Stefanie Fiore: Tonight we are interviewing Shannon Lee Simmons and the theme is finances. I can’t think of a better person to interview! Simmons is widely recognized as a trailblazer in the Canadian financial planning industry and an expert in millennial personal finances and money in the digital world. She was named one of Canada’s Top 30 Under 30, the 2014 Notable Award for Best In Finance and New School of Finance recently won the 2016 Wealth Professional Award for Digital Innovation. She is a regular financial expert in the media and has a monthly column for Globe and Mail personal finance section and is the host of Coral TV’s Money Awesomeness.
I’ve never been this excited to talk about finances before! Welcome, Shannon! Tell us a little bit about yourself and how you got your start in financial planning.
Shannon Lee Simmons: I’m a math geek and also a people person, and finance seemed to be a place where these two things intersected in a way that meant something to me. That’s where I started out. I started working on Bay Street after university doing the whole high-net-worth investment management thing — which actually wasn’t shady or shitty. When you have millions of dollars, people treat you so well and you get all the low fees. I was like, “What’s wrong with the financial industry? Why does everyone hate on the financial industry? ” And then we got bought out by one of the banks. And then I was like, “Oh, that’s why.”
And so I learned what happened on the tiered system — when you are not super wealthy, the advice that you’re getting is often “free”, but how a planner makes money off of you is to sell you a product. So, they’re selling you debt products, bank accounts, mutual funds, insurance — they’re selling you something. So how do you know if that advice is actually what’s best for you? It’s not unbiased. And that really bothered me. So I peaced out and quit in 2010 and I launched a one-year project called Barter Babes where I offered financial advice for a barter. I was like the original Bunz! I would barter my financial advice in exchange for a good or service instead of actually taking cash. I was originally going to go back to Bay Street after that but then I was totally hooked on being an entrepreneur (if you can call it that when you’re not making money) and to be working with a demographic of people that were like, normal, and not super high net worth. And then I launched New School and the rest is history. It started off with me and my cat working out of my living room. Now we’re a team of five and we have offices down on Queen and Bathurst.
SF: Cats are the best employees!
SLS: 100%. She was like my go to Christmas party person for a long time.
SF: Tell us a little bit more about New School and what sort of services you offer. And what does it mean to be a fee-only financial planner?
SLS: We do fee-only planning which means that we only make money based on our time spent and our brain power. So, if you’re like, “I’ve got debt! I want to buy a condo! I want to buy a house! I want to have a family! I want to move to Costa Rica!” I don’t make more or less money off of you depending on where we decide to put your money based on those goals. The only way we make more money off of you is if you come back to see us again!
Being unbiased is super important to us. We are also really affordable. There’s only about a thousand of us in Canada that actually do this, and we are the most affordable out of all of them, so I’m really proud of that. We do in person one-on-one sessions, and we also do online courses which is what the digital innovation award was for. So, we have a couple of online courses for personal finance, and we also have Sole Prop School, and it’s like a freelancers’ wet dream — how much tax you will owe, are you on track? How to track expenses so you don’t end up counting bags of receipts and crying at tax time, that sort of thing.
SF: I can see why this would appeal to millennials.
SLS: Millennials are our largest demographic because we are so affordable. I am a millennial myself. We are tech savvy, web savvy, and young people are really great on researching things, like how to get the best value for your buck before actually committing to something. And so I think there is a movement away from the typical advisor model, and young people are moving toward unbiased advice. So we just happened to hit the sweet spot with the young people, being affordable, and unbiased, and not stuffy people.
SF: That authenticity piece is very relevant. As I was preparing for this interview, doing some research on finances, as well as a little social media stalking, I came across your @therealselfies project. It’s so hilarious. Can you tell us a bit more about it?
SLS: I have a wonderful bird’s-eye view of what’s going on with my peers’ finances. Y’all think you know what’s going on with your friends, but you probably don’t. Whereas, I actually know what’s going on with your friends! Someone can post a picture and be like “Home reno is done!” and it’s so gorgeous, and I’m thinking, “Yo, you are swimming in debt and freaking out!” It’s a really good perspective for me to have.
