Creating a financial buffer

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Creating a financial buffer for your business (and your life)

Donna McCullum, who runs the successful Money Magic online programme, says that saving is the ultimate commitment – to yourself, your business and your relationship with money.

McCallum should know. She started her small business, Fairy Godmother Inc., in 2006 and is already at the point of being financially free. In other words, her monthly passive income exceeds her living expenses and she is not obligated to work for a living.

She got there by paying herself first and says this was her biggest wealth lesson of all.

Before any other expenses were paid in her business, McCallum paid her salary first. She put 10% of her salary into a personal savings account that she later used to build her investments. She also put 10% of the business turnover into a business savings account.

McCallum recommends building a 6-month buffer in your business savings account – enough funds to keep your business afloat for 6 months if you had to. You might also want to use this account to put money aside for your tax payments.

Doing this, she found stability in her business, peace of mind around her own personal finances and grew in confidence about her ability to attract wealth. It’s a perpetual cycle: the more savings you have, the better you feel, and the better you feel, the more money you attract and save.

To help you manage your money and your savings, McCallum recommends adopting T Harv Eker’s JARS System, which means splitting your income into six different “jars” or accounts. She runs this system with 4 bank accounts – 1 current account and 3 savings accounts.

These are the six jars with the suggested percentage splits:

  • NECESSITIES – 55% – for managing everyday expenses and bills like rent, food, petrol, bills, etc.

  • FINANCIAL FREEDOM – 10% – initially used to build a savings cushion and then investments that create passive income streams.

  • EDUCATION & GROWTH – 10% – to further your education and personal growth.

  • LONG-TERM SAVINGS FOR SPENDING – 10% – for bigger purchases like skiing trips or cars or furniture.

  • PLAY – 10% – spent each month on nurturing and spoiling yourself.

  • GIVE – 5% – for donations or gifts.

If you have debt, McCallum suggests allocating 10% to a MONEY EASE account – taking 5% from the Savings for Spending jar and 5% from the Give jar (giving can be done by offering your time rather than your money). This money is used to lower your debt each month – starting with the most expensive (highest interest) debt first.

You might not be able to do these percentages perfectly at first, but McCallum says it’s more important to be aware of them and build towards them by cutting costs, reducing debt and exploring ways to bring in additional income.

To recap:

  • Pay your salary first in your business.

  • Put 10% of your business turnover into a business savings (buffer) account – keep this up until you have a 6-month buffer. You could also use this account to put money aside for your tax payments.

  • Put 10% of your salary into an untouchable personal savings (financial freedom) account to build a savings buffer that you can later use for investments.

  • Use the JARS system to manage your money, working toward the following percentages:

    • Necessities 55%

    • Financial freedom savings 10%

    • Education and growth 10%

    • Long-term savings for spending 10%

    • Play 10%

    • Give 5%

  • If you have debt, allocate a Money Ease jar instead of a Give jar. Contribute another 5% to this from Savings for Spending.

  • You don’t have to be perfect when you start, see where you can cut costs and work towards these percentages.

Take out: Paying yourself first in your business is the key to creating wealth and stability in your business. Use 10% of your salary to build a savings buffer for investments and use 10% of the profits from your business to build a 6-month business buffer.

 

Author: Nikki Grandin

 

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