Financial Fluency Episode #38: How much money do you need to earn?

Today I want to talk about how much money you really need.

You can listen in below and Tweet it out here

This is a pretty tricky topic because need versus want can be so difficult to pin down and put an exact number on, especially when people are thinking about things like their overall goal for retirement. Today I want to take a look at the two types of people that I run into most.

People who think they need massive amounts of money to do what they want and have the kind of life they want to live. These are people who say they want ten million dollars, or they want their business to be worth 40 million dollars.
People who make top line revenue goals without really accounting for expenses and taxes, and that sometimes gets them into trouble.

Let’s think about what you want to earn with your business, your freelance, your income, what are your goals and why are they?

The Big Money People

I run into a lot of people who say, I need to make ten thousand a month or I need six figures a year, or I want ten million in the bank and a 40 million dollar business. I’m not saying those goals aren’t good, I’m just questioning what they’re attached to.

What is it that you need that requires ten million in the bank?
What is it that you need that requires the business to be worth 40 million dollars?
Are you planning on selling it?
Are you going public?
Where does this number come from?

I like this story from Tony Robbins’ money book about a talk he was giving where he asked people what their financial goal was. There was a young man towards the back of the room who raised his hand and said, I need a billion dollars. Tony said, okay, let’s map that out, and he asked him to start listing all the things that he needed that were going to require a billion dollars.

He wanted to own an island, he wanted his own private jet, he wanted real estate in different places. Tony said, okay, I have some experience with a lot of these things, I own an island, I own jets, let’s talk about your experience of those things, because if you want to own an island, do you actually want to run a resort? Do you want to have a hotel? Is this part of the life that you’re dreaming of, or do you just want to be able to spend three or four weeks a year with all your family and friends on an island?

It wasn’t that he wanted to run a hotel, he wanted the island, and Tony said, it takes a lot of maintenance, a lot of staff, you’d be better off renting out Necker Island for 350 thousand dollars for a couple of weeks with all of your family there, with the full staff. If you want the experience of a private island, rent it for a few weeks, don’t buy it.

He went onto the private jet and said, okay, how many trips a month do you think you’ll be taking? Tony added up how much it would cost to charter a private jet instead of buying a private jet. He went through all of the things, getting the experience that he wants out of life, without necessarily owning all the things that require all this maintenance and upkeep.

They could not get past ten million dollars.

So this young man who said, I need a billion dollars to have the life I want to live, when he went through it item by item and Tony added how much these things roughly cost, when he put real actual dollars to each item they couldn’t get more than ten million dollars.

Ten million dollars is still a lot of money, but it’s a hundredth of a billion dollars.

That’s like going to a store thinking you’re going to need a thousand dollars, and needing ten dollars. To be that far off, to think you need a billion dollars and only actually need ten million, it’s a staggering miscalculation.

So I just wanted to bring that idea up. If you have these very, very big number goals, try to sit down and look at what you actually want the experience of. Are there other ways to experience that? Do you actually have to own all the things you’re thinking of in order to experience it?

Often ownership is a burden. Some people want to own a lot of houses all over the world, but you have to staff and maintain them and have people there taking care of them, making sure they’re not being broken into, making sure everything’s ready when you get there.

Maybe you’re renting them out, maybe not, it might be much more worth your while to travel a lot, but not own houses in all these places.

Personally I love going to a different country and renting a place or staying in a nice hotel and getting that experience of being pampered of experiencing a different household than you usually do.

I don’t know that I’d want to go to the same place every year. The idea of owning a vacation rental isn’t super high on my priorities. I just think, well, what happens to it the rest of the year? If you’re going to rent it out then you have to pay for management and upkeep, and what happens if there’s a natural disaster and it’s in a different country, or if the government changes.

This happened to some people from the UK who had properties in Spain. There was a period of time when the government totally shifted and there was a question of what was happening with all of the overseas owners of houses in Spain. Depending on where you’re buying, it could be a tricky situation if governments change drastically and tax implications change for overseas owners.

Think about the experience you want to have, and go and look up how much it costs to maybe not own that thing, but rent it instead. Put some real dollar amounts on there and start adding up, because I think sometimes having these goals like ten million dollars or 40 million dollars or a billion dollars, it’s so big that it’s hard to actually start taking action towards saving towards it.

If you start putting 100 dollars away a month you’re like, oh gosh, I’ll only have 1200 dollars by the end of the year. However, if you think, okay, the first step towards this life I want to live is to be able to travel for two months out of the year, 100 dollars a month isn’t going to get me there very soon, maybe I need to do 250 dollars a month. Make it something that you can actually start seeing progress towards.

The Top Liners

Looking at the top line revenue people, because I work with a lot of women who are freelancers or entrepreneurs or have online businesses of some kind, or have offline businesses but are trying to put them online, a lot of the time we come to this topline revenue thinking problem.

You think, okay, I need to sell x number of products or service at x dollars to equal this amount, and to run my business I need this amount, I need to pay myself this amount each month to cover my personal expenses.

If they do it from the top line before taxes are taken out and before all their expenses are taken out, you can really end up short. I’ve seen a few people who have either left regular traditional employment jobs to go online, or who have just started freelancing after being out of work for some time, maybe with kids.

After the first one or two years in business they have a good year, the think they have some profit in the bank, and then they go to file their taxes, they weren’t doing quarterly estimated taxes – which in your first year totally makes sense, because what are you estimating on, you don’t have a previous year to base it on – and they’re shocked by what they owe.

Sometimes it wipes out their profit, sometimes they end up owing the government and having to set up a payment plan with penalties. This means the following year every product and service that you sell – until you pay off that balance with the penalties – not only are you needing to set aside taxes for the current year, you’re also putting some of it towards back taxes and penalties.

If you have a slim profit margin, that can really wreak havoc and possibly do a business in. Both having a healthy profit margin and really planning for taxes and expenses along the way can make such a difference.

To help people who are in this situation, I have recently built a cool new calculator on my website that is called The Bottom Line Revenue Calculator. What it does is it lets you list out your products and services, the prices, the number of sales that you need, see the top line revenue that comes of that, and then below you plug that top line revenue into a few calculations that let you calculate your tax withholding rate, and look at your business expenses to see what your actual potential take home will be.

I say potential take home because it depends how much you leave in your business and how much you pay yourself, either through salary or draws.

I’m hoping that this will be a really useful tool for you. I built it because I’ve run into so many people who really have a hard time calculating out how much tax withholding they should put away every month, and figuring out what real profit they make, month by month.

I realize freelancing could be a little different if it’s an hourly project, so maybe we’ll do a separate calculator for freelancers as well, so you can figure out how many projects you need to take on that take so many hours to figure out your bottom line revenue.

I realize we have not covered everything on how much money you really need in this, but I think both looking at those big long term goals, the ten million, the 40 million, the one billion, I think that putting some real numbers to that will really help, and then also for people who have been looking only at top line and not at bottom line revenue, using this calculator can give you a real sense of how many products and services you actually need to sell every month to hit those target numbers on the bottom line, not the top line.

If this was helpful to you, please subscribe, I would love for you to subscribe and review this podcast on iTunes. We’re always trying to get a few more reviews and subscribers, and please share it with your friends. If you want to continue this discussion, we have a Facebook group called Financial Fluency, which you can find here. I hope to see you there.