I know that it’s common sense to know that everything costs money, but sometimes we forget about that. And when were scrolling through Instagram we can feel like garbage and I don’t want you to feel like garbage! So the point of the project was just to remind people that everything isn’t awesome all the time, and I always say, “Nobody goes on vacation and then posts their Visa bill afterward!”
SF: I love that so much. Your playful take on the glamorous lives of Instagrammers is so refreshing. There’s so much that goes on behind the scenes when it comes to finances. That’s why we’re so glad to have you come and chat with us!
Anyway, let’s get right down to business. If I was starting a business and asked you for your top 3 things to do right away, what would they be?
SLS: The first thing is choose the correct business structure. Are you a partnership? A sole proprietor? A corporation? Make sure you are mindful of your choice — it’s not a default position. Two, if you do nothing else, if you don’t listen to anything else I say…KEEP THE RECEIPTS. Just keep the receipts. When in doubt, keep the receipts! Keep those receipts for tax time. I can honestly tell you that as a tax preparer and also as a entrepreneur, tracking this stuff is the most annoying thing to do, but at tax time, the only way to lower your income is through writing things off that are expensive.
You need two things to write things off at tax time: proof of payment (a credit card statement, or a bank statement– something that proves that money flowed out of your account) and an itemized receipt. Let’s say you go to Walmart and buy office supplies, and you don’t have an itemized receipt. Your credit card statement just says “Walmart.” How does the government know that you didn’t buy some avocados for dinner? You need that itemized receipt! Just keep them!
The third thing would be to be sure to understand how your taxes work so that you don’t get screwed at tax time. There will be a bill! There will be blood! It will come! A lot of times what happens is people forget that you owe Canada Pension Plan (CPP). Employees have their employer paying half of CPP and the employee pays the other half. Well, us entrepreneurs have to pay both sides! And many people forget that. So, not only are you paying income taxes and HST, you also have to pay CPP. Even if you make less than $20,000 and can barely make ends meet, that can amount to a $4,000 tax bill. So, make sure that you fundamentally understand what your tax situation is, how to reduce it, and how to prepare for it. Get in the practice of putting a portion of your earnings away. You can put it in a separate savings account so it’s never yours, and it’s easier to hand that off to the government.
Even if you don’t want to do any of that, or if this all freaks you out, if you have receipts for business expenses…KEEP THEM! The worst and most heartbreaking this is like, “Here’s all my stuff but I don’t have any receipts.” And there’s not much we can do now. That sucks!
SF: How about taking photos of receipts? Do you actually have to keep a box of paper receipts?
SLS: You can absolutely do digital receipts, but the only caveat here (which comes directly from the government, not from me!) is that they can still ask for the paper receipt. If they don’t like the quality of the photo and it’s difficult to read, then they can request to see the paper receipt.
Oh, and I have one more tip: don’t be afraid to call the CRA! Everyone is afraid of the CRA! Everyone panics when they see that little brown envelope! But keep in mind that the people who work at the CRA are 9-5ers, doing their thang, they’re not going to show up in the middle of night and audit you. Don’t be afraid to talk to the CRA. If you’re worrying about their judgement if you’re asking a sketchy question, just don’t give them your social insurance number and ask them anything you want. Just say thanks and hang up.
SF: That’s a relief! Your first point had to do with business ownership structure, I was wondering if you can speak on the different ownership structures and maybe talk about the pros and cons of each?
SLS: This is a loaded question, so I’ll give you some generalized information. So, first of all, one of the biggest things people aren’t aware of is that freelancers are sole proprietors. You don’t need to do anything to make it official. As far as the government is concerned, you still have all the same business rules, tax rules and regulations as a sole proprietor. So, even if you didn’t officially register as a business, in the eyes of the tax man, you are!
The pros of sole proprietorship (otherwise known as freelancer, self-employed, solopreneur, anything like that, as long as you don’t get a T4!) is that the start up costs are $0. You can pay your $60 for your master business license and register, or not, so it’s really easy to open or close. You don’t have to legally dissolve anything. It’s all really easy. You are your business. Both you and your business have the same social insurance number at tax time, anything that you make from your business — let’s say that you made $40,000 in revenue/what you invoiced your clients, and you have $10,000 worth of expenses, so your profit would be $30,000. That would be taxed on your personal income taxes, just like if you had a salary.
