Divorce – how to bounce back financially – Episode 8



Financial Autonomy is about managing and planning for major transitions in life.  A transition that many of us face unfortunately is divorce.  I understand researchers have found that going through a divorce can be one of the most stressful things you can experience in life.

As a financial planner, I often work with clients who have been through or are going through a divorce, and assist them in the planning necessary to get them back on their feet financially.

In this post I’ve broken down the things you need to be thinking about into 4 key strategy elements.  If you can work through these, you’ll be in a position to get your financial life back on track, and with this stress removed, hopefully your life back on track too.

Divorce is certainly no fun.  But it does offer the opportunity to hit the reset button in your life.  With some good financial planning, this next chapter in your life can be the best yet.

 

Fortunately the days of couples sticking together in relationships that no longer work are behind us.  Divorce provides the opportunity for a fresh start.  But of course beyond the very significant emotional pain of getting through a divorce, the financial consequences are also very significant.  There may be many reasons for getting divorced, but improving your financial position is rarely one of them.

Whereas you and your partner once shared a roof over your head, there is now a need for separate housing.  Often children are involved, so considerations of being local and having enough room for the kids can be a big challenge.  It’s not an option to move half an hour or more away to find more affordable housing when you don’t want to turn the kids’ lives upside down.

You typically also go from two incomes and sharing expenses as a couple, down to one income with little change in expenses, so budgeting becomes a real challenge.  Often one of you will keep the family home so as to minimise disruption for the kids, but this may mean borrowing a significant amount so that your partner is able to move on with their life and get a new house of their own.  How will you service this new debt?  You may be required to pay child support, which, on top of new housing costs can be a real strain.

And thinking longer term, retirement plans are often significantly disrupted.  Often one member of the couple took time out of the paid workforce to help raise the children.  This means their superannuation balance is typically considerably less than their former spouse who worked through.  This difference is allowed for in your financial settlement, but the result is that you are both now facing a less generous retirement outlook than was once the case.

So divorce has big financial impacts.  But as I mentioned at the start, divorce also provides an opportunity for a fresh start.  It provides you with an opportunity to steer your life in the direction that you want to head, possibly without the compromises that you needed to make when you were in your former relationship.  You can set goals and work hard towards them without the potential for your former partner to decide they need a new car, or some other distraction. 

Financial Autonomy is about giving you choices, and managing key transitions in your life.  Divorce is quite clearly a significant transition, and also an opportunity to gain choice.  So let’s look at a few strategies that might help you get back on your feet.

1. Budgeting

The starting point must be gaining clarity around how much you have coming in and how much you have going out.  Following the divorce your household arrangements have changed, and possibly there is child support obligations and spousal maintenance to meet.  Or perhaps in reverse, you have these support payments coming in and need to ensure they are used wisely and appropriately.

You can create your budget in a spreadsheet.  We also have a sample budget template in the toolkit for this post.  There are also budgeting apps available.

Gain a clear understanding of how much you have coming in and how much you have going out.  Allow for the fact that bills are lumpy, and large expenses such as car servicing and council rates come up.  I suggest having a separate bills account with your bank.  If you determine that over the year your bills, including things like getting the car serviced, will be say $20,000, divide that by 26 (assuming you get paid fortnightly), and then arrange that amount, $769 in this instance, to be automatically transferred from the account that gets your income, across to your bills account each pay day.  Ideally you would kick your bills account off with a few thousand dollars to allow for the fact that a big bill could come up 3 weeks after you started.  You might even wish to put your mortgage or rent payments in here too.

With this set-up, you know that all the bare necessities are covered, and what is left in your account is what you have to live off.  You can start to move forward with confidence.

 

2. A roof over your head

In Australia there is no tax on gains in the value of your home (primary residence).  Also, given our growing population, historically the value of houses has risen over the medium to long term.  For both these reasons, for most people, becoming a home owner as soon as possible will be an important element of recovering financially from a divorce.  You may need to start smaller or less comfortable than what you once owned, but getting back into home ownership is likely to be a very important step.

I recognise in this step that post-divorce there is usually a period where you are in limbo awaiting finalisation of the financial settlement.  That can’t be avoided and buying a home will need to wait until this is concluded.

