After leaving my sales job and finding my first customer, I knew I had to find a way to sustain myself if I wanted to keep being free and independent.
If you want to know why I decided to leave a highly-paid tech sales job, go check the origin story.
Lifestyle audit
I was making over €100.000 in my full-time job, which translated into buying a lot of cool stuff, going to restaurants all the time, and traveling all over Europe. I was having a great time and we had just moved in together with Ara.
We spent a lot of money furnishing the house, and I did a few crazy purchases:
A motorcycle
A full DJ setup including 2 turntables, a mixing table, 2 XDJs, a table, an audio system, and all cables, records, and tracks that come with it
A BBQ
We went on trips to France, Switzerland, did a motorcycle tour in Tuscany, and a weekend trip to Denmark (really expensive place)
My last few paychecks allowed for a lavish lifestyle, quite typical of a tech sales guy in his late 20s. But as soon as I left, I knew I had to change the way I lived radically.
I started by doing a lifestyle audit and listed the activities of my life in three categories:
Essential
Really important
Non-essential
And here’s what came out:
Back in 2018, I was a different person. My essentials were almost the same as today, but I was spending most of my money buying stuff, traveling, and socializing.
I loved going out, enjoying Berlin’s nightlife, and meeting with friends and acquaintances. A big part of my budget was spent on these activities.
As I left a stable job, I knew I couldn’t spend so much on really important and non-essential activities. I calculated that I needed €2.030 per month to survive and live a decent life.
From employee to freelancer
Now that I knew how much money I needed in my bank account every month, I had to figure out how much it meant in gross amount. But in order to do that, I had to make sure I was doing it legally.
Getting my tax and VAT IDs
In Germany, you need to register as a “Freiberufler“ (freelancer) to the tax authorities. At the time, it was quite a challenge to understand everything I needed to do, but I found useful resources in this article.
I managed to download the right papers, brought them to the local tax authority, and got my Tax and VAT IDs.
Opening a bank account
Now that I had my tax IDs, I opened a free business bank account with N26, received my credit card and I was ready to go.
Finding a private health insurance
An important detail in Germany is the type of health insurance you choose. There’s a public and a private health insurance system. As an employee, you’re most likely in the public system, where your employer pays half of the amount of your insurance, and you pay the other half.
When you’re a freelancer, you can choose to stay in the public system, but you’ll have to pay the whole amount (as you’re your own boss). For me, this meant paying around €800 from my pocket.
Luckily, my insurance broker (who I met when buying my motorcycle) found me a private health insurance that costs €350 per month. I get access to better treatments and I skip the waiting lines. The only drawbacks are that my monthly contribution increases with age and I cannot go back to the public system.
Free healthcare is a great option, but I don’t mind paying more to get access to better treatment. I see it as an investment in my future.
Finding an accountant
Initially, I thought I would only need an accountant to do my yearly tax returns. I had a good idea of what needed to be done to stay compliant when operating as a freelancer.
But when you charge VAT in Germany, you need to report it monthly through a system called ELSTER. I went on the website and tried to understand how it worked. After a few hours, I realized I would never be able to submit my tax reports without making mistakes.
Luckily my insurance broker introduced me to his tax lawyer and accountant (who is amazing) and now he’s taking care of all my tax matters + advising me when necessary.
Running a business without an accountant in Germany would be impossible for me. The complexity of the system added to the fact I wasn’t native in German made it really challenging.
By the way, just book a call with me if you’re looking for introductions to a good accountant and/or an insurance broker. They both speak perfect English, and they know the German system in and out. All my friends are customers.
My essential goal
With the 4 steps I took above, I knew I was operating legally and with minimal risk to get in trouble with the tax authorities (you don’t want to deal with the Finanzamt, trust me).
When you operate as a freelancer, you charge gross amounts to customers + VAT. This means you have a lot more cash in your bank account than what you’re allowed to use.
As a reminder, VAT is a tax we all pay on products and services we purchase. In Germany, it’s 19% of the gross amount of a product/service. As a freelancer or business, you collect 19% VAT on everything you sell inside of Germany, but you deduct all the VAT you pay.
For example, if you charge €1.000 of VAT in a month, and you have €600 of VAT related to your expenses, you will only send the difference (€400) to the Finanzamt. This means you get to keep €600. In my case, I kept a separate space in N26 for all the VAT I collected, so I knew I would always have the money available to send to the Finanzamt.
Outside of VAT, you also need to pay taxes on your net income. Simply put, you pay a percentage of the gross amount minus costs every year.
In my case, I took the highest tax amount in Germany (around 45%, with all social deductions), and I applied it to my gross income. For example, if I make €100.000 in a year, I’ll keep €45.000 so I have way more money than needed when the taxman asks me to pay.
As I calculated in the lifestyle audit part, I needed to make €2.030 per month to cover my essential costs.
Net earnings for 12 months €2.030 x 12 = €24.360
% available after taxes: (100%-45%) = 55%
Gross amount needed for 12 months: €24.360/55% = €44.290
If I was able to charge around €45.000 per year, I would be able to meet my essential needs. The good news is that I also had €20.000 in savings, which meant around 10 months of cash flow at my essential burn.
And at the end of the year, I had saved a massive amount of money because I had to pay a lot less taxes than I had saved.
Key learnings
In the process of defining my financial goals, I learned a few things:
Doing a lifestyle audit is required when becoming a solopreneur. It will help you understand where you spend your money, and you’ll realize you don’t need as much as you think
Listing your activities as essential, really important, and non-essential helps gain clarity on your lifestyle and what you can live without
Be well informed of the administrative steps related to freelancing in your country. You can save or waste a lot of money with health insurance
Having an accountant is absolutely necessary. You’ll gain peace of mind and even save money in the long run
Be careful with the cash in your bank account. A lot of it isn’t yours and you should be ready to hand it out at any time
Find out your essential net income, find out how much of it you’ll save, and calculate your gross income. Take massive margins to be safe
See your tax obligations as a good excuse to save money
Want to escape the hamster wheel too?
If you’re interested in going further, here are 3 ways I can help you:
Go listen to my podcast “Escaping The Hamster Wheel“