Calculate Your MVI
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Making the leap into a new entrepreneurial lifestyle often involves some element of financial risk. Many aspiring business owners are making a comfortable living as they contemplate a new path, and this inevitably means a reduced paycheck to start out with.
But just how low can you afford to go? Some people call it a “spaghetti number”, others like to think of getting to “ramen profitable”, but all of these pasta analogies boil down to exactly one question: how much money do you need to make in order to support yourself (and possibly a family) on a monthly basis?
That number is your Minimum Viable Income (MVI).
This monthly number should not be incredibly comfortable — in fact, it might scare you a little, which is why the word “minimum” is in there — but it should be enough for you to keep the lights on without having an anxiety attack.
Think of Minimum Viable Income (MVI) as survival mode; while you won’t have to stay here forever, you will likely have to do some cutting back in the early stages.
Question: What if I don’t need this business to support me full-time? Even if you’re working on a side project, doing this MVI exercise will help bring enormous clarity to your financial reality. Sometimes money worries are like monsters in the shadows that cloud our judgement. This MVI exercise will shine the light directly on them, often revealing the monsters to be a lot more cuddly and cute than you thought. Even if you’re building a side-gig for fun, calculating your MVI will help you make decisions moving forward.
It’s probably lower than you think!
It’s easy to get worked up over the unknowns of starting a new business, and the nagging question knocking around in your brain is probably along the lines of, “But how am I going to pay for everything in my life?”
Here’s a crucial piece of the puzzle: “all the expenses in my life” is not a number. As is the case with most of our fears, putting a real name on it renders it far less scary. Unless you already have a very tight handle on your day-to-day spending, it’s likely that two realities can work in your favor:
- You have more financial wiggle room than you imagine right now (because you haven’t really evaluated your true expenses yet!) and, thus,
- You don’t need as much as you think you do in order to make this work.
Yes, there will be sacrifices to make here, but know going into this that you might just be pleasantly surprised at how possible your dream is once you’ve ironed out the true dollars and cents.
Step 1: Determine Fixed vs. Variable Expenses
A. The first step is to gather up all of your expenses, sit down with them and put them all in one place.
A simple Excel or Google spreadsheet will do the trick here as you just need to create two columns — one for the name of the expense (i.e. “mortgage”, “car payment”, “groceries”, etc.) and the second for the amount of money you’re spending on average in each area every month.
A Helpful Guide: Fizzler Jeff Helman put together a helpful Excel spreadsheet you can use if you’d like. Click here to download the spreadsheet.
You aren’t making a budget for yourself by estimating how much you think you need in each category. Instead, you are simply recording what you do on a monthly basis currently. Let’s make this exercise about the current state of your spending, not about future future budgeting.
B. Once you have all of your expenses laid out in front of you, it’s time to differentiate between fixed and variable.
Fixed expenses do not change month after month. They are rigid, predictable and always stay the same. Examples include your rent or mortgage, cell phone, internet or cable bills and car, student loan or minimum credit card payments. Gather up all of your fixed expenses and arrange them together or mark them with a special color.
Variable expenses, on the other hand, fluctuate or vary month to month depending on your habits. This category would include things like groceries, gasoline, entertainment, clothing, dining out and travel. Just like we did with fixed expenses, find a way to visually group your variable costs.
Every expense you incur should fit into one of these two categories. If you have trouble figuring out where something belongs, ask yourself, “Am I able to influence this expense each month, or is this a standard cost I’m incurring every month?”
Step 2: Trim the Fat
Now that we have all expenses sorted into fixed or variable categories, it’s time to pinpoint any financial wiggle room that will make attaining your MVI that much easier.
Total up all of your expenses as they sit in your spreadsheet right now. Jot that number down, then turn your attention to the variable expenses. Take a hard look at these numbers, because they’re the ones we have the most control over and thus are the easiest levers to pull when it comes to lowering our financial needs.
Are you surprised to see how much you spend on dining out at restaurants? Do you find that you are throwing a lot of groceries away and could more carefully plan your meals to lower the bill? How about nixing the monthly manicure in the short term?
For example, when my husband and I did this exercise and looked at our variable expenses, it dawned on us that we were spending tons of money on entertainment between dinners and drinks out with friends, frivolous Uber rides and mindless debit card swiping on things we just didn’t need.
Living on your minimum viable income doesn’t mean you can’t have any fun whatsoever, so avoid getting too ambitious and slashing your spending down to zero. Instead, look for the small adjustments you can make that will add up big.
Step 3: Get Creative
At this point, you should evaluate how much you’ve managed to shave off of your monthly number by playing with your variable expenses alone. It’s quite possible you’ll feel pleasantly surprised by your MVI already!
But, if it still feels high, you might need to take a harder look at fixed costs. How creative can you get? Is your cable TV package worth putting on the chopping block if it saves a grand or two a year? How about your living situation? We’ve known aspiring entrepreneurs who chose to downsize their homes, move to a cheaper area or even move in with parents if that’s what it took in order to be successful.
Becoming an entrepreneur does not need to be synonymous with “miserable”, and we aren’t advocating pursuing your business ideas at all costs. But the fact remains that, for some people, these are viable options when they open their minds and seriously consider it.
Step 4: You’ve Figured out Your MVI!
After evaluating your expenses and making adjustments where you can, you’re left with your own personalized MVI number.
This is your “freedom number,” the monthly revenue number goal your business needs to get to if you want to work for yourself full time.
Write this number down! Take a picture of it. Commit it to memory. This is the concrete number of your freedom, the break-even point. And it’s a big deal to get this kind of clarity about your business reality.
OK, you’ve got your business archetype and you’ve got figured out your MVI. Now let’s look at the biggest question of all (which you’ve already started answering).