Once again having a good understanding of your budget is crucial so you can be clear on what you can afford to pay in loan repayments.  Run your numbers allowing for interest rates to increase by 2-3%.  Ideally budget on making repayments of a little more than the banks minimum so that you get ahead on your loan and thus create a bit of a buffer for the future.

If you simply can’t make the numbers stack up to buy a home, and it looks like that won’t be a reality in the medium term, consider increasing your contributions to superannuation instead.  That way you’re still building your personal balance sheet and long term wealth, whilst also providing for some additional income in retirement that could be used to cover rent.  Just keep in mind that the money you put into super is “preserved”.  That means you can’t access it until you retire.

3. Review your insurances

There are two elements here.  The low hanging fruit is updating the beneficiaries on any policies to ensure any payout would be directed where you would want it to go post-divorce.

The larger item is thinking through how you will establish a financial safety net to ensure you are totally self-reliant.  Things like Income Protection and Trauma cover may become far more important than perhaps they were when you were part of a couple.  Seek specialist advice here to get a customised package that fits your needs and budget.

 

4. Retirement planning

I typically see two scenario’s after the divorce.  One member of the couple keeps the house, most often the wife, and then has very little in superannuation savings.  Or the person gives up the house, but retains their far larger superannuation balance – most often the husband.  Whichever side you fall on, there are quite clearly long term retirement planning issues.

If you have kept the house but now have minimal super, you need to plan for how you will support yourself in your later years.  Perhaps downsizing the home will be possible (it’s certainly very tax effective).  At some point though, increased contributions into super will be required, and the sooner this is affordable the better, due to the benefits of compounding.

If you’re the partner who gave up the family home as part of the settlement, you may have a reasonable superannuation balance, but now you need to get a roof over your head.  Mortgage repayments or rent will limit how much extra you can contribute to super.  Compulsory employer contributions are not likely to be fully adequate to provide the quality of retirement that you would hope for.

In whichever camp you are in, you need to develop a retirement plan, and the sooner you get onto it the better.

Some other things to think about are whether your existing superannuation and wealth creation structures continue to make sense.  For instance is an SMSF still a cost effective and appropriate vehicle for you?  Do the numbers still work on that negatively geared property?

Also, as with your insurance, check the beneficiary details on your super fund to ensure these are as you would want them to be.  A new Will may also be relevant and should be discussed with your solicitor.

 

Hopefully these 4 items get you thinking about bouncing back financially from divorce.  It’s a tough time but many before you have done it, and you can succeed too.

Finally, don’t procrastinate.  The sooner you get your finances in order, the sooner you will start to move forward with your life.

 

Need help in planning for your life post-divorce?  Visit the “Work with me” page.

 

Important Information:

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.

 

Financial Autonomy success story – how Nish escaped the corporate world and pursued his passion – Episode 6



I’ve known Nish for over 25 years.  He was there when I started my first job out of school, and over the years our careers and lives intersected. These days, as well as being a friend, Nish and his family are also clients.  For many years Nish was a financial planner, even running his own firm for a period.  To have someone with that professional skill and background decide to engage me and my firm to act as their financial planner is to me, one of the greatest professional compliments you can receive.

Today I’m really excited to share with you a little bit of Nish’s hugely successful transition from the corporate world to running his own photography business – Nish Photography.  But it doesn’t just stop there.  Because Nish and his incredibly supportive wife Janine made a second transition a few years later by making a sea-change.  Leaving the big smoke with its big mortgage and hecticness, and moving the family to a small seaside community about an hour out of Melbourne.  Nish and his family have never been happier.  I asked Nish how these two major transitions came about, and I think there is absolute gold in what he was able to share.  So let’s dive in and take a look at this real life example of someone who has achieved choices in life, true financial autonomy.

So far in Financial Autonomy – the audio blog, we’ve looked at different transitions that you might make in your life – moving from being an employee to starting your own business, reinventing yourself after a redundancy, or rebuilding after a divorce.  In future episodes we’ll be exploring many more, like planning financially for starting a family, making a career change, and retirement.

Today though I’m really fortunate to be able share with you a real life experience of someone who has successfully achieved not one but two major transitions.

In preparing for this piece I interviewed Nish to gain a better understanding of how his move from the corporate financial world to running a photography business unfolded, and then how he and his family subsequently made the transition from inner city life to a small seaside community.

