual and that everyone’s magic number of how much to set aside is different. Our CPA helps us estimate what we will owe the following year and we adjust our withholdings from my husband’s normal w2 job. We try to not owe quarterly and not owe at the end of the year but I hold back 15% of all of the business income just in case. It helps me sleep at night knowing we have that money on hand if we need it.
30% of that income number gets moved to an account called “Operating Expenses”. That sounds like a lot if you think of expenses as small items like magnets, whiteboards, classroom decor, and reward systems. By setting aside 30% my first year, I now have enough saved up so that if my computer stopped working or the tech requirements at my company were suddenly not compatible with my computer, that I could replace my computer and not miss an income-earning moment.
That leaves 50% for “Owner Compensation” – that’s my salary and that gets transferred to my family’s checking account.
I know what you are thinking. There is No Way you can survive on HALF as much as you are currently making. There is No Way you can teach TWICE as many classes as you are now. The first year I used the Profit First accounting system I was worried about this belt-tightening but I am so glad that I made the shift.
STEP TWO
Once that Income Plate is empty, I go to the Operating Expenses account and pay any bills that came in during the previous week. This only takes a moment since I do it every Friday and it is comforting to see a lot of money building up in that account for a future computer replacement. Having money on hand means when a new opportunity comes up I have money on hand to purchase and continue to grow my business.
STEP THREE
Businesses often review how each quarter of the year is going. Employees get bonuses and the company evaluates how profitable a three-month period it was. Your online ESL teaching is a business. You deserve a quarterly bonus too! That means that on January 1st, April 1st, July 1st, and October 1st I get a bonus!
On this date, I log into my Profit account and transfer 50% of what is in there to our personal checking account. This money is for a treat of our choice. My husband and I work very hard on the various areas of our business. He creates resources for my classroom and yours after our kids go to sleep at night. He takes care of our kids during those early morning hours so that I can teach at VIPKID or finish editing and filming YouTube content to help other teachers find their way.
Every quarter, we get to take a moment, reflect on our big dreams, and choose some way to celebrate. Whether it’s a small dessert or a new iPad taking a moment to celebrate helps keep us going forward and feeling encouraged. If you are feeling burnt out by your schedule, consider trying the Profit First accounting approach and see how it changes the stress you feel about your job.
STEP FOUR
Next, it is time to prep for tax season.
In the middle of January, I take a moment to list all of our spending for the previous year of business expenses as well as all the income we brought in. I record this information with pen and paper on the FREE worksheet below.
This step brings an extra level of awareness to our financial situation and gives me a moment to reflect on each item that we spent money on in the previous year to see if there is anything that I want to cancel, sell, or purge.
Then I can look at our percentages to see if they should be adjusted for the following year. If I have already saved up enough to cover the largest ticket expense that I can imagine, then I can lower the amount I am sending each Friday to Operating Expenses and increase the amount I am sending to Owner Compensation for the year. If we didn’t have enough set aside to cover our tax bill with ease, that would tell me I need to increase the percentage for taxes in the following year.
STEP FIVE
Once we have gathered all of our documents and determined what we owe or are owed for taxes, I visit that Taxes account.
If the money in our Taxes account is MORE than we owe, we can transfer the extra money to our Profit account.
If the money in our Taxes account is LESS than we owe, we can use some of that reserves money that is in the Profit account (since we only withdraw 50% of the balance of that account at the end of each quarter).
FINAL THOUGHTS
I know that at first taking only 50% of your paycheck as a salary sounds scary, but planning for computer replacements and celebrations proactively overall creates a less stressful situation. If you are ever planning to make online ESL teaching your full-time job make sure you research important topics like health care and retirement before taking the leap. Whether you choose to focus on making more money or spending less money, the path of being grateful for what I have and learning to live on less has been positive in more ways than I can count. I hope this post helps you think of your online ESL business as a business and that you can use this FREE income and expenses organizer to help you set your business up for success this year.
