New Business + New City + New Baby + Big Debt Payments = Stressed Out

magnifying glassNate and Carrie moved from California to the midwest early this year to be nearer to family and to launch their web design business in a lower cost of living area.

In spite of the move and a new baby in the house, they’ve managed to generate enough revenue to keep their expenses below their income by an average of $218 per month.

But it’s been stressful, and Nate reached out to me in hopes that I and the community would offer some budget tips to help him and Carrie better manage the variability in their finances.

The Budget

Category Budgeted Notes
Monthly Bills
Rent $1,140 Apartment building offers high quality public space and free internet, allowing him to avoid renting an office for his web design business.
Cell Phones $53.90 $26.95 each, thanks to a discounted smart phone plan. (Not Ting, but similar.)
Electricity $45 Likely to increase in the cold mid-western winter.
Utilities $45 Covers water, trash, sewer, and natural gas for the apartment.
Health Insurance $370 They use a Christian expense sharing plan that covers non-routine medical expenses.
Loan Payments $243.49 Non-college related debt.
Student Loan Payments $500 Roughly $54,000 in student loan balances.
Investment $200 Roth IRA
Monthly Bills Total $2,597.39
Everyday Expenses
Groceries $250 Average outflows actually come in under budgeted amount.
Household Goods $150
Restaurants $65 Average outflows exceed budgeted, so I used average.
Restaurants $70 Average outflows exceed budgeted amount, I used average outflow.
Fuel $45 They drive very little, always spending less than budgeted.
Transportation $40 Five month average outflow. Covers bus fare, parking meters, paid parking lots around town.
His Money $15  His and her average outflows are less than budgeted.
Her Money $15
ATM Cash Out $50 Highly variable, but five months of data shows an average that needs to be acknowledged in the budget.
Everyday Expenses Total $700
Tithing $325 Varies widely due to variable income. They pay 10% of income.
Other Charity $40
Giving Total $365
Predictable Rainy Days
Date Night $30 They average less in actual outflows.
Self-Employment Taxes $200 Wisely setting this aside to avoid getting behind.
Predictable Rainy Days Total $230
Unpredictable Rainy Days
Other Medical $225 They run a large balance in this category in anticipation of medical expenses not covered by their health sharing plan.
Misc Unexpected $15 Average outflow.
Car Repairs $50 Average outflows are higher due to a big repair a few months ago. Current category balance is low.
Vet $60 They only budget $10, but average outflows are nearly $60. You have to acknowledge the real cost of the pet, or it will always throw off your budget.
Gifts $10 Average outflows are lower: $6 per month.
Health & Beauty $10 Average outflows are lower: $4 per month.
Unpredictable Rainy Days Total $360
Budget Total $4,252.39

*Nate currently manages his business finances in his family budget. I pulled out all business-related expenses. I address the issue below.

Alright, Nate, here’s what I’m seeing:

You have a lot of debt, but I can’t really advise you on how to attack it until you have stability in your income. For now, you’ll just need to keep current on your payments with plans to ramp up debt payoff when you have the income to make it happen.

You and Carrie are doing very well with the rest of your budget. It says a lot that your average income exceeds your average outflows. You’re doing much better than I did in making the transition to self-employment.

The only thing I would clean up in your budgeting workflow would be to budget more accurately based on historical outflows. You’ve done great with expense tracking, so you have nearly six months of real data. You have a few chronically under-budgeted categories (Restaurants, ATM Cash Out, Vet), and a few chronically over-budgeted categories (Cell Phones, Health & Beauty, Gifts, Fuel).

Adjusting these categories won’t make a huge difference in the budget, but if you have data to help you be more accurate, you might as well take advantage of it.

Separate Business Finances from Personal

Your business is very new, and things feel tight, so I understand why you’d blend your business and personal budgets together.

The problem is your family and your business are two separate entities. Each has inflows and outflows that have nothing to do with the other. Each needs its own budget that abides by the 4 Rules.

