How To Calculate Your Ideal Income: How Much Money Is Enough? | 078

If I asked you how much money you need each month,

could you tell me the answer?

A surprising number of business owners struggle to answer this question

lacking a true understanding of how much money is actually enough

for them and for their business.

Are you earning enough right now?

Would you like to earn more?

And if so, how?

Much more?

How much money is enough for you?

If you'd like to be able to answer this question with

confidence, then do stick around.

It's exactly what we'll cover in this episode of Architecture Business

Club, the weekly podcast for small firm founders who want to build their

dream business in architecture and enjoy more freedom, flexibility,

and fulfillment in what they do.

I'm John Clayton, your host.

I know that building an architecture business can feel hard, especially

if you're a sole practitioner.

The good news is that you don't have to do it alone.

In 2024, we launched our membership community to a small group of

founding members, including architects, architecture,

technologists, and interior designers.

We meet online each week and occasionally in person to support

each other in building our businesses and to have some fun along the way.

We'd recently opened the doors to a limited number of new members.

If you'd like to join this supportive group of like-minded

professionals, now's your chance.

Just go to architecture business club slash wait list, or click the link in

the show notes and enter your details.

We can let you know how to join this incredible group.

And if you have any questions, just email John.

That's JO n@architecturebusinessclub.com.

Now let's uncover how much money is enough for you.

Hey everyone, thanks for joining me today.

Really excited with today's topic because it's definitely something that

I've struggled with over the years.

We are gonna be taking a look at how much money is enough for you.

To begin, we're gonna take a look at why it's so important to

understand how much money is enough.

It informs how much revenue you need to generate, that your business needs

to generate in turnover each year.

And it helps inform how much you need to charge either per

hour, per day, or per project.

And it tells you how many clients you need each year and the minimum amount that

you need to generate from each project.

Now, there are some common myths and common mistakes.

When it comes to calculating how much money is enough, uh, one of those, is

that enough for you is simply whatever your previous salary was at the

practice where you previously worked, plus a bit extra for tax and expenses.

A common mistake is also underestimating your financial needs, particularly when

it comes to the amount that you need to allocate towards expenses each year.

And another common myth is that what you should charge should be mainly

based on what your competitors charge.

So what can happen if you don't fully grasp how much money you really need?

Well, you may not generate enough income to maintain your desired salary.

I. You may not have enough money to invest in the growth of your business.

Worst case, your business may fail due to insufficient cash flow.

You just might not have enough money to stay in business moving forward.

But there are a few things you can do to help avoid this.

And this really comes down to having a very clear understanding of how much

money is enough for you and how much money is enough for your business.

I recommend that you first have a think about how much take home

pay or net income after tax that you personally need to have.

I suggest that you consider your current personal expenses each month.

So this would include things like household bills, savings, your pension,

if hopefully you have one, and any disposable income more, or spending money

that you have each month for, for the fun stuff that you do in an average month.

So add those up and write that number down.

This is your baseline income goal.

This is the minimum amount that you need to take home each month to get by.

So let's call this monthly income milestone number one.

But let's be honest, you don't just want to scrape by each month.

So let's consider how much money you really need each year.

So times that first number, your minimum monthly, take home amount

by 12 to cover the whole year.

And then I recommend that you add in allowances for the other stuff that occurs

during the course of the average year.

So this is gonna be things like.

Birthdays, maybe, uh, anniversary.

If you're married, Christmas, annual holidays, weekends away, you're

really trying to think of all those extra things that occur throughout

the course of the year that you don't necessarily budget for each month.

But those things occur each year.

There are things that you can reasonably forecast are going to happen.

Then what we do is we add a buffer for the unexpected things that often crop up the

things that are more difficult to predict.

Let's call this our, our rainy day fund, or our buffer.

It's really up to you how much you add.

For this, I would recommend something in the range of 10 to 30%, depending on how

accurate you feel your other allowances are and how cautious you want to be.

