How to Reverse Engineer Your Dream Income

* Transcript created by AI – may contain errors or omissions from original podcast audio

What if we flipped the script so that instead of picking a random income amount, like “My life will be great when I make $50,000 a month or a million dollars a year,” whatever the number is. What if you were to work out what your dream life would actually cost you and how much you need to make to get there?

Well, in today’s episode, I’m gonna break down how to actually work out how much your dream life really costs, and then how to reverse-engineer your profit so that you can pay yourself your dream income and be able to afford to live the life of your dreams. 

Here’s the thing. Most business owners get it all wrong when it comes to making more money. They pick an arbitrary number and decide that that’s how many [00:01:00] sales they need to make. So what we’re gonna do today, let’s mix that all up and come up with a new way that you can actually say, “What is my dream life gonna cost, and how much does my business need to be earning to get me there?”

Alright, let’s start with the destination. I am hoping, guessing, that you have a vision board that is like an idea about what you want your life to look like? If you don’t, well, that might be a good starting point, and that’s a whole other conversation. Maybe I need to do another podcast episode about how to build your, your vision board or your dream life.

But that’s a great place to start is, “Where do I want to go?” And regardless of whether you do or don’t have one, the first thing that you need to do is actually price up your dream life. Something I do with my husband [00:02:00] every month is that we review our household expenses. We sit down, we objectively review how much our current life costs. And I’m hoping that this is something that you do as well. If not, this episode might be a great starting point. So here’s what I want you to do, go through and work out what you currently spend per month. It’s always good to look at it over a longer period of time, like maybe over 12 months. Have a look month by month, by month.

What are your expenses? And what we wanna start with is your essential expenses. So these are things like your mortgage or rent, childcare (if you have children), food, clothing, water bills, etc. That then gives you a baseline for: “Okay, this is what the essentials [00:03:00] are of life currently, or my current life costs me this.”

And I think it’s also important to build in your financial security. So if there’s other things that you have, other bills that you have, such as your superannuation, putting aside savings, insurances, etc. You wanna make sure that you’ve got that in there. Now, once you’ve got those base costs down pat, this is where you start to have some fun.

And this is where you map out your dream life premium. So first of all, I want you to just write down all of the things. Don’t worry about the dollars at this point in time, just write them down. So you might already have some of your dream life components in there. For example, you might already have a cleaner.

You’re like, “That’s part of my dream life.” But actually go through and think what else would be part of my dream [00:04:00] life? So you might say, “Okay, yes, I’ve got a cleaner, but I’d also love to have a gardener.” Maybe you don’t have a pet, but you’d love to have a pet. So what would your bills be for having a pet?

Maybe you currently spend money on clothes and shoes and things like that, but you’d like to spend even more. So have a look at what you currently spend and then say, “Do you know what? If I was living my dream life, I’d actually be spending double at on clothes.” So you might say extra wardrobe expenses. You might have beauty expenses, travel.

You might want to, I don’t know, renovate your house or build a completely new house. You might wanna have another investment property. Write down all of those things that when you sit there and really think about this dream, amazing life. What would your regular expenses look like? Now, once you’ve got the list written out, this is where I [00:05:00] actually want you to go and do a bit of homework.

I want you to go and price these things up. Now, this is always interesting because sometimes things actually don’t cost as much as we think. Maybe you’ve thought, “I wanna go and get regular facials,” but you’ve always just thought, “Oh, that’s ridiculous. It’s something I could never afford.” And when you go and price it up, you realize, “Actually, do you know what? I could even do that right now.” Or maybe there are some things that when you price it up, you’re like, “Whoa! Okay, that’s gonna require a bit of an income step up for me.” I didn’t realize that that’s how much it costs to I don’t know, have all designer label clothes in my wardrobe, or if I wanna go to Europe twice a year, I had no idea that it was gonna cost me that much when I’ve actually gone and looked at flights, accommodation, food, all of the things. I’m gonna need to build that into my [00:06:00] premium life income.

So now what you should have, once you’ve gone through and put all of the costs for all of those things, you should now have an annual cost of what your dream life will cost you. So you’ve got all of those essentials. You’ve got the financial security, and then you’ve got all of these beautiful premium things that you are planning to have in your dream life.

Some of them you might have now, you might be like, “I eat out. I eat Uber Eats a couple of times a week already.” But there might be, you might be like, “I wanna eat Uber Eats every single night of my life. In my dream life, I never cook. I just eat Uber Eats.” I don’t know what feels right for you, but when you add it all together, you should then have an annual cost of what your dream life will cost you.

