SCFO #017: Reverse Engineer Financial Success
Read time: 3 minutes
Today, I will explain to you how to reverse engineer financial success as a solopreneur in three steps.
When you reverse engineer financial success, you:
Move closer to your goals
Take control of your finances, and
Create a financially sustainable business.
And you can accomplish this while creating the lifestyle you want today.
Unfortunately, most solopreneurs don't reach this level of success.
Failing to create a strategic financial plan is the primary reason why.
Solopreneurs also struggle to achieve financial success due to a handful of common mistakes:
They overlook the importance of consistent savings
They aren’t sure what financial targets they should aim to hit.
They fail to align their business income to match their personal financial needs.
They neglect the need for work/life balance and burnout.
Today, we’ll break down how to overcome these obstacles step by step:
Step 1: Know What You Need
Not understanding your financial needs is like sailing in a boat without a destination in mind.
You could end up where you want, but there’s a good chance you get lost at sea.
Two critical things define your financial needs. Your
Savings and
Living Expenses.
Begin with creating a savings target because that’ll drive your timeline for reaching financial independence.
Even if you don’t have a timeline in mind yet, give your future self greater optionality by picking one.
To put some context to savings, the more or less you save as a % of your expenses (savings rate), the faster or slower you reach financial independence.
Say you are saving $10,000 with total expenses of $100,000. Your savings is 10%
If you have $0 in savings, your retirement timeline is 51 years.
Now let’s say after you do the math, you would like to cut down that number significantly.
Instead, you target $50,000 in annual savings, increasing your savings rate to 50% while cutting down your financial independence timeline to 17 years!
You can use the chart below for a loose target when completing Step 1, but please note it’s always best to work with a professional to fine-tune these figures.
After you combine your savings target and total expenses, you’ll clearly see what you need ($150,000 in our case), which is important as you head into step 2.
Step 2: Determine What You Need from Your Business
Many solopreneurs miss this step by failing to align income from their business to match their personal financial needs.
The root of the issue tends to be a combination of two of the three money mistakes highlighted a few weeks back:
Not charging enough, and
Over-investing in the business
When you complete step 1, you’re far less likely to make these mistakes because there is zero ambiguity about what you need from the business.
In the example from Step 1, we know to target $150,000 net from the business to cover savings and expenses.
Now, with this context, review what cash you extracted from the business during the last year and/or, alternatively, what you project on a go-forward basis.
Any shortfall relative to your target is a signal.
That signal is telling you that if you want to achieve the targets you laid out in Step 1, you need to:
Cut costs
Increase prices,
Add additional clients
Or a combination of the three
Alternatively, you could revisit Step 1 with added context to decide if the status quo is an acceptable timeline.
Note: If you need some inspiration to right-size expenses, check out the quarterly expense review guide.
Step 3: Always Enjoy the Journey
If you’re like me, you didn’t start a business to create burnout or stress.
You started a business for better balance in your work and personal life.
While steps 1 and 2 are important, avoid going overboard with unrealistic targets that force you to sacrifice the present.
For years, I overemphasized retirement as the only path to freedom, but it steered me away from doing things I wanted, like:
Owning a business
Working flexible hours, and
Allocating time to focus on my family and health.
Once I changed my orientation to the present, my life improved drastically.
So as you go through these steps, remember that time is a finite resource.
Use it wisely.
Thank you for tuning in!
See you next week.
How Can I Help?
Being a solopreneur doesn't mean you have to navigate finances alone.
Book a free 15-minute consultation with me, and let's work together to clarify your financial picture and reduce your tax burden.
