You know I really wish I could remember where this idea came from (if you know, please tell me so I can give credit where credit is due), but it is something that I teach in all of my business classes. It is a powerful tool to help you to realize you financial goals and take a measure of control in your life.
70% Living
As the name implies, with this method you live on 70%. In other words, all of those expenses, bills, and all that should total no more than 70% of your income. Easier said than done you might say. True, but we all need goals to aspire to. This is a roadmap for you to be able to achieve those goals. So this leads to the first step - figuring out your expenses.
Expenses
Although this is the first step in just about any financial process, many people take the wrong attitude at the outset. When you figure out your expenses, don't go for the bare minimums. In other words, don't go into this process with the idea that you are finding out the bare minimum needed to survive. It's about lifestyle. What you want to do is figure out how much your lifestyle costs - without the scrimping and scrounging. That doesn't mean spend exorbitantly, but don't cut out expenses in your head before you even write them down. We're looking for frugality, not miserliness.
Add up all the expenses you have and then translate them all into a monthly format - easy for things like rent, but requiring a little more estimation for things like clothes and gifts. Don't forget annual expenses like car registration (just divide by 12). You will probably have to make some estimates and you're better off estimating too high rather than too low. Include entertainment and vacations and all the rest. Everything that you spend should be accounted for here.
Once you have your number, divide it by 70% and that is the income you need for this.
The Other 30%
So what about the rest? This is where the power of this technique becomes apparent, mainly because most of us live our lives in the other 70%. But it is the remaining 30% that can really get your financial ball rolling. This money is used to fund three things - your rainy days, your future, and karma.
The Rainy Day Fund
10% of your money should go into savings. Most financial advisors recommend having at least 3 months expenses (what we figured out above) in the bank - 6 months for a business. This money helps to prevent living paycheck to paycheck. As a massage therapist, we know that business is not constant. It fluctuates and we have our busy months, weeks, days, and seasons as well as our not so busy ones (boo). The money in your savings can help to offset that variability. It is also used for life's unexpecteds - which to be frank we should expect anyway. Things like car repair, medical bills, emergency plumber visits and the like. If we don't have a savings cushion, these things can be major disruptions in our lives.
Keep your savings in a separate account than you pay your bills from - preferrably something that pays interest too. I usually recommend ING Direct (no affiliation, although I do have an account). They can even withdraw a set amount each month from your checking account to enforce your savings. It needs to be regular and habitual.
Future Fund
10% gets invested. This is for your future and once it is there, you shouldn't touch it. Until that future arrives of course. I'm not going to spend a whole lot of time on this because there are so many resources out there on this subject, but do make sure you do it. It is scary how many people have not planned for their future. Seek out a good and experienced financial advisor to help (ask around). Don't just pick the kid who just finished their FA training program - get somebody who's been doing it a while and has a track record. It shouldn't cost you much because FAs make their money by growing yours.
Karma Fund
Give 10% away. That's right, you heard me. 10%. Give. Away. Whether it is to church or charity, the homeless or polar bears, this is your contribution to a better world. Sometimes this can be 10% of your work (i.e. if you can do 20 appointments a week then you can give 2 appointments away) or time (work 40 hours, give away 4) or a combination of those and money. This creates a habit of generosity. You'll find you don't resent the freebies as many can come to do and that you feel like you're doing some good in the world. There is a lot of anecdotal evidence out there that whatever you give away comes back to you multiplied. Just make sure that anything given away is done so with the spirit of generosity and not expecting something in return. It just doesn't work that way.
Generosity is good business and good practice. Think about it - would you rather go to a business that is helpful, welcoming, and generous with their time and attention, or one where you are seen as dirt until you seem interested in paying money? I've seen both and to me it's a no brainer.
Parting Thoughts
This system is really about setting up the right habits. If you can even adhere to a part of this system, you'll still be moving in a more positive direction. Good luck!
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