If you’ve ever tried to figure out how long you could go without working then you know all about a financial runway. Whether you’re looking to extend your maternity leave or start a business, it’s the same concept. How long can you keep going before you hit your comfort threshold and dip below your sweet spot when it comes to savings? Here’s a guide and template to help you calculate your financial runway.
Determine Your Monthly Income
The first step is to determine just how much income you will be bringing in monthly. This might be nothing, it might be a regular paycheck, or it could be something in between. If your income is irregular and you’re not sure exactly what you will be bringing in, use an estimate based on your lowest possible level of income. This will allow you some extra wiggle room if you end up bringing home more income, but most importantly, it won’t leave you in a bind like it would if you overestimated your income.
Estimate Monthly Expenses
Next, you should estimate your monthly expenses. How much do you think you will need to spend on a monthly basis? The best way to gage this is by taking a look at your typical spending on any given month. If you have a working budget, this is a great place to start. Use this as a jumping off point, but make sure to take into consideration any additional expenses you may incur or any expense you may be able to cut out. For instance, if you are calculating your runway for maternity leave, you may be able to save on normal expenses like gas, tolls, and buying lunch, but those may be offset by things like diapers and formula.
Survey Your Safety Net
To calculate your runway you will need two additional pieces of information. You will need to know how much you currently have in savings, as well as what your bottom line is. In other words, what is the minimum amount that you are comfortable keeping in savings in case of an emergency? At what point would you feel your savings were depleted to the point that you would choose to make a change to your financial picture such as returning to work? The spread between these two numbers in addition to the monthly income and expenses you estimated above will allow us to calculate your financial runway.
Crunch the Numbers
We’ve finally made it to the dramatic conclusion. This is where you’re actually fitting the pieces of the puzzle together to estimate just how many months your financial runway is. For this calculation you essentially want to subtract your minimum savings balance from your current savings balance. Then subtract your estimated monthly expenses from your estimated monthly income to calculate your monthly net income (or more likely loss). Lastly, take the difference between your savings balances and divide it by your monthly net income/loss and your answer will be the number of months you can live under that financial scenario before you hit your minimum savings balance. When you’re performing this calculation remember that it is usually used when your income is expected to be less than your expenses. If that is not the case, your financial runway is considered infinite since your savings account will just continue to grow indefinitely. Not a bad place to be, but also not a great fit for running this calculation.
If that all seemed way too confusing, let me save you some time with a template that can perform the calculation for you.
Written By: Lindsay Dell Cook
Lindsay Dell Cook is a CPA, finance writer, and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband and adorable daughter. When she's not working, she enjoys spending time with her family, taking their lovable mutt for walks, or reading a good book while buried under a pile of cats.