I started by asking why he decided to make the initial move from the finance world, where he had worked in various roles for around 20 years, into photography.

He attributed the initial steps in that direction to a discussion he had with a psychologist who encouraged him to spend more time and energy doing the things he loved.  His two great passions beyond his family were music and photography.

So he took some singing lessons and picked up some small gigs playing his guitar and performing.  Now that’s no small thing.  First you need to acquire the skill of singing (he already knew how to play the guitar), then you need to have the courage to get up and perform in front of real people, and then you need to find venues and convince them to let you play, ideally with you receiving some money for the effort.

He did it.

Next came photography.  Nish told me he’d essentially missed the transition in photography from film to digital, so as with the singing lessons in pursuing his musical interests, there was a financial and time investment to be made in bringing his skills and equipment up to the level required.

 

He recognised that the singing wasn’t likely to be a viable alternative to his current career, but saw that photography presented the possibility of building a business and giving him an option to escape corporate cubicle captivity.

So he launched his photography business as a side project, working on weekends.  His initial focus was family portraits and weddings.  He built his web site, and promoted himself through word of mouth.  He gained valuable experience and knowledge.  He operated this way, working his normal job, and developing his photography business on the side for roughly 12 months.  This is a great strategy to progress towards a transition, and one you certainly should consider if this is your financial autonomy goal.

Eventually, and after a significant nudge from Janine, his wife, he quit his job and devoted himself full time to his photography business.  I asked Nish what steps they took financially to make this huge step possible.  The key things were:

  1. Janine always monitored their family budget, and so had a good sense of how much income the household needed to keep afloat. She was therefore confident that they could manage on her wage alone for a period.
  2. They changed their mortgage to interest only to reduce the loan repayments.
  3. They approached the change as a 5 year plan, with the understanding that Janine’s income would be the primary income to the household during this period, and then at the end of that 5 year period, Janine could potentially pursue her own transition, perhaps working fewer hours, and Nish’s business would by then be at a level where his income could be the primary support for the household.

In addition to these financial planning steps, through Nish operating the business as a side project for a year, he had already identified that the relationship management skills he had learnt through his corporate career, were applicable to building his new business.

He’d also started to get some corporate photography work, and shortly after moving into photography full time he pivoted the business entirely towards this corporate work, which has been a key to the success of his transition from employee to self-employed.

So let’s break things down.  Nish’s successful transition to self-employment entailed:

  1. A low risk trial for 12 months. Any money he made was reinvested back into the business.  This period wasn’t about making a fortune. The gain here though was knowledge and experience, not least of which was finding that his initial target market was wrong – family portraits and weddings, and that he was better suited to corporate work.  This is right out of the Lean Start-up approach of a minimum viable product.  Put your idea out to market with the lowest investment possible, and then get market feedback as to whether your idea, your concept is right.  Then use that feedback to change or improve your offering.
  2. They had a survival strategy, as I explained in episode 1, mapped out. They had a household budget and knew their numbers.  They knew that with the mortgage repayment reduced to interest only, they could survive on Janine’s wage alone while Nish built up the business.  This knowledge was empowering to them both.  Without this knowledge, the stress levels would have been enormous.
  3. They were realistic about the time it would take to build this new business – a 5 year plan. Nish and Janine embarked on this adventure, not with the expectation that the new business was going to be an instant success, but with a realistic time frame that enabled Nish to develop his skills and the relationships essential for the business in a sustainable, long term way.  Nish told me that it wasn’t until year 3 that he started to make a reasonable income.  I wonder how many people in a similar position, with less planning, would have quit after 12 or 18 months?

As inspiring as that story is though, as mentioned in the intro, Nish and Janine didn’t stop there.  About a year ago they made a second transition, moving from inner city Melbourne to a small seaside community about an hour out of Melbourne.

Financial Autonomy is about gaining choice, and this move was in very large part, motivated by that desire.  Nish and Janine had always wanted to live by the beach, and indeed when in Melbourne, they were within range of the beach.  But beyond that, city property prices are expensive, and that means a big mortgage.  They wanted to have more flexibility around when and how much they worked.  Part of their 5 year plan was to be in a position where Janine could reduce her hours.  This sea change was an important step in making that possible.

Once again, Janine’s handle on the family budget empowered them to know what was possible.  They were able to determine how much they could afford to spend in the new town, and then look around to see if the type of house this budget would allow, was suitable for their family.

