How to Treat Your Personal Finances Like a Business
As a property mentor, I speak to a lot of investors about their money. I’ve found that people tend to treat their personal finances in one of three ways: like a hobby, like a government or like a business.
Hobbies exist for fun only. They have no profit motive. Those who treat their personal finances like a hobby give their cash flow little serious attention. They love to spend money, and may even make a lot of it, but when it comes to budgeting, their heads are in the sand.
Others treat their personal finances like a government. In good times, they may manage their finances well. But when times get tough and money is tight, they vote to raise the debt ceiling.
The biggest budgeting distinction between you and a government is that you can’t print money, unless of course you want to end up in jail. Therefore, consistently spending more than you earn is unsustainable.
Then there are those who treat their personal finances like a business. They meticulously account for every dollar and efficiently direct their resources toward achieving predetermined objectives.
People like this tend to be more confident and more at peace about their finances. They are able to spend money without feeling guilty or uncertain.
These people are also more likely to reach the point where work becomes optional. Because they are actively saving and investing, they are gradually moving closer to financial freedom.
The more effectively you apply sound business principles to your household finances, the more secure your and your family’s economic future will be.
Here are eight ways that you can begin treating your personal finances more like a business:
Start With a Strategic Plan
As an entrepreneur, no bank would loan you money, and neither would a venture capitalist invest in your business without first seeing a strategic business plan. A business plan contains your vision and a detailed analysis of how you’re going to achieve it.
At the very least, your personal financial strategic plan should answer the following questions:
- What are your long-term financial goals for the next five, 10 and 20 years?
- How much income do you want to have in retirement?
- How much of a capital base will you need to produce this income?
- By what date will you have acquired these assets?
- What investment return is necessary to achieve your goal?
- What investment vehicle will you use to produce your retirement income?
- What must you achieve in the next 12 months to be on track toward your longer term goal?
- What percentage of your current income will you consistently save?
- How will you educate yourself toward the fulfillment of your vision?
Reduce Your Operating Costs
If your personal finances were a business, would you be watching your expenses any closer?
Look for areas in your current budget where you can slash expenses. At the end of the day, it doesn’t matter how much you earn if you spend it all. What really matters is how much is left for you to allocate toward building your capital base for retirement.
The first step in cutting expenses is to take a thorough look at your recurring expenses. You’ll likely find areas where you can tighten up. I recently gave a few examples, here.
The second step in cutting expenses is to look at your non-essential spending. This may include entertainment expenses or loan payments on expensive toys. If you’re serious about achieving financial freedom, be willing to sacrifice for a while.
Create Multiple Revenue Streams
A business with multiple revenue streams is more valuable, more stable and more resilient than a business that relies on one source of income. Not only is there potential for greater income, but if one income stream declines, your revenue doesn’t completely dry up.
In the same way, developing additional streams of personal income can boost your household cash flow and protect you from changes in your job or industry. Of course, the ultimate goal is passive income from real estate or other income-producing assets, but income accelerators can help you achieve that goal faster.
Here are a few possibilities to consider:
- Harness your skills to launch a consulting business on the side.
- Use an area of expertise to start an online business.
- Grow existing cash reserves through options, commodities or currency trading.
- Use online platforms like eBay or Gumtree to sell merchandise.
- Engage in quick cash property deals.
If you own a business and don’t pay your employees’ wages on time, you can be penalised by Fair Work Australia. Besides, if you don’t take care of the people that work for you, they will likely find another employer who will be more reliable.
The same principle should carry over to your personal finances. You should pay yourself first. Before you pay your mortgage and utilities or buy groceries, set aside a certain amount of cash to go directly into a savings account.
The first and most important principle of wealth creation is to spend less than you earn and invest the difference. If you lack the discipline to live below your means, accumulating money to invest will be impossible.
Warren Buffett once said, “Do not save what is left after spending, but spend what is left after saving.”
Prepare a Monthly Budget
A business without a budget is a business destined to fail. A budget simply plans the revenue and the expenses of a company. A budget not only projects what the business is expected to do in the future, it also becomes a measure against which to gauge performance.
Budgeting is not an optional addition to your personal financial management plan. It’s not just for those who can’t reign in their spending. Budgeting is foundational to wealth creation. This is perhaps the most important proof of whether you treat your personal finances like a business.
The ultimate goal of budgeting is obvious: to be deliberate about where you spend, so that you can direct maximum funds toward savings and investment.
If you’re in debt, I can virtually guarantee that you have not been living on a budget. For those who were never taught how to budget, disciplined spending can take some getting used to. But don’t give up. If you stick with it, it will get easier.
Create Reports to Monitor Your Progress
Business managers stay in regular contact with their accounting and finance departments. You must know where your money is going and where you currently stand in relation to your budget and goals in order to make adjustments that maximize efficiency.
Just like a business, you can use the following three primary financial statements to monitor and track your household financial situation:
- Income Statement: This report shows your income in relation to your expenses. Simply list your income and then your expenses. Then subtract your total expenses from your total income. This figure amounts to your personal profit; what you can use for savings and investment.
- Balance Sheet: This report shows your net worth. It lists your assets on the left, and your liabilities, or debts, on the right. The right side also shows your equity position, or what you own. This means both sides should balance out. Your assets should equal your liabilities plus your equity. But don’t get hung up on the accounting details. The purpose of this report is to track your progress toward your wealth creation goal.
- Cash Flow Statement: This report shows the flow of cash in and out of your personal finances at a particular point in the future. It can be used to predict whether you will be able to meet your planned expenses.
Meet Regularly With Your Team
Have you ever heard of a business where the key players in the team didn’t meet together?
In the same way, regular personal finance meetings with the key players on your household finances team are crucial to achieving your goals. Who are the key players on your team? It could be your spouse or partner, your kids and occasionally even your accountant or financial planner.
These team meetings are perfect opportunities to cast vision to the family, discuss financial goals, review the previous month’s expenses against the planned budget and remind the team of the importance of sacrifice. Alignment is one of the most often overlooked characteristics of healthy family financial management.
Harness the Power of Education
Just as any business relies upon proper training to maximise results, so too must we continually develop ourselves in the area of money, business and investing.
I was speaking last week with one of the recent graduates of Steve McKnight’s Property Apprenticeship course. Before the course, he was the typical Aussie investor with a few negatively geared properties. Now he’s working on an eight-unit development in a joint venture with another investor. He was marveling at how far he’s come over the past few years. And more importantly, he was crediting the education that he had received for getting him to where he is today.
Never underestimate the power of investing in yourself.