Lifestyle Break-even — bake your cake and eat a slice too

As the owner, your financial role is that of an investor. Your business is an investment and the funds you injected should be considered no differently to your stock market and real-estate investments. You want to ensure the capital and time investment will provide you with a financial return in the future. 

As the CEO, you are an employee, and your role is running the business and ensuring it’s well managed financially.

These two roles will conflict.

As the owner, your motivation is to maximise the financial return from your business. To generate an return on the investment of capital and time you have invested into building it.

The dilemma you will face is the trade-off between taking income now as a CEO, versus long term wealth creation as an investor. You earn present income from the salary you make as an ‘employee’, as well as dividends the business pays you as an investor/owner.

Long-term wealth is earned by growing the value of your business.

Two financial hats

Mind the chicken scratch 😉

The trade-off is this.

The more present income you draw from out of the business now, the less capital there is to invest in the business to create long-term value. On the other hand, drawing the minimal amount of present income leaves more capital to create higher long-term value (if spent wisely) — but at the cost of your current standard of living.

Paying what you’re worth

Nike, now the titan of the sporting apparel world was spawned from an idea not dissimilar to yours or mine — dissatisfaction of the status quo. Founded by track athlete Phil Knight, Knight turned his frustration with the available running shoes in the early 1970s into the billion dollar empire it is today. However it was no ‘overnight success’. In his memoir Shoe Dog, Knight shares his struggles of the business in its startup years.

“The business simply couldn’t support me. Though the company was on track to double sales for a fifth straight year, it still couldn’t justify a salary for it’s co-founder.”

Despite growing sales and team members across 13 States, Knight, still held a full-time job as a CPA accountant to pay the bills in his personal life.

Consider Elon Musk and his brother Kimbal in the early days of building Zip2, building a tech company in the mid 90’s with no funding. The Musk brothers lived on nothing but takeaway and slept in their office during the most difficult the first two years.

“Sometimes we ate four meals a day at Jack In The Box…It was open twenty-four hours, which suited our work schedule”.

They barely had enough money for internet, let alone paying themselves anything of a wage.

I am not suggesting that you have to be a sadist or masochist to be an entrepreneur (although it’s likely that many are…). I am inferring that there are lifestyle trade-offs that you, as both an owner and CEO need to constantly make.

What we know for certain is that it is highly unlikely you will be able to draw a ‘market value’ salary in your startup phase. You can’t bake your cake and eat it too.

Your objective is to scale yourself from the business and it’s unlikely your business will have the resources to take a market value present income, whilst investing into what the business needs to be self sustaining.

If paying yourself a market salary first is your priority, then perhaps you’re better suited to freelancing or contracting.

The art is finding the balance that gives you both the present income to support the lifestyle you need, whilst still providing the business with funds to fuel healthy growth.

So, what’s a realistic, happy middle-ground? To help you quantify this, I offer you this methodology we’ve termed “lifestyle break-even”.

Bake your cake and eat a slice too — Lifestyle break-even

You may be familiar with business term ‘break-even point’ which calculates the number of sales to be made, (in dollars or units), before all the business expenses are covered and profit begins. The way to calculate this is dividing your fixed overhead expenses by your gross profit margins.

Business break even = Fixed overhead expenses / (Gross Profit margin)

Business break-even example:

Say an Ecommerce business has $37,500 of monthly fixed operating expenses which includes the founder’s salary of $5,000 per month. It makes 50% gross profit on every sale.

The business break-even point is calculated as:

Break-even = $37,500 / (50%)

Break-even sales per month = $75,000

Knowing your business break-even point is vital, and serves it’s purpose from a business accounting perspective. But, for the purposes of understanding the balancing act between personal and business cashflow, it is flawed. Why? Firstly, the salary being drawn from the business is probably really low, which skews the business break-even point calculation. And secondly, it doesn’t factor your personal expenses outside of your business.

What we need is a break-even calculation which considers both business and personal lifestyle expenses. Referred to as lifestyle break-even.

How to calculate it

Step 1: Review your personal bank and credit card statements for the last month and tally your spending into these four categories:

  • Housing — rent/mortgage
  • Food and entertainment
  • Transport
  • Health, childcare and education

If you feel that your last month was an odd month, tally up 3 months then find a monthly average. The outcome of this process is to calculate your monthly lifestyle expenses.

After totalling your monthly lifestyle expenses, add a 30% margin to factor for taxes and safety net.

Step 2: Deduct your current monthly salary from the monthly overhead costs of your business.

Step 3: Add the lifestyle expenses to your overhead expenses and use this value to calculate your lifestyle break-even.

Lifestyle break-even example

Step 1: calculate total monthly lifestyle expenses, including the 30% margin:

Life expenses example

Step 2: Deduct your monthly current salary from total business overhead costs of your business.

— Business operating expenses: $37,500 per month

— Less founders salary: ($5,000) per month

— Adjusted business overhead costs: $32,500 per month

Step 3: Add the lifestyle expenses to your overhead expenses and use this value to calculate your lifestyle break-even.

— Adjusted business overhead costs: $32,500 per month

— Add: Lifestyle expenses: $9,100 per month

— Total: Business and lifestyle expenses $41,600 per month

The recalculated business break even point is calculated as:

Lifestyle Break-even = $41,600 / (50%)

Lifestyle Break-even sales per month = $83,200 per month

Having a lifestyle break-even point provides a guide of the minimum sales required to cover your current lifestyle. It represents a target of how much sales you should generate before reinvesting the surplus profit back into the business for growth and hiring, whilst maintaining a satisfactory lifestyle outside of the business.

Naturally, a couple of 25 year old founders like the Musk brothers, who can live on practically nothing, will have a comparatively low lifestyle break-even point. This is a competitive advantage as it allows for more capital to reinvest back into growth.

Interrogate every personal expense and question if you really need it. You’d be surprised with what little ‘luxuries’ you can do without.

One last important thing to note, this lifestyle breakeven calculation assumes just for 1 founder. If there are more than one of you in the business, you will need to cater for them as well!

We recently ran this methodology with a handful of our clients. I found it helped to re-frame the founder’s mentality of living a satisfactory “Minimum Viable Life” presently, whilst thinking about long term wealth creation.

I believe it’s the middle ground between Warren Buffet’s long-term Value Investing principles and Tim Ferriss’ Lifestyle Design.

Bake your cake, and eat a slice too.

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This article was updated on 17 May 2024.  It’s not…