Pleasingly they found a home that fitted all their requirements, and Nish tells me that the whole family has just never been happier.  Like all parents, he worried about the kids moving schools and making new friends.  Well it took less than a day for his girls to settle in, and their happiness in this new seaside life has been a core ingredient on the overall success of the move.

 

I finished up my discussion with Nish by asking what advice he would give others who dream of gaining choices in life.  He offered four suggestions that I think are absolute gold:

  1. Love what you do. Pursue your passions.  You’ll look back and think “why didn’t I make this change years ago?”
  2. Talk to your partner and approach your transition to Financial Autonomy as a team. Nish freely admits that there is no way he could have achieved what he has without the support of his wife Janine.  She both gave him permission to have a go, and the nudge needed to take the plunge.
  3. Don’t listen to nay-sayers. For both the career change and the sea change, Nish had plenty of people tell him he’s crazy. He relayed the story of some friends who were absolutely convinced the sea change was a terrible idea, and that in a short period of time they would want to return to the inner city but would be priced out.  Those friends recently sold their Melbourne home and bought a house not far from Nish and Janine.
  4. Follow your heart. Take a risk sometimes.  It is scary, but it’s well worth it.

I hope you’ve taken something out of Nish’s story.  I’m really grateful to him for allowing me to share it with you.  Check out Nish’s work at the very easily remembered name of www.nishphotography.com.au There’s some absolutely stunning photo’s there so be sure to take a look.  And if you need some photo’s done, be sure to give him a call.

 

 

 

How to analyse the financials when buying a business – Episode 4



One fantastic and I find often overlooked way to achieve financial autonomy is to buy an existing business.  In comparison to starting your own business where cash flow starts at zero and you need to support yourself whilst the business becomes self-sustaining (refer episode 1), when you buy an existing business, you have cash flow and customers from day one.

Buying a business is something I can talk about with quite a bit of experience.  I’ve bought two businesses, and for a couple years I was a licensed Business Broker as a side line to my financial planning practice.  The thinking at the time was that my business owner financial planning clients would need to sell their businesses when they retired, and so perhaps offering business broking services was a sensible expansion.  I ended up concluding that the two services weren’t especially complementary, but I picked up some great learnings that make me a better advisor for my business owning financial planning clients, and for those seeking financial autonomy through buying a business.

Just as an aside, something that I believe really strongly about business endeavours, but also life more broadly, is that we can’t be afraid to try.  I heard someone trying to sell business coaching recently and their tag line was 98% of business fail within 10 years.

What a ridiculous statement.

I assume their definition of failure is that the business isn’t around 10 years from when it started.

So?

Does that equate to failure?

I operated as a part time business broker for 2 years and then made the decision it wasn’t sensible for me to continue to devote time and effort into that area.  At the end of that period I had $35,000 sitting in my Business Broking bank account, and had learned an enormous amount.  In fact even if there was no money in the bank account from that business, I’d still say it was a success because I learnt so much.

So if you hear people trying to convince you that your plan or idea will never work because most businesses fail – don’t believe it.

People start businesses, and people wind up businesses.  Their lives change, new opportunities come up, industries change.  Sometimes people just come to the conclusions that they could make more money doing something else.

That’s not failure – that’s having a go and then having the intelligence to reflect and chose a new path.  In Silicon Valley jargon, that’s a “pivot”.

Anyhow, sorry for the rant but that’s just something I feel strongly about – you can’t live your life being afraid to try.

 

So when you look at buying a business, here’s the process:

You search the various web sites such as businessforsale.com.au and find a business that looks interesting.  You submit an enquiry to the broker.  The broker will send you a Confidentiality Agreement which you need to sign and send back – most business owners that are selling want to keep it quiet.  They don’t want their customers and staff to know that they are looking to exit.

The broker will then send through to you an Information Memorandum (IM).  The level of detail in here will vary depending on the scale of the business and it’s complexity, but the IM will give you some good information about the business, it’s history, and some figures around how revenue and profit have been tracking.

Having read through the IM you should be able to determine whether this is a business you really want to look into in a serious way.  Expect to look at quite a few IM’s in your hunt for a business.  They cost you nothing and it’s always useful to see the figures for different businesses.

