Because by now you should have the following figures:
- Your Lowest Monthly Income
- Your Total Critical Monthly Expenses
- Your Total Discretionary Monthly Expenses
Now get your spreadsheet ready (if you’re a Plotter) or a pen and paper (if you’re a Pantser) so we can analyse what we’ve got and learn some new terminology.
Chapter 4: Understanding cashflow & paying yourself a salary
First, put the figures we’ve worked out into your spreadsheet or as a list on your sheet of paper. Here’s an example:
|Your Lowest Monthly Income||$3000|
|Your Total Critical Monthly Expenses||$2000|
|Your Total Discretionary Monthly Expenses||$800|
|Cashflow = Your Lowest Monthly Income – Your Total Critical Monthly Expenses – Your Total Discretionary Monthly Expenses||+$200|
In Business, the term Cashflow refers to “the net amount of cash and cash-equivalents being transferred into and out of a business.” (Investopedia)
What does this really mean and why is it important?
In simple terms, imagine all the money a business was making was less than the total of all its expenses. This is what we call “negative cashflow”. You don’t need to have a PhD in Maths to understand that this is an unprofitable venture.
On the flip side, imagine all the money a business was making was more than the total of all its expenses. This is what we call “positive cashflow”. This is of course an example of a profitable business.
I’m not going to get into complexities like tax saving strategies, why people would buy an unprofitable business etc… The key principle I want to get across is this:
When you are a writer, especially if you have the aspiration to do writing “full-time”, you need to start seeing your writing as a business venture and understand principles like “cashflow”.
Looking at your calculations above, you now have the big picture. Do you have positive cashflow or negative cashflow?
If you have negative cashflow, let’s consider this diagram.
It’s logical that you either need to reduce your expenses or increase your income to bring your cashflow into the positive (or to at least break even). If increasing your income is out of your control right now, you can control reducing your discretionary expenses. But this is temporary, remember, so don’t lose heart!
Now that you understand cashflow, let’s discuss your next step.
Pay yourself a monthly salary that’s comprised of Your Total Critical Monthly Expenses + Your Total Discretionary Monthly Expenses
When I first heard about this concept of “paying yourself a salary”, I just loved it. Again, it brings back that discussion we had in the beginning about the power of words.
What does it actually mean to “pay yourself first”?
It’s just another way to think about working within a budget. We know how much we need to “survive” + how much we’d like to still have some fun. These two figures added together can be seen as “the budget we are restricted to the next month” or “the salary we pay ourselves to cover the upcoming expenses”.
Toe-may-toe, toe-maa-toe, as they say. But one outlook may feel suffocating while the other empowering. Thus why I like the latter.
As for, how do we pay ourselves exactly?
I like to have different bank accounts for different purposes. If you saw the number of bank accounts I have, you’d probably have a heart attack. But you don’t have to go nuts like me.
Keep this salary in your main transaction account (we’ll talk about what to do with the rest soon). If you’re a Plotter and like even more control, you may want to have separate accounts for the Critical Expenses compared to the Discretionary Expenses.
By the way, I don’t know if you’re noticing the theme that a big part of mastering money is “mindset”. In fact, Tony Robbins purposely titled one of his books “Money Master the Game” because what he’s learnt from working with and studying multi-millionaires and billionaires is, they see money as a game.
Although a game involves wins and losses, we don’t stress over it if we lose one day because there’s always next time. Moreover, the enjoyable part is the journey, discovering the hacks to overcome the hurdles. Imagine a game that had no obstacles that you just cruised through—where’s the fun in that? Finally, just like in a game you might play, in the game of money, you just need to discover “the edge” to win.
What you’ve been learning through this blog series is “the edge” to tip the scales in your favour. So my challenge to you until next week is, start seeing this as a game that you can and will master!
Raihanaty A Jalil
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