“Deride not what I say because of its simplicity. Truth is always simple. I told thee I would tell how I built my fortune. this was my beginning. I, too, carried a lean purse and cursed it because there was naught within to satisfy my desires. But when I began to take out from my purse but nine parts of ten I put in, it began to fatten. So will thine.” ~from “The Richest Man in Babylon” by George S. Clason.
OK, I love this book so much that (although it is not Christian) I’m just going to say… You have to read this book!! It is told as a story and it reads easily and it will change your life. It is a fantastic book about the power of saving money, and managing money. One of the principles that it lays out so clearly is never spend more than 90% of your income. It doesn’t bind you to just 10% but lays that out as the absolute minimum. As Christians we are used to hearing this because we are told to give 10%, but as a Non-Christian book, it urges that you have to save at least 10% of anything that comes into your hands to ever move beyond where you are. Now I don’t believe that 10% is a magic number. I really believe that God can lead you how much to give and how much to save, but I also believe that He can lead you in advance. Giving and saving are both such amazing principles in your financial life, but if you don’t prioritize it, the money for both giving and saving seems to be the first to dissapear. There will always be an “urgent need” or bill demanding that money. This is why it is so important that you prioritize your finances, and you do that through the power of percentages.
If you are self-employed the power of percentages is going to enable you to be purposeful with everything that comes through your hands, and also find the finances for your dreams. My husband is on salary at his full time job, but he also has several side businesses, which he does contract labor for and is self-employed. Every dollar that comes in through his self-employment is filtered through our agreed upon percentage plan before we look at what is usable from that money. For instance, a certain percentage goes to savings, a percentage goes to pocket money so he can feel the rewards of his labor (a huge point that I will blog on later), a percentage goes to giving, and to a dream we are saving for, and then the rest goes to our needs and is available money. So out of every side check that comes in only about 50% of that money is “available”. We never even consider the whole check, we just divide it in half. This needs to become your mentality every month, otherwise 100% of your income will disappear every month and you will perpetually struggle.
So how do you go about setting up your percentages? It is really simple actually; a simple math equation will tell you what percentage to withhold from each check for each category of your budget. However, percentages are mainly applicable for expenses that do not have a definite due date. This is because it just doesn’t work to only pay a percentage of your mortgage payment. It will still be late :). Most of your fixed bills will need to be paid by their due date and that is where having an “escrow” savings account will come into play in self-employment. If you do have a bill, like your mortgage, that is due and you don’t have quite enough to cover it after paying out your percentages, you would then withdraw the needed funds from your escrow account. You do not take the money from your grocery money, or Christmas fund, or vacation fund. This is the beauty of having an “escrow” savings account set up specifically for months when your income is lower than other months. At the end of the year it will all average out if you have based your budget on an accurate estimate of your earnings, so tap into the picture of your whole income and quit thinking in the desperation of the now.
So you have already determined your monthly budgetable income from yesterday’s blog and you have outlined all of the categories for your bills with their estimated totals for the month in your budget (from my blog two weeks ago~ see “Finding the Holes”, and “Learning for Life”). So to determine the percentage rate of each of your budgeted expenses, you would take the expense amount, and divide it by your monthly budgetable income. So if your monthly budgeted grocery amount is $600.00 and your monthly budgetable income is $4000.00, your grocery percentage rate would be $600. divided by $4000. = .15 or 15% So lets say that you receive a check for $2500 for a contract that finally pays (Yea!). You would then take that check and immediately multiply it by your percentages before you do anything else. So in our example, take .15 and multiply it by $2500. = $375.00 which you would set aside from that check for groceries. Other bills that I would do a percentage for would be your taxes (ask your accountant to tell you what to withhold for your tax payments), gas money, savings, vacation fund, dream funds, entertainment money, and any bill that is paid, bi-annually or annually and not paid monthly (like car insurance).
I am feeling a little “clear as mud” moment right now and I hope that you are not feeling that way because it really is not that complicated. Basically, the percentage allows you to prioritize living rather than always living on what is left over. The thing about leaving your dreams, and your savings for the end after you have paid all your bills is that the money never seems to be there in the end. By making yourself the lowest item in your priorities, you will continually perpetuate the feeling of deprivation and never accomplish what is really important to you. So your budget might look something like this (this is just an example, your percentages need to be based on your workable budget of what you can afford to spend in each category!):
Percentages:
Taxes 10%
Giving 10%
Savings 10%
Groceries 15%
Gas 5%
Vacation 3%
Car Insurance 2%
Leaving 45% of every check that comes in for your set bills. At which point I would pay in full whatever bills were coming due at the next bill period, and draw from your “escrow” savings account for anything that you are short on your budget.
Again, I would like to reiterate that this is a plan for people that are just making it. It is not optimal, but it is extremely necessary if you are in the situation of getting a business off of the ground, or if your income from your business is just enough to cover your budget. Optimally, your business will eventually grow to the point where you can draw a steady salary from it, but in some fields that may take a long time to happen. There are many people who live in the place of “just enough” and percentages, and an “escrow” savings account could truly help you to not just subsist, but to actually thrive. I truly believe, that having consistent money for groceries might just revolutionize your wife’s world and keep her from resenting your business, and having a plan for a vacation might just invigorate your husband into bringing his business to the next level so you no longer have to live in the desperation of paycheck to paycheck.