How long can you support yourself without an income before you hit your financial threshold? Could you survive without dipping into your holiday savings? Think really hard about that one….
How would you feel if you had six to twelve months of expenses in your bank account - at all times? I want you to imagine that for a moment; imagine the stability and the freedom, not to mention the peace of mind that you would have. Awesome, huh?
What is a runway?
So, what exactly is a runway? Well, if you have ever wondered how long you could survive without working, then you probably already know what a runway is. But let’s keep it easy for you… A runway is a financial conglomerate of your expenses over a set period of time. Think of it as an extended emergency fund; a savings plan for your monthly expenses and financial commitments. Whether you are looking to start a business, or perhaps you are blindsided by a global pandemic, getting started on creating a runway puts you one step closer to financial freedom, during those tough, and often unexpected times.
Know your income, know your expenses!
Now that you know what a runway is. The first step is to calculate your runway. So, how do we do that?
We need to start by knowing and determining your monthly expenses. This is a big one, and I mean KNOW your expenses. These are things like: rent, utilities, groceries, health insurance, car insurance, Netflix, phone, gym etc. The best way you can determine your monthly expenses is with the use of a Spending Plan. With a Spending Plan, you know your exact spending on any given month (day, week, year, quarter) without having to estimate (it’s SO fab).
A Spending Plan is a brilliant way to easily outline your exact income AND expenses. If you do not have a Spending Plan yet, that’s okay - you are in the right place, even if your income was nothing, you still need to plan! Perhaps your income is a regular paycheck - or even an irregular one. If you aren’t sure what your exact income is right now, then you can start off by an estimate based on your lowest current level of income; this can give you a bit of wriggle room to work with, should you bring home more than estimated.
Calculate your runway goal.
Now that you have determined your income and expenses, it’s time to calculate your goal! A good rule of thumb is to have a runway that covers six months to a year of expenses. But this isn’t always realistic for everyone, as we can imagine. Because you have already determined your income and expenses, you can define what is a realistic runway goal for you. This could be anywhere from one month to Three months. I think we can all agree that starting somewhere is always best.
The calculation is easy; it is your expenses multiplied by your runway goal. For example, if your monthly expenses are $4,000.00 a month and your runway goal is six months of runway, then your runway would be $24,000.00. This is a great goal to have; It allows for you to have a significant buffer should your future financial plans change over time - as they usually do.
Don’t let your goal scare you, it’s not a race.
Okay, so now you have calculated your goal and it may look like a lot of money right now. Remember that we all have to start somewhere and that Rome wasn’t built in a day. Ironically a runway isn’t a race…. It is simply a savings account that allows you to rest easy knowing your expenses will be covered for a period of time that you determine, should you have a planned or sudden unplanned change in your life that would otherwise affect your source of income. A runway takes time to build, so assess your wants vs your needs and determine what you can cut out, in order to save and build your runway. Start building your runway today and a few months down the road you will be surprised to see how far it has grown.
Remember what you are saving for!
Remind yourself that these funds aren’t to be dipped into when your car breaks down or for unexpected travel, that’s what an emergency fund is for. This type of savings account is designed to be able to cover your expenses that you are financially committed to over a set period of time, such as; food, rent, bills, electricity, water, etc. where you are not generating an income. How many people do you think have an Emergency Fund for these times? Never mind a Runway! Let me tell you… it is all in the planning… (the Spending Planning).
For more information on Spending Plans, Runways, Emergency funds, etc, then contact us at Spending Made Easy or book in here for a no obligation chat.
Samantha 0404 468 525