How exciting. So you’ll have your target. You’re like, “Wow, okay. My dream life costs me this much per year.” [00:07:00] Now, this is not where the process ends. This is actually where the rubber hits the road, because that dollar amount is your after tax number that you need to make. After tax and after your business expenses.

So remember, if you’ve done this and you are like, “Do you know what my dream life costs me $250k year?” You need to earn a hell of a lot more than $250k in sales. You can’t just go $250k there, $250k there. Great. “If I make $250k grand a year, I can live my dream life.” Unfortunately, it doesn’t work like that because as we know, our business costs money to run and you also have to pay tax.

So the first thing you’re gonna do, once you’ve got that dreamlike number, what I’m gonna do, I’m gonna refer to as $250k for the purposes of continuity in the [00:08:00] podcast. So that $250k, you then need to reverse engineer it for tax. So if I’m to gross that up, if I’m to say, “Okay, if that’s the amount after tax, what would my profit need to be before tax?”

Now, I would really suggest that you do this with your accountant because there’s gonna be complexities. If you are a director, you are likely paying yourself an income through the business. So you’re gonna need to work out the component of income tax and the component of business tax to actually say, “Okay. This is what I need to be making. This is what I need to be earning.” Or alternatively, you can simplify this and say, “Okay, I’m gonna pay myself all of that as an income. And my goal is for the business to completely break even, and I just increase my income up to that threshold.” Chat to your accountant about what that might look like, because your [00:09:00] accountant might give you some different tax advice around the best way to structure.

But you, you’ve got your number that you’re like, “This is how much I need to have in my hand each year so that I can be living this life.” And what I’m going to do for the rest of this, I’m gonna assume that I’m gonna talk about profit. As profit is your income or your wage plus your business profitability, just ’cause it’s gonna make it a lot more simple.

But there are, of course, different ways that you can pay yourself through your business. So let’s just assume that you’ve got this number. It’s grossed up now for tax. This is now becomes your net profit before tax. So this is now the amount of profit that you need to have left before you pay your taxes.

Next, what you need to do is work out what it will cost to be running a business that will [00:10:00] produce that much profit. So when you, objectively, this is one of the things I love to do when I do budgeting with my clients. If you were to sit and say, “Okay, that’s how much profit I wanna make.” if it’s a big step up from where you’re at or even a small step up, it’s likely you are going to need to make more investments to increase your income, to increase your sales, because you’ll probably need to hire extra team members.

You might need to invest in tech, hire a coach. There might be additional things that you need to spend money on to actually hit that profit goal. A big mistake that I see is business owners say, “I’m gonna make this much more money.” And I’m like, “Excellent. How much more are you gonna invest?” And they’re like, “None.”

Now, sometimes you could earn more money without making more investments, but a lot of times it’s gonna need to be some things that you are gonna need to streamline, or investments that you [00:11:00] need to make to get there. So, once you’ve determined what these costs look like, again, you’re gonna go and price it up.

Rather than say, “I need Facebook ads for to make more money.” How much are you gonna invest in Facebook ads? How much does an ads manager cost you? Get some concrete numbers so that you’ve got a view about, “Okay, this is what my annual expenses are going to look like.” So now what you’ve got, you’ve got a a net profit amount, you have your expenses, and the last component of this is of course your sales.

So here’s how you work out what your target sales per year need to be. You wanna take your net profit before tax. And you wanna add the expenses, add those business expenses that we just spoke about, and this will then give you what [00:12:00] your target sales are. Because to come back to basics, sales minus expenses equals profit.

So when you’ve got your profit, you add the expenses, you’ve then got your sales targets. Here’s the thing. I know I sound like a broken record about this, but many businesses focus on revenue. They focus on sales and not on profit. But remember: you can’t spend your revenue. You can only spend your profit.

So hopefully what you’ve done through this exercise is that you’ve grossed up to figure, “Okay, now I’ve got a really clear income goal. It’s not some random arbitrary amount. This is exactly how much I need to be earning.” You should be super clear about exactly what you wanna create, and now you know how to get there.

And rather than just [00:13:00] hoping this income will miraculously reach this level, you can now create a deliberate path to get there. I hope this episode has got you excited, it’s got you inspired, and that you are feeling really in control of how to build your dream life by reverse engineering your dream income.

If you’ve loved today’s episode and you think you’ve got friends or members of your audience that will benefit, I’d really appreciate if you can share it with them. And of course, make sure you tag me if you do share on social media so I can bob on over and say thank you. Once again, thanks so much for listening to The Clare Wood Podcast and I look forward to chatting to you again next week.

* Transcript created by AI – may contain errors or omissions from original podcast audio