I’m not a CPA or a lawyer, so I can’t advise the ideal legal setup of your business. All I know is you want separate bank accounts and budgets for each. Money flows into the business; you assign jobs to those dollars. The biggest, most important job for the business’s dollars will be to pay your salary. The salary will leave the business budget as an expense and enter the personal budget as income.

The obvious goal is to build enough revenue and cash in the business that you can simplify your personal finances by taking one monthly salary payment. You’ll be living Rule 4, and the bulk of your variable income stress will be gone.

Because you’re self-employed, it’s on you to create that stability. And it’s not easy.

Who’s Going to Write You a Check this week?

You’re running a creative business where you’re the primary creative. That means you have to create the product but you also have to market, sell, and support the product yourself.

I’d encourage you to start each week with one question:

“Who’s going to write me a check this week?”

You’ll know you’re on the path to stability when you have a list of clients who are likely to write you a check this week. I say “likely” because the nature of client work (as you well know) is the money never comes when you think it will, but most of it comes eventually.*

*Unless you have bad clients or bad account management practices. Bad clients are typically the result of bad sales practices – underpricing, poorly defining scope, etc. Topics for another blog. Nate seems to have clients that pay, so his main issue seems to be getting more of them and managing the scope of his projects to keep his effective hourly rate high.

The key to stability is having enough receivables in place so that collecting some percentage of what’s due will cover your business’s cash needs (and by extension, your personal cash needs).

In other words, sales needs to be your priority until you have enough pipeline and enough of  a client base that you can shift focus away from business development. Like I said – not easy. If you haven’t seen it yet, read this great blog post called Maker’s Schedule, Manager’s Schedule about how creatives can continue creating while dealing with business stuff.

Summing up: keeping managing your budget with care, separate your business budget from your personal budget, and go into hard-core sales mode to build a business pipeline that will stabilize your income for good.

28 Responses to “New Business + New City + New Baby + Big Debt Payments = Stressed Out”

  1. Stephen

    since a lot of submitted budgets include tithing, it got me thinking. is it better to always tithe (even with lots of debt) or suspend the tithe and put that money toward paying off debt. once the debt is gone you could contribute a greater amount to charity by also contributing the money that would’ve otherwise gone to debt servicing.

    i.e., in the long run, wouldn’t using a tithe to pay off debt might free up more money to contribute to charity? instead your tithe is prolonging your indebtedness and limiting your ability to contribute to charity.

    • Jordan

      I believe this could go either way, and I can see why people do it and why others choose to delay. Tithing is obviously important to a lot of people and there is actually a quantifiable morale boost when you give to charity especially to one you personally believe in. So it is possible that even with the free money from not tithing they may be in a worse situation if they didn’t. My 2 cents.

      • Christine Griese

        As a Christian, we believe the our money is not really our money but God’s money. The Bible states that we are to give a portion of our income right off the top.

        Malachi 3:10
        Bring the whole tithe into the storehouse, that there may be food in my house. Test me in this,” says the LORD Almighty, “and see if I will not throw open the floodgates of heaven and pour out so much blessing that you will not have room enough for it.”

        Philippians 4:19
        And my God will meet all your needs according to his glorious riches in Christ Jesus.

        It is in Deuteronomy where it specifies a tenth.

        I’m not trying to be preachy, just explaining why we fully believe that we are to give to God first, and he will supply us with everything we need. Not necessarily everything we want, but everything we need. And I’ve heard stories again and again where this principle held true for people.

        In doing this, we show that we love God more than our money. It DOES NOT mean we are perfect at handling our money, but that we are trying to honor God with it as much as we can.

        Hope that helps explain why we do it. :)

    • Ryan

      Hi Stephen.

      That’s definitely something that I and the church I have attended have thought about before. I think it is a really difficult question, but on the weight of argument I would advocate continuing to tithe or give to charity even when you are trying to pay down debt. I think two reasons are primary in this.

