Clarify how much money you need to bring in

In the last four steps, you’ve looked inwards towards your values and goals, dug deep to imagine your potential client’s pain points, and aligned your values with your services.

In this step, you’ll do the calculations to figure out exactly how much money you need to bring in each month to cover your expenses — including taxes. 

Your final formulas will be:

My ideal monthly income = ground floor number (_________) + 25%-30% in estimated taxes (_______)

My topline income = ground floor number (_________) + additional optional expenses (__________) + estimated taxes (_______)

If you already know all those numbers, fill them in. If you need help figuring out any of these, I’ve included the formulas below. 

Figure out your ground floor number

First, identify your “ground floor” by averaging the last three months of spending. Your ground floor is the minimum you need to exist, not a goal. If you’re just starting, you might make about this much. But if you’re more advanced in your career, you’ll probably want to make more.

Here’s your formula: 

Month one expenses (_____) + month two expenses (_____) + month three expenses (_____) = Three month expenses (_____)

Average monthly spend = Three month expenses  (______) / 3

For example, say you spent $5,000 in January, $4,500 in February, and $5,500 in March. Here’s how you’d get your average monthly spend:

Month one expenses ($5,000) + month two expenses ($4,500) + month three expenses ($5,500) = Three month expenses ($15,000)

Three month expenses  ($15,000) / 3 = Average monthly spend ($5,000) 

Go ahead and fill out the formula to get your own ground floor number: 

My last three months expenses are: $_____, $_____, and $_____.

My average monthly expenses are  $_______________.

I need to bring in $__________ each month to make ends meet, not including taxes.

If you don’t know what your monthly living expenses are, take a look at previous bank statements. (And when you begin running your business, you’ll be forced to keep detailed receipts for taxes.) You can add up how much money you spend, on average, on:

• Rent.

• Utilities (wifi, phone bills, gas, electricity, etc).

• Food (Groceries, eating out).

• Travel (buses, trains, gas, planes).

• Entertainment (Netflix subscription, fun, shopping).

• Loans.

Tip: Want a resource to keep track of your expenses, or want to start a budget? Excel and Google Sheets both come with some template budget sheets you can use. If you’re more of an app person, I love Mint. 

I can tell you from experience that it’s a lot easier to give clients a number when you have a solid rationale behind it.

Add estimated taxes

Don’t forget taxes. Remember that unlike a W-2 job, you’re responsible for withholding and paying taxes as you go. A good rule of thumb is to set aside between 25% to 30% for your quarterly taxes. I love SmartAsset’s calculator to give me an estimate.

And remember, every business accounts for taxes when they price their offerings. You're no different. Don’t just price on an hour or word or project. Always make the client pay what you’ll have to pay in taxes.

Take the ground floor number and add your estimated taxes.

Fill out the following statement by adding 25% to your monthly expenses:

Ground floor number $________ x 1.25 = My ideal baseline monthly income $_________

My ideal baseline monthly income, (aka my ground floor, adjusted to include taxes) is $_______________.

Add in optional expenses to find your topline number

Of course, life is more than expenses and taxes. You want to be comfortable, cover business expenses, and account for retirement, college, and an emergency fund. Adding these to your ground floor will give you your topline number.

Here are some optional expenses you can add to your list: 

• Monthly emergency savings: $________. A good rule of thumb is three to six months of your “ground floor” number. 

• Monthly retirement savings: $________. This is different for everyone, but I cover a comprehensive guide to how much you should save for retirement in my playbook here.

• Monthly debt pay-off: $________. How much debt you’d like to pay off this year.

• Monthly career development: $________. Courses, conferences, or any other business investments. If you only know your yearly expenses divide that number by 12 to find your monthly.

Ground floor expenses $_________ + optional expenses $________ = $_________  

Now adjust that number for taxes (maybe this time you use 30% instead of 25%).

Total expenses $_________  x 1.30 = Top floor number $_______

And now fill in the following statement:

Ideally, I’d like to make between $____________ (top line number) and $__________ (survival number) each month.

Add this to the financial goals section of your business plan.

In the next step, you’re going to combine everything you’ve done up until this point so you can fill out the “pricing” part of your business plan. You’ll take your values, what you can offer, your target clients, and your baseline salary, and use them to come up with what you should charge.