I started my company SBO Financial as a side hustle.
We operated it like this for about 12 months before I jumped in full-time to grow it.
When I did make the leap, the business wasn’t at a level to pay me a salary – and for the first time in my life, I had no income to fund my lifestyle.
While I did have some savings which would serve as a financial runway for my personal life, this was finite. I had to work out what was the minimum amount of money I could live on, without racking up debt. It allowed me to calculate the timeline I had before I ran out of money.
That’s when I coined the term Minimum Viable Lifestyle.
In this article:
- What is MVL (Minimal Viable Lifestyle?)
- How to calculate your MVL
- How long is your personal runway?
- Using your MVL to make better financial decisions
What is MVL (Minimal Viable Lifestyle)
You’ve probably heard of the term Minimal Viable Product (MVP). This was a phrase made popular by Silicon Valley start-up guru Eric Ries in his book, The Lean Startup.
The MVP thesis is designed around building the cheapest and smallest product possible, with just enough features to satisfy your early customers. The idea is to work within a cost constraint that achieves the most viable outcome.
This principle can be applied to disciplines outside of the software and product development world. As an accountant, I like to apply this perspective to my personal finances.
Enter the Minimum Viable Lifestyle, or MVL.
The idea behind MVL is to design your lifestyle so that you are living on the lowest viable cost, which still yields the highest impact to your satisfaction. The core principle is that you only spend money on things which have a high personal utility.
The process simply involves a review of your personal monthly lifestyle expenses, so you can eliminate the unnecessary or impulse purchases. The aim is to understand the minimum salary you can live off of and still enjoy a satisfactory life.
Now, before I scare you away, I want to emphasise that the key word here is satisfactory.
An MVL does not mean poverty. It simply means making small sacrifices that still provide you with a comfortable quality of life.
How to calculate your MVL
Here’s how to do it in three steps.
1. Categorise your data
First, begin by exporting your bank and credit card statements for the last month into a spreadsheet and tally your spending into four categories:
- Food and entertainment
- Housing
- Transportation
- Everything else
Now, categorise your expenses into columns. To help you do this, here’s a list of the most common expenses and where they should be allocated in your lifestyle expenses.
There may be expenses that don’t directly fit into these buckets, so just put them into an “other” category. The idea is not to get into extreme details, but rather to get a base understanding of your current lifestyle costs.
2. Conduct a lifestyle review
Once you have a summary of your current living expenses, it’s time to review the cost buckets. You might want to do this with a significant other (partner, husband, wife, etc). Ask yourself, which expenses are really necessary? If we go without them, how would that impact our happiness?
You don’t have to be a Scrooge here – your MVL should be the bare minimum of costs to live a comfortable life. Be realistic.
Usually, the biggest gains can be found in the food and entertainment bucket. Think about how small changes can impact your costs. It could be as simple as moving ‘date night’ out to once a month, instead of once a week. Remember, the less you can live on, the more you can invest back into your business.
Once you’ve identified your ‘unnecessary’ expenses, remove them from the total and re-calculate your monthly lifestyle expenses.
This is your new MVL budget.
3. Add a buffer
After calculating your revised lifestyle expenses, add a 30 per cent margin to factor in personal taxes and a savings safety net – your rainy day fund, in other words.
This final number is your monthly MVL.
How long is your personal runway?
Once you have calculated your MVL, the next step is to calculate your personal runway. That is, how long do you have before you run out of personal savings?
To calculate this, take your total savings and divide that by your MVL. This is the number of months you have before you deplete your savings.
When I started SBO, I had about $30k in savings. My MVL at the time was around $3k per month, so I had 10 months of runway.
This meant I had 10 months for my business to generate enough surplus profit to pay myself and fund my lifestyle.
Using your MVL to make better financial decisions
If you’ve been looking to start a business and you’re not sure if you can afford to, start by calculating your MVL. This will serve as an anchor to make better financial decisions, like:
- How much runway do I have before I rack up personal debt to fund my lifestyle costs?
- What’s the target sales I need to hit in my business to be able to pay myself a wage?
- What is the minimum salary I should draw from my business before reinvesting back into growth?
Even if you’re not looking to start a business, a simple audit on your personal lifestyle costs is a healthy exercise to do every now and again. You just might surprise yourself with how much you’re burning on unnecessary, impulse purchases.
As the designer Francis Jourdian once said:
“One can furnish a room very luxuriously by taking out furniture, rather than putting it in.”