As a partnership, it’s very similar to a sole proprietorship from a tax point of view, except it’s sort of like two social insurance numbers had a baby. So, if the partnership revenue was $40,000, and the partnership expenses were $10,000, then the partnership profit would be $30,000, only now it gets split 50/50. Each partner claims $15,000. So, even if you didn’t take that money out of the business bank account, it doesn’t matter! You’ll still get tax on the profit and that’s another big misconception. People will be like, “We’ll just keep it all (the profit) in the business. We don’t take anything out!” Well, only a corporation has that luxury of not paying personal income taxes on money left in the business. If you’re a sole proprietor or a partnership, it doesn’t matter if you touch the money or not, you pay personal taxes.
Corporations can be very expensive to start up. Those of you in corporations, I’m sure you’ve experienced this. There are legal fees that you should pay, and every year there are annual filings that you need to do, plus the bookkeeping, as you have to do balance sheets and income statements and there’s a whole bunch of other things that you don’t legally have to do as a sole proprietorship or a partnership. One of the pros of corporations is liability protection. There’s also tax savings, but there’s a lot misconceptions about that. Let’s go back to our $40,000 example. If your corporation makes $40,000 and you have $10,000 of expenses, the corporation has $30,000 worth of profit. If you don’t touch that money and it stays in the corporate bank account, then that $30,000 is only taxed at appx 15.5%, which is super low, vs. our sole proprietor friend who would be taxed at appx 20% of that. You can imagine as the profit goes up, the tax rates go up. If the profit of the corporation goes up, your tax rate is still 15.5%. Super cheap, right? However, if you take any money out– let’s say $30,000 to pay yourself, then you’re paying personal income taxes on $30,000 and corporate profit is 0, which means you didn’t take advantage of any tax savings whatsoever. You pay probably $1500-$2500 a year to maintain a corporation and file, and then you may not ever even get the chance to take advantage of the tax savings! This is the #1 mistake I see people doing because they Googled something, or some dick in a bar has been like, “Yo baby, you gotta incorporate, DIY it for only $500.” If your profits are bigger than what you need for living expenses, like if $100,000 is your profit and you only need $50,000 to live, then you’re winning as a corporation and there is tax savings because you can leave the other $50,000 in the corp and only pay 15.5%. If you were a sole proprietor, the whole $100,000 would be taxed at a high rate.
So, just walk before you run, and make sure if you incorporate, it shouldn’t be because you think it’s something you should do.
SF: When it comes to taxes, what’s the difference between review and audit?
SLS: Review is like, “Hey! Can you send us the reason why this happened?” and then you provide them with an answer, and then they go away. If you’re being reviewed for your personal taxes, it will be like, “Hey, can you send us this receipt?” or “Can you explain where these meals came from?” just to double check. It’s like getting randomly selected at the airport. It does not mean your tax professional messed up!”
An audit is the one that people live in constant fear of. They show up and go through your bank account and through all your receipts. It takes a long time. It can be scary.
SF: And how do you actually track your expenses? Do you use an Excel sheet? Do you have any apps or software to recommend?
SLS: If you’re a corporation I would 100% recommend an accounting software like FreshBooks, QuickBooks or Wave. If you’re a sole prop or partnership, you can get away with an Excel Spreadsheet or you can go ahead and use the accounting software as well. That said, if you are using an accounting software, make sure you know how to use it! When you’re not sure, transfers can look like income, money out looks like expenses, and things don’t make sense and it just creates more work for you. You just need to find what works for you!
One of the easiest ways to manage and track expenses is to put all your business expenses on a separate credit card. It doesn’t have to be an actual business credit card if you’re a sole-proprietor, it can be another personal one, what’s important is that it’s separate from your personal finances. It’s so much easier to have all your business expenses in one place.
I usually suggest that everyone put aside 45 minutes per month, do it with another self-employed friend, have a glass of wine, put on some Enya and figure it out. And remember, you’re only paying tax if you’re making money!