So let’s say you’ve found a business that looks like it may fit your needs.  The next step will be to get the detailed financials – at least 3 years worth.  So what to look for?

The Profit and Loss is the most important.

First of all, is the business making a consistent profit?  This will be the number at the bottom of the Profit and Loss.  If it’s losing money it’s tough to see how it’s worth anything, so let’s assume it is showing a profit.

Is that profit after the owner has received a wage?

There should be a wages or salaries item in the Expenses section, and often in the financials there will be an explanation of what this is made up of.  If it’s not completely clear, go back to the broker and ask for a breakdown of what the wage’s expenses are.

It is very common in a small business for the owner not to take a wage, and just live off the profit.

Consider this example.  One business you look at shows a profit of $30,000 last year.  The other a profit of $90,000.  At first blush the second business looks more attractive.  But you dig a bit deeper.  You find in business one that in fact the business owner has paid himself a wage of $80,000, and also paid super of $25,000.  In business two however, you learn that the business has paid nothing to the owner, and in fact in this case the husband works on the business 6 days a week and his wife does the book work one day a week.  $90,000 rewards for all that effort is starting to sound less attractive.

So you need to get an understanding of what is the actual return to the owner.

It wouldn’t be unusual to find the business owner running his car through the business.  I’ve seen instances where the entire families’ mobile phones all go through the business.  So go through the expenses, ask lots of questions, and get to a point where you know how much the current owner is actually making out of this business.

So as an example you might find a business that made:

$30,000 profit

$80,000 in owners wages

$25,000 in owners super contributions

$15,000 in owners vehicle expenses that aren’t essential to the operation of the business

$5,000 in other expenses related to the owner.

So add this all up and the total return to the owner for this business is $155,000.

There may also be depreciation in the expenses.  This is a non-cash item reflecting the value of equipment wearing out.  You may want to add this amount to the return the owner receives as well.

This is less clear cut because at some point that equipment will need to be replaced.  If depreciation is a large amount, you’ll need to dig a bit deeper into this and it may be something to discuss with your accountant.

However you decide to best treat depreciation, you will have arrived at a total return to the owner in the most recent year.

Now run this same calculation across the previous year’s financials so you can see how stable this is.  Was last years $155,000 earnings a typical year, or abnormally high or low?

You won’t get it from the financials, but once you understand the total return to the owner, ask the broker how many hours the owner is putting into the business.  Earning $155,000 might be acceptable to you if she’s putting in 40 hours per week, but perhaps, if to earn this, the owner is working 7 days a week and 12 hours a day, maybe that return isn’t so attractive.  In reverse you might come across a business that only returns $30,000 to the owner each year, but if it only takes up 2 hours a week of the owners time, maybe that’s a really good business.

Okay, so you’ve now got a good sense of what the current owner is making from this business, and how stable that is.  The next thing I’d go to is trends.

Start with the total revenue and total expenses items.  I’d put them in a spreadsheet myself but it’s up to you.  You’ve got 3, maybe more years of data.  What is the trend?  Now we’d all like to see a trend of rising revenue.  In my experience though, business owners are just like elite sports people – rarely do they get out at the top.  So don’t be surprised if you see declining our plateauing sales.  Whatever the trend, you need to understand what is going on as this will definitely have an impact on whether you want to buy this business, and how much you would be prepared to pay.

Often at the revenue level income will be broken up into several sub-categories – what is that telling you?  Is one area of the business dying?  Perhaps another is growing.

Similarly at the expenses level.  What is happening there?  Have input costs or wages been rising faster than revenue?

Having gone through the process you should have a whole bunch of really intelligent and insightful questions to ask the owner.  You also have a good basis upon which to talk price.

You could ask all your questions to the broker, but I would suggest you ask for a meeting with the owner at this point so you can get the answers straight from the horse’s mouth.  A direct discussion is likely to give you far more detail, plus you can gain a lot in the non-verbal cues.

