We know the times of each year where we can predict a lower than usual income, like after Xmas and New Year’s.
But what about the unexpected times, when a new project falls through or you fall off your bicycle and are left with a broken elbow? After all, this is the nature of owning your own business.
In times like these any thought of budgeting can be thrown out the window. Along with that holiday you were planning next summer with it. It doesn’t have to be.
Here is the secret: It’s not your budget that will save your sanity. It’s your buffer.
I know what you’re thinking, it’s the chicken and the egg problem. I’d love to save a buffer but any money I save ends up on the next unexpected thing to arrive in my mail box.
Well there is one step before a buffer, and that is ensuring you are living within your means. This includes those long term expected once a year expenses – but also the inevitable but unpredictable expenses. In this case, saving something is better than saving nothing. You might like this worksheet to help you work yours out.
So, how much do I need for a buffer?
Unfortunately, even that depends. It really is a gradual step by step process.
To start with, I usually recommend a $1000 buffer to concentrate on first. This $1000 is there to replace your need for a credit card and help you prevent putting any ‘surprises’ back onto debt. If you ever need to use this $1000 buffer, it should be your first priority to save it back as quickly as possible.
Next, eliminating debt (other than the mortgage) is what I would concentrate on. Using the snowball method is such a good strategy for staying on track.
After these debts are paid off, next you’ll need to increase your buffer, but this time for a different purpose.
When you can save one month of living expenses, then you can transition from living paycheque to paycheque to instead living on last month’s income.
Any income you make this month is saved until the beginning of the next month. You will have the exact figure of what you have available to budget the next month.
There is the added bonus that if this current month’s income is looking leaner than usual you have more than a month left to adjust your current spending so you can still afford your immediate obligations.
Once you are living on last month’s income (don’t panic, it took us about six months). Your goal is to once again, increase your financial freedom buffer to about 3-6 months worth of living expenses. This way, we know if for one reason or another our business didn’t make any income for at least three months, we would still be able to keep paying our bills without hardship.
Do’s and Dont’s
Do ensure you see a financial planner to have your business insurances such as income protection, trauma insurance and life insurance adequately set up.
Don’t fall back into debt, I would rather that you use your buffer down to zero and build it back up again, than undo all your hard work of eliminating your past life’s expenses in debt form.
Do ensure your partner and household are on the same page as you to help encourage each other towards the big picture and end goals when the low months get tough.
Don’t do it alone, go and see an advisor, mentor or business strategist to help with a different perspective when you can only see a short distance ahead of you.
Want to learn more about building up your successful business and how to implement the Profit First system? Sign up for my free tutorial here: bit.ly/ProfitFirstWebinar