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

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

Nate 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  
     
Giving    
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.