On price, don’t be surprised if, having gone through the financials, you struggle to make sense of the price being asked.  For many business owners their business represents their life’s work and in their mind it is a gold mine worth millions.  Do your own numbers, determine what you as the owner could make out of this business, and from that what is a sensible price for you to pay.  Typically that will be 1 to 3 times what the business will make for you each year depending on the trend of revenues and profits, and the industry.  If you come up with a price that makes sense to you of say $300,000, and the owner is asking $900,000, don’t be afraid to tell the broker that based on the numbers and information provided, it only makes sense to you to pay $300,000.  Don’t throw in a ridiculous low ball offer just to play games, because that will just piss people off, but if you say “look, from the numbers you’ve provided I think I’d make “x” per year, and so as a result it would make sense to me to pay “y” for this business, the broker will understand and the business owner will come around, or perhaps furnish you with additional information to show why the business is actually worth more.

Very often the business owner’s expectations are way off the mark, and as much as the broker can try and advise them of that, it’s not until genuine offers start coming in that the reality hits.

Also, keep in mind that most business owners, by the time they decide to sell, are well and truly ready to exit.  They’re already thinking of the retirement holiday or what they will do next with their life.  So make an offer that makes sense for you and be patient.  If the owner won’t come around, there’ll be other businesses.

 

Important Information:

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.

What is financial autonomy and how to begin the journey towards financial independence – Episode 3



I’ve named this podcast Financial Autonomy.

So what is Financial Autonomy?

What does it mean?

Well that’s what we’re going to explore in today’s podcast

I’ll give you a big hint – Financial Autonomy is about gaining choices in life.

Buckle up – let’s dive in!

Financial autonomy or financial independence if you prefer, is about being in a financial position to have CHOICE.

In my role as a financial planner, every day I talk to people about their financial plans.  In almost all cases, amongst their financial goals will be retirement plans.  For the past 50+ years, most people in developed countries such as Australia have lived on an expectation that they will enter the work force in their late teens or early 20’s, and work through until somewhere in their 60’s, whereupon they will cease work entirely and live out their remaining days in “retirement”.

This scenario is perhaps a bit male centric, as for many women, paid employment is often put on pause when children arrive.  But none the less, in more recent times this is a rough sketch increasingly applicable to both the sexes.

Financial independence

Whilst this trajectory remains applicable for many people, increasingly the feedback that I’m getting is that this is not how many people wish for their life to unfold.  Instead they seek a path perhaps looking more like this:

Financial independence

Financial autonomy, is about getting yourself in a position where you can move to yellow section above.

Where you have CHOICES.

Where you don’t have to work in a job you hate, or with a boss who is a moron, simply because that’s your lot in life until you reach 65.

Financial autonomy might mean reducing your normal paid employment from 5 days per week to 3 or 4.  And in those now freed up days, you might chose to study, do a different job, care for your kids or grandkids, or get involved in the local community.

Financial autonomy might mean a career change.  Initially the pay might be less, maybe even permanently so.  But you spend a lot of your life at work.  Do you really want to waste so much of the limited time you have on this earth in a job you hate?

Financial autonomy might mean starting your own business.  There will be many challenges and certainly risks.  But you will have the flexibility to work when and how hard it suits you. Do something you are passionate about.  Take holidays when it suits you.  And if your son or daughter is getting presented with a student of the week certificate at assembly, you can go without having to ask the boss for a favour.

Whilst financial independence in the extreme might mean not having to work again, for most people this is not what they want.  Financial independence is about having choices in life.

So where to start?

First you need to clearly identify your goal or objective, and then you need to quantify it.

Vague “one day I’d like to …” won’t get you anywhere.

Let’s say that your goal is for a career change.  You currently work as a company accountant but have lost the passion for this profession and are finding the stress too great.  You would really like to re-train to become a primary school teacher, something you feel you were born to do.  So what are the financial challenges associated with this change?

  1. To retrain you would need to take 2 years out of the paid workforce to attend uni and  complete the on-the job training required.
  2. The pay for a teacher will be lower than you are currently on – approximately $30,000 per year less initially you estimate, though this will narrow a bit as you gain experience.

You and your husband own a house with a mortgage of $300,000.  Your husband works full time, enjoys his job, and believes it is quite secure.  As a household therefore you have confidence that during your training period, some money will be coming in from your husbands earnings.

But what if any, is the shortfall?  , ie. what is the difference between your husband’s take home pay and what it costs to keep your household afloat?

You need to know what you are spending.

We have a budgeting tool in the Resources page of our web site.  I know household budgeting is no fun, but there is just no way you can gain choices in life through financial autonomy without knowing how much it costs you to live.