      (1) For many, postponing tithing until you are out of debt can turn into a perpetual game of procrastination. This does not hold for everyone, I admit, but it can be tempting for people to forget to tithe even once they are out of the debt machine. However, if you have made it a priority to tithe or give some percentage or amount of your income even when things are tight and you are fighting debt, how much easier will it be to tithe once the debt is gone?

      (2) For those who will tithe faithfully even after debt, postponing giving often neglects the urgent spiritual and physical needs of those to whom we are giving. Churches, non-profits, or whatever other organizations you are dedicated to giving your money to need money now. That may not be true for all of them, but I know that if everyone in my church decided to fight debt for a couple of years until it was payed off, my pastor and his family would probably starve! If I decided to put off sponsoring a child through some organization but sponsor three children when my debt is paid off, what about the child who is hungry today?

      I know those are not airtight logical arguments, but they have helped in my thinking.

      • Stephen

        Thanks for the thoughtful responses. I agree that it’s not obvious that one way or the other is best but putting things off to some later date entails its own problems.

    • Ben

      To offer a counter point…the Bible never explicitly defines a tithe as money unless you count war plunder as a viable source of income. Should Christians give, definately, but there are other ways to give while you are in debt and getting out of debt can potentially allow for greater, and certainly more cheerful, giving of money in the future.

  2. Megan K

    They seem to be doing a very good job!
    I wonder… depending on the balance of their debt, maybe they should put the $200 from their Roth IRA payments toward their debt? I believe this is what Dave Ramsey would recommend.

    The other suggestion that comes to mind… Maybe it’s time for the pet to go? Now, I know that that is much easier to suggest than to do, given that it’s not *my* pet, and I’m not one who gets hugely attached to my pets. So I say this only as a suggestion to consider, without any judgement or heat, and hope it can be taken in such a light.

  3. Tawnia

    I don’t think you can say gifts is overfunded when Christmas is around the corner and not in your 6 months of tracked data.

  4. Purfectoptions47

    I confess, every time I see a ‘Tithe’ line item in the submitted budgets, I sigh a little because there always seems to be so much ‘non-YNAB’ related debate on giving and religion that go on and on. Is this really the place for it? Let’s stick with the numbers!

    I have one question about Nate and Carrie’s budget and that is: What’s in the $150 Household Goods category? There’s no description and it seems like a large-ish monthly amount to me. I used to do a lot of unnecessary spending in that category. To me, it was like Misc., so I needed to break the expenses down for more clarity in my budget.

    • BWK

      right? accept that people tithe or not tithe and move on. The budget doesn’t lie about peoples priorities.

    • Nate

      Good question! The $150 tends to be things from the grocery store or amazon that are non-food items. This is higher on average than we’d like it to be, but with our recent move and baby we’ve found this category increasing. Now that we’ve had our baby for a couple months this is starting to come down, and we hope to keep it lower with more renewable resources like cloth diapers and DIY wet wipes.

      I originally tried separate categories for toiletries, kitchen goods, baby stuff, but it didn’t seem like we consistently spent enough in any one category to make it helpful for planning purposes.

  5. kmcshea

    impressed with your 250 grocery budget! what is your secret there?

    • Nate

      Carrie is an avid couponer and we have a lot of really wonderful co-ops and farmers markets in the area. They’re not always the best deal, but quality over quantity makes the difference for us. :-)

  6. Julie

    Rent–seems high for the Midwest. Something to seriously look at. Agree with questioning Household–what is that amount going to? Tithing–I get that it’s important to people, but how about reducing the monetary amount and increasing the in-kind/time amount. Base it on your hourly billing rate and donate time, creativity and talent to your church. Contributing time is often much harder (and more valuable in so many ways) than contributing cash.

    • Nate

      I agree 100%, but a few things went into our apartment:

      1. We live in an urban area where we can bike (or walk) just about anywhere we want to go.

      2. With baby on the way and Carrie’s love of cooking, we wanted a nicer than average kitchen and washer and dryer in unit. We looked at lots of options for the week or so before we found our current place. For the marginally increased rent the difference was night and day.