So add that altogether.

So you're taking the first figure, your minimum monthly take home amount.

You've time slot by 12 to cover the whole year.

You've then had a think about extra allowances for the things that you can

predict, the things that come up in the average year, and then you're adding on

a buffer to give you that safety net.

So now you've got a more realistic annual income target, and if you

divide that number by 12, you'll get an updated monthly income target figure.

Let's call this number monthly income milestone number two, and

notice how much it differs from your previous monthly milestone figure.

These calculations are focused just on the short term, so this is looking

at now on your immediate year ahead.

But I also recommend thinking about how your income requirements

might change over time.

How might they be different in the future?

Do you want to save more money in the future?

Do you want to travel to exotic places or maybe upgrade your car or move home?

Or maybe one of your children might be going off to college or university in the

coming years and you'd like to be able to support them financially with that.

So.

Make a big list of everything else that you'd like to do, be or have in the

next three years, and take an estimate of how much they'd cost you each year.

And I would say don't overthink this.

Rough figures are absolutely fine.

It's just making some allowance for it, and then what you do is

you add those numbers to your previous annual calculations and

update that buffer percentage.

And again, you divide the overall number by 12 to calculate your

updated monthly income target figure.

So let's call this number monthly income milestone number three.

So by now, you should have a very clear understanding of how much money you

need right now to get by each month.

How much money you need over the next year, allowing for annual things that

crop up and a buffer, and also how much money you're likely to need in

the future for your desired lifestyle.

So armed with this knowledge, you can now calculate how much revenue your business

needs to generate each year to support your income goals and salary requirements.

So how much money does your business need to generate?

You need to generate enough revenue to cover your salary, all your business

expenses, pay your taxes, and make a profit without bleeding your accounts dry.

If you're already in business, you can use past financial data to help you estimate

those numbers, but if you're starting out.

You may want to do some research to help you figure out what

those expected expenses may be.

This is gonna be everything from software subscriptions to your professional

indemnity insurance to your stationary, through to everything else that you

might need to run your business.

I would say be realistic and think about.

Everything that your business might need, it's better to err on the side of

caution and allow for something and make a saving than to to not do your homework

and to have some unexpected expenses

in the book Profit First, Mike McCalvi.

Recommends as a starting point, allocating 50% of your overall business's

revenue towards owners' compensation.

So this is your net take home pay after tax, the remaining 30% is

allocated to your operating expenses, so that's your running costs.

15% towards tax and 5% saved to one side for company profit.

These percentages are based on your company turning over less than

250,000 US dollars per year, and today's exchange rate that roughly

equates to 187,000 British pounds.

So that's gonna be a business that typically has one key employee

yourself, perhaps with some contractors.

Part-timers, maybe you might have one full-time employee.

Uh, so you have to bear in mind that those recommended allocation

percentages would vary depending on the size of your company.

So based on those recommendations you'd make your businesses target revenue

amount, double your personal target income goal to allow a realistic amount of money.

To cover your expenses, taxes and profit.

So remember, that's 50% of the overall company revenue allocated

to your net take home pay.

And 50% of it is allocated towards your running costs, your operating expenses

tax, and a small percentage for profit.

Bear in mind, these target allocation figures are just a starting point, and

you may want to adjust them over time.

You can do this same exercise.

Using each of the three monthly income milestone figures that we previously

calculated to get a clear picture of what your business needs to look like

financially in order to support each of your monthly income milestone goals.

So hope this exercise has been useful for you.

If you learn something new or it's helped you to uncover something about your

business, then I'd love to hear from you.

You can email me at johns JO n@architecturebusinessclub.com, or

you can connect with me on LinkedIn using the link in the show notes.

Next time I chat with architect Joe Wright about his changing approach to business.

Thanks so much for listening to this episode of architecture business club.

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Remember.

Running your architecture business.

Doesn't have to be hard and you don't need to do it alone.

This is architecture business club.