So let’s say mortgage repayments are $2,100 per month, and from the budget tool you have determined that your living expenses average $2,600 per month, and bills average another $1,200 per month.  So your household expenditure is $5,900 or $70,800 per year.

You should allow some money for the unexpecteds, so let’s assume $75,000 is the current need.

Note that we have not allowed for lavish holiday’s here, or a new car.  This is just what the household needs to function.

Your husband’s bring home income is $53,000.  This is after tax and lease payments on a car. This is net income.

So you have a shortfall of $22,000. To achieve your goal, this shortfall needs to be plugged, both during the initial 2 year training period, and then longer term.  In our next post we’ll look at some potential strategies you might be able to deploy to plug this gap.

Congratulations.  You have taken the first definitive step towards achieving financial independence and being able to choose the life you want to lead.

 

So let’s summarise.  To begin your journey towards financial autonomy and gaining choices in your life, you need to:

1 – determine your goal or objective

2 – quantify – how much money do you need to make this a reality?

 

Important Information:

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.

How to be financially ready to start a business – Episode 1



So you’ve decided you’re ready to take the big plunge and start your own business.  Congratulations.  Having transitioned from being an employee to running my own business, I can tell you, you will be in for some challenges, but also many rewards, not least of which is flexibility in how you manage your time.  I know of self employed people who like early morning, quiet, thinking time, and so choose to work for 2-3 hours from 6am, then take a break, do some exercise, have something to eat, and sit back down to continue working late morning.  Others work better at night, hitting full stride at 10pm and working through until the early hours.  Of course many businesses require you to be on deck during normal business hours to respond to customers, but even here you have flexibility, especially when you employ staff, to decide when you will be “at the coal face”.

So you’ve made your decision, but how to be financially ready to start your own business?  You need a roof over your head and food on the table.  Perhaps you have a family to support.  Most often the thing holding people back from taking the plunge into self employment is the financial worry.  But that is where good financial planning comes into play.  I don’t know about you, but sometimes I have pieces of work that need doing, and I just really don’t want to do them, primarily because I don’t know where to start and so it’s daunting.  So I keep pushing them aside thinking maybe I’ll feel in the mood to tackle that one tomorrow.  Eventually I bite the bullet and my usual strategy is to make it the first thing I do in the day.  So often, once I get cracking, I find it actually wasn’t nearly as big a deal as I had thought, and the piece of work I had been dreading is knocked over in half an hour.  Now whilst a financial plan to get you ready to start your own business will certainly take more than half an hour, I think it is common for people to put off planning for the move because the thought of doing the planning is just too daunting.  They just don’t know where to start.  Well let’s solve that for you!  None of us are getting any younger, so the sooner you transition into the thing you are passionate about, the more of your life can be devoted to that dream instead of clocking in doing something that is not totally fulfilling.

There are two elements required for you to be financially ready to start your own business – a Survival Strategy, and a Capital Strategy.  By Survival Strategy I mean how will you (and your family if relevant) survive financially whilst you get this business off the ground?  How will you maintain a roof over your head and food on the table?  The Capital Strategy concerns your new business – how will you fund the start up costs, marketing, perhaps fit-out costs and the like?

Step 1 – the Survival Strategy

The starting point in developing your survival strategy is for you to be clear on how much you spend.  That means doing a household budget.  Now I know that for most people doing a household budget is about as appealing as taking an ice bath in the middle of winter, but if you want to transition successfully from being an employee to running your own business, it just needs to be done.

I would set-up a spread-sheet (I have created one you could use, which can be found in our Resources page here), but if you’re not comfortable with that, hand written on a piece of paper will work too.  Set up something like this:

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Start with your housing costs – mortgage repayments or rent.  These are likely to be your largest expense.  Of course if you’re lucky enough to own your house without a mortgage, well done you, you can skip past this bit.  Record expenses as either weekly, fortnightly, or monthly, and then tally that to a yearly figure (the sample spread-sheet will do this automatically for you.)

So now you know how much it currently costs per year to live.  Save that one, now create a second version with what is necessary to survive.  Let’s be realistic – if you want to pursue your dream of starting your own business, some sacrifices will be required.  Perhaps you will need to forgo an annual holiday.  Maybe spending on clothing and eating out will need to be cut back for a while.  Short term pain, long term gain!

