John Briggs explains why averaging past spending doesn't work. Instead, set revenue goals first, add expenses tied to growth, then cut historic costs that don't acquire clients. For personal finances, he recommends the Profit First system: take a fixed percentage of revenue as pay, then allocate surplus to savings and discretionary spending.
How do I properly set a budget, and is budgeting for my personal life the same thing? Is there a difference? So I wanted to show you how I recommend budgeting for your business, and I do believe it's a little bit different on the personal side. So I'll talk about that. The concept of budgeting, as most of the world talks about it, is the idea of. Looking at what you spent over the last 12 months, taking its average, and saying, this is what my budget is for each month. That's not an appropriate way to budget because all you're doing, especially if the last 12 months didn't result in a financial outcome that you wanted, you're now budgeting to have the exact same outcome that you had 12 months ago. So, first step in budgeting is actually forecasting and predicting for your business what you are trying to accomplish. So we use this template, and this is an example, so I have numbers filled into it, but we have a template that is completely empty. And in this example, we would first look at how much revenue am I looking to add or have by the end of the year on the different services or products that I sell as a business. That's the first step. You start with the revenue. What's that goal? Second step is then to look at what are the expenses that I'm going to have that are directly tied to this new revenue that I'm hoping to accomplish. Do I have to have a bigger team? Do I have to add some software? Are my fees going to go up because my email list gets bigger? Things like that. Then after— so I've done revenue forecasting, what I'm hoping to get, likely or hopefully forecasting growth. What are my expenses, new expenses related to that revenue? Then I go back and look at my historic expenses, but I'm not looking at the average only. I'm also looking at, based on expenses that I've had, Mm-hmm. Do I really need those in the future? Does the expense help me bring on new clients, or does it help me keep current clients? Productive versus not productive. If it doesn't help you keep clients or add clients, then there's a strong likelihood it is not an expense that you need. So you would not put that into your section, the expense section. So again, this is a template. You have these revenue numbers at the top, and then I put expenses down here. I start with new expenses first, then I add in historic expenses. That— there's a little bit more involved into the template. I actually just went through a course called the Wealth Building Framework. This is a Wealth Building Framework tool that we use, so there's a little bit more involved to it. But for the sake of answering the question, I wanted to show how I use a spreadsheet to help me budget. Because then the beauty and magic of the budget is that I'm going to regularly look at it and compare what did I actually do to what I budgeted. If there's a difference, that should bring up questions for me. Why is there a difference? And the answers likely lead to actions that I can take to continue growing my business and fixing roadblocks, because they will happen. They'll happen. From a personal standpoint, I prefer to be a little bit more conservative on my personal budget. And the reason is, is because we have a natural tendency as our income increases to increase our living quality and costs of our lifestyle. It's natural. And so without protection or boundaries around that, We run the risk of every dollar and cent that I now can improve my lifestyle, I immediately spend it on lifestyle expenses. And that's not the way I want to live. I want to have some cushion. I want to have money left over so that I can save it and invest it and build retirement and build assets and things like that. I want to keep building and growing my wealth. And if I'm just spending it on my lifestyle, I can't grow my wealth. So I wouldn't use my business forecasting tool to then say, well, based on my business forecasting tool, my income is going to increase this way. I would stick with what was my income last year that I lived comfortably off of. That's cool. Then I'm going to use that as my total personal income, and then I'm going to go back. Now, Instead of asking, does this help me keep clients or retain clients? I would ask, does it increase my freedom? And does that additional freedom increase my happiness? When I'm looking at my personal expenses, we all have probably lots of subscriptions. It's possible some of those personal subscriptions we're not utilizing and they don't add anything to us. Look, if you have a gym membership and you're paying $10 a month, But you haven't been in 6 months, maybe cancel it. I know it's $10 or some small amount, but don't— I don't know if you have the— I'm not here to judge, uh, you make your own decisions. I know some people do that because they like it. Well, maybe I'll have the motivation to go and I want to be able to go when that happens. Okay, cool. Just when you personally— when you budget personally Make sure that you're putting some sort of boundaries around your income so that you have some control instead of naturally falling into the flow of things, which the result is my income increased, therefore my cost of living increased. I believe in the Profit First system. And with that system, it's a cash flow management tool. My owner's pay amount is based— it is a percentage of my revenue. So as my revenue increases, my owner's pay amount automatically increases, but I'm only taking home the same flat amount. Then when I get to the end of the year, I usually have money left over in the owner's pay account. That's fun because then I can take that and use it to do things to improve the quality of my lifestyle. And by saying that, what I mean is I can then do my wife's honey-do list. Our whole backyard is basically based on increase in owner's pay. And profit distributions. So whatever makes us happy, right? Freedom and happiness. Then we keep those expenses. So I hope that helped. That's how I look at budgeting, and that's how I look at personal budgeting. The difference between business and personal. Remember, profit is a choice. Have the courage and wisdom to choose it.