      3. I work from home and needed either a 2 bedroom min or great workspace in the building. Our place has really amazing workspace (including conference room for meetings, coffee, standing desks, couches, kitchens, etc) for residents to use. I would have paid $400/mo for coworking space, so that balanced things out.

      4. It was winter, we had two cats (making it hard to find cheap hotels or friends who weren’t allergic), and were quickly running out of money. We needed to find a place quickly.

      We’re planning to put some significant time into finding something cheaper (and hopefully bigger) a little further outside of the city once our lease comes up.

      We’ve considered counting our volunteer time as tithing, however through biblical research and prayer it just didn’t feel right to us. We trust God to provide wholeheartedly, and there’s honestly no other way we could have made it through, what would have been a very disastrous and chaotic three-way transition.

  7. Jess_Esq.

    I am seeing two restaurant line items..? One at $70 and one at $65…? I am thinking this could be a typo?

  8. Chris

    Can anyone explain what an “ATM Cash Out” budget item is? It seems to me like you can just take cash out and then spend it however you want.

    I have a separate account for myself and my wife called Cash. If I transfer money from an ATM to my wallet, then I put in a transfer. You aren’t spending any money. You’re just transferring it over to another account.

    • Ben

      If you have a separate account called “Cash,” then you should be recording transactions in it otherwise you will have an ever growing untrustworthy “Cash” account balance. The way they are doing it allows them to just take cash out as a budget transaction and spend it without having to record everything they buy with the cash.

      • Chris

        Exactly my point. Where the money is doesn’t matter to the budget. The total money in all your accounts needs to add up to the total money in your budget.

        Not sure why this part got glossed over. it’s not only a money sink (600 a year) but it’s also against YNAB’s tenets.

      • Ben

        Wheather it is a money sing or not is neither hear nor there, but it is not against the YNAB tenets. They are doing it essentially how is is recommended in the YNAB workbook. Both ways are acceptable.

      • Chris

        I didn’t purchase the workbook but this definitely doesn’t ring true to me.

        You’re not giving those dollars jobs by just saying that they’re cash now. You can spend it however you want at that point, which means that you won’t be tracking it correctly in whichever category you ultimate spend it in. It leads to incorrect information and won’t help you in making decisions since you can’t see how/where you spent it. it also means that you’re actual #’s in your budget aren’t correct (say you spent that cash on groceries; that means your grocery budget # is too low).

        If you called it “Fun Cash” that’s something entirely different.

      • Nate

        We didn’t get the workbooks either, but we did take every single online workshop offered by YNAB. We asked in depth questions about cash and the instructor argued both of the points you’re making here are valid options.

        We started off with a cash account, but quickly realized that keeping track of every penny we have on hand was too tedious and not something we would be good at keeping track of.

        In the end, our ATM cash category is for places and things that don’t accept credit. They’re few and far between and the average is currently a little inflated due to post-move Craigslist purchases.

      • Chris

        Appreciate the response.

        My wife and I just round everything up to the next dollar and don’t keep track of change. This makes us more likely to spend using our cards, which makes it much more easily traceable.

        As you get better at tracking everything, it may be an area for the future improvement if you seem like you just can’t get over some financial hump in your budget.

  9. Nate

    Great advice about the maker’s schedule, manager’s schedule. I hadn’t seen that before, but it definitely explains how I can better optimize my time to compromise between my creative (web design) and my manager (sales, meetings, etc). Thanks!

  10. Janet

    For your student loans, call and ask about Ibr, income based repayment. I would guess your payment there would be much lower until your income goes up.

    • Nate

      Thanks for your suggestion Janet. Unfortunately the largest student loan payments each month go to a couple private (non govt) student loans with higher interest. Even if they’d let me reduce the payment, I don’t think I’d want to. We have considered a consolidation loan, but every attempt has left us frustrated and confused. Do you have any suggestions for that?

Comments close automatically after 14 days.