An option you may be able to explore if you have a mortgage is reducing your loan repayments down to the minimum required, as most of us, very wisely, pay more than the minimum.  You could also explore having the loan structured as interest only.  In both cases this is not intended to be a long term thing, but it may be helpful for a year or two as you get established in your new enterprise.

Okay, so you’ve crunched your numbers and the minimum amount of money you need to survive is let’s say $42,000 per year.  I would divide that by 12 to get a more meaningful number of $3,500 per month.  Now of course bills are lumpy so some months it will be a little more and some a little less, so a bit of a buffer of cash in the bank is needed.  But you now have a target to hit – for you to progress your dream of starting your own business, you need to be able to generate $3,500 per month as a minimum.

The next step in devising your survival strategy is thinking about how many months it will be before you first start having enough revenue in your new business to begin drawing some income.  This will vary greatly from business to business, but whatever period is your best guess, from my experience, double it.  So you’ve done some basic business planning (a topic for another post), taken a best guess at what revenue you’re likely to raise and what your expenses will be, and determined that you would be in a position to start drawing some income from your business 4 months after commencement.  This will be wrong.  No matter how hard we try, these forecasts are just educated guesses.  Which is why I say, whatever period you estimate, double it.

So we need to assume in this example that you will have no income from your business for the first 8 months.  So where is the $3,500 per month going to come from?  When I left my employee role to start my own business, I had several months of accrued long service and annual leave that was paid out.  This covered several months of expenses and was essential in enabling me to make the transition to self employment.  Perhaps you have money available to redraw on your home loan.  Maybe you need to find a part time job to bring in some income whilst you get your business going.  Perhaps some freelancing via sites such as Upwork, Airtasker, or 99Designs.  Think broadly, ask around for ideas.  You may have a partner generating income which covers some or even all of this minimum income need.  Every solution is unique, but develop your survival guide and you are well on the way to achieving your dream.

Step 2 – the Capital Strategy

Okay, so you’ve got a solution to keep a roof over your head and you wont starve.  Wow, you can taste it now can’t you?  This transition to your own business might actually be able to become a reality.

Now how will you fund your business?  That’s where the Capital Strategy comes in.  Spread-sheet time again!

Many business these days are service businesses, and so start up costs are fairly low.  Certainly when I set out to open my financial planning business, I needed a computer, a mobile phone, some stationary, and not a lot else.  I was able to rent a serviced office which included furniture and an internet connection, and I joined a network that provided access to the research and planning software that I needed, and who waived their usual monthly fee for the first 6 months to give me a chance to get going.  You might be able to work from home initially (maybe permanently although most people I speak to find this a bit lonely long term – we are social creatures, at least for parts of the day!).

Once again, I have created a spread-sheet that you might want to use.  It is in our Resources page, which can be found here.  None of the cells are locked, so chop and change it as required.

With this completed you will know how much cash you need to start your business, and then how much you need on a monthly basis to remain afloat.  For many services businesses, the initial capital required is pretty low.  You may be able to fund this out of savings, redrawing on your home loan, or perhaps a loan from a willing family member.  If your business requires significant equipment, then typically the seller of that equipment will have a financing solution whereby you can lease it over several years.

I suggest doing a little reading on the Lean Start-Up methodology.  There’s plenty of article about it on the web.  It may have some application for your business.

The monthly requirement for the business to survive can hopefully be meet fairly quickly via your business revenue.  Estimate what you expect your sales to be.  Then reduce it by say 30% to be conservative.  If you are providing products or services to other businesses, allow for the fact that most pay 30 days after receiving your invoice, and many drag out longer than that. Think about how you can get deposits or up front revenue to help with your funding.

The most likely outcome is that you will have no or minimal revenue for the first few months, then it will progressively grow.  Your Survival Strategy will cover your household expenditure needs until the business can start to distribute some income.

Your Capital Strategy will need to resolve how to cover the initial outlays for equipment and the like, and also the running costs of your business. Perhaps you determine that 50% of the business running costs can be met by business revenue in month 4 say, increasing to 70% in month 5, and then by the 6th month, the business will be generating enough revenue to cover its overheads and start to be in a position to payout some income to you.

So there you have it, a framework to get you financially ready to start your own business.  If you have any questions please fire away below.  Or if you’d like to find out how we can work together to develop a tailored solution for your transition to your own business click here.

Important Information:

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.