SF: Ok, so you’ve figured out your business ownership structure, you understand how tax works, you’re saving your receipts and you’re (hopefully) making sales. Let’s talk about getting capital! Any tips on applying for loans and grants?
SLS: This is a tough one because it’s very industry-specific. But anyone who is under 40 should check out Futurpreneur if you are looking for a business loan. I don’t think you don’t have to be a corporation, and they’ll usually give anywhere between $5000-$15,000. Regarding loans (in general), most of the time banks are more difficult. They may give you a credit card, or a line of credit, but you have to build your business credit. You typically have to be doing your business for at least 6-12 months in order to ask for a loan. If you walk in and are like, “I just started a business! Please give me a line of credit!” they’ll be like, “Uh, no.” Which makes sense. So it’s best to wait a bit.
SF: I applied for a Futurpreneur loan and one of the things they ask you to do is provide a 2 year cash flow estimate. Now, for creative freelancers who don’t have a consistent pricing structure (creative services are usually not a single pre-determined fee), it can be harder to project cash flow. Do you have any best practices in mind?
SLS: The one thing I would try to is make assumptions — if you can’t make assumptions, you can’t project anything. You have to try to bundle things as best you can. How many logos will I do for around $500? (Or however much you charge.) How many websites will I do for $5000? You need to make these assumptions or else it will be a total disaster when you’re trying to forecast. So, lump things together in similar price points, and then try to estimate the whole year, month-by-month. Map out any peak and slow seasons you might have. And I love Excel spreadsheets for this and also my course Make that Money is all about this.
SF: We’ve touched on business finances, but how about personal finances? Any tips on creating and sticking to a budget?
SLS: Another shameless plug! Budget with your Boo or Get On Track (our best-selling personal finance course) are amazing, cheap and awesome. Otherwise, the best thing to do when you’re budgeting is to find what works for you, and not overdo it. So many people do the “all lettuce diet” version of budgeting, which more or less sets you up for failure because it’s so unrealistic! “I’ll walk every day! I’ll never buy a takeout lunch again! I won’t have fun! I won’t buy ANY clothes for all of 2017!” C’mon, you know that won’t work, you’re setting yourself up for failure.
So the first thing you want to do is set a goal. What do you want to accomplish with your money? Do you want to go on a trip? Pay off debt? Next, you set up realistic parameters. Don’t come at it from the budget first, come at it from the goal first. If we connect our savings to something we’re stoked about, then we’re way more likely to do it.
SF: On that note, let’s talk about saving for retirement.
SLS: Never think about your revenue as your income. That is a great perspective shift. When you’re an employee and make $60,000 a year, you know that you don’t actually take $60,000 home with you, because on your paycheque, it’s being deducted. As self-employed people, we get to collect the full $60,000 and we get attached, and then we feel resentful that we pay tax and CPP, but an employee pays that too! And this actually isn’t saving!
The saving part happens with your after-tax income, just like an employee, so the same advice applies here. So, to make a sweeping generalization, if you own property you should try to put away at least 10% of your after tax and CPP income away each year. If you do not own property, I would aim for 15%-20%. In both cases, I would start doing this as soon as possible, no later than 35. It’s the age where you still have 30ish years to retirement. I believe many people in this room will retire in our 70s because we will have robots to medically fix us – we might never die! [laughs] Anyway, age 35 leaves you with enough of a runway and a little bit will go a long way.
SF: I have one last question, and you can go ahead and plug your awesome services! Why is it so important to book a financial planning session, or invest in financial planning courses?
SLS: Well, we spend money every day of our lives. It’s the difference between your business and a hobby. To not fundamentally understand how your finances work is a real shortcoming, because we’ll always question if we’re doing the right thing. And especially if you’re self-employed, it’s so important to be having these discussions. Nobody but you is on the chopping block at the end of the day. It’s up to you to feel empowered by your finances.
Shameless plug: I think anyone that’s a freelancer should take Sole Prop School, because it’s designed to help you with all of this! If you use the promocode “newschool” you can get 15% for tax time!
SF: Yes, check out Sole Prop School and all of Shannon’s other fabulous courses! Thank you Shannon for taking the time to answer our questions.
