Your Life is a Business

 
CEOWe are all self employed and our business is ourselves. If you run your life like a business, understanding things like cash flow and investments, you will be very successful and not worry about your future.

I watch shows like The Profit on CNBC and Restaurant Impossible on Food Network and the common thing between these shows is how most of the business owners don’t know basic information about their finances.

As a business owner I’ll admit that I may not be able to answer all their questions off the top of my head, but I have meticulous records and I could have an answer within minutes. Can you do the same for your personal finances?

Salary versus income

This is the first thing that people often get wrong. In business it’s the difference between revenue and cash flow. Say your salary is $100,000 a year, that’s $1,923 a week. But that is not what you take home. After taxes, health insurance and other deductions, like your retirement savings, you are saving for retirement right, you could easily be taking home only about $1,000 a week or less which is just $52,000 a year. Live like you have 100k and you’ll be broke all the time.

Here are my questions for you: what is your net worth? What percent of your gross income did you save in 2014? If you can’t answer them immediately can you get the answer in less than a few minutes?

Mislabeling investments

Forget the debate on whether a house is an investment or not, what some people do with their homes in the name of investment can be downright silly. For example, renovating the kitchen, bathroom, or basement might add some value to your home when it’s time to sell but it’s not an investment, it won’t appreciate beyond the value of the house as a whole. You can’t sell your kitchen renovation when you’re short on cash.

In business every investment has an ROI, return on investment, meaning that if you spend $100 on a new piece of equipment it better increase your income by $200 or more (because you don’t invest to break even). Then there are capital expenses and that’s more like the kitchen upgrade, it may not make you money but it’s necessary to function.

A hobby is not an investment even if you consider it a business. Unless there is potential for this hobby to be your sole source of income it’s just not an investment. I’m not against hobbies or even having a little side income but inflating what it is doesn’t help.

Stretching is for exercise

Too often I see people reach beyond what they can afford for what they want (even so called experts). They want a new car but the payments are too high so they lease it instead, a couple with one child in a two bedroom home say they’re outgrowing it and buy a bigger house they can’t afford, they want a vacation home and overestimate the rental income they will get.

All these examples are people who stretched to afford something but they all run the risk of pulling a muscle to keep the analogy going. Instead, buy the car one model lower, stay in the house longer, only buy the vacation home if you can afford it without renting it out, and still rent it.

Successful business people look at every expense carefully, they don’t spend unless it’s necessary or will lead to more income.

What are some things you feel people could do better if they ran their lives more like a business?

 


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Action and Reaction

 

Early in our school lives we all learn about Issac Newton and his apple mishap that led to his theory of gravity. Well Newton also had some laws of motion and his third law of motion loosely states that for every action there is an equal and opposite reaction. Welcome to world of consequences. For every choice you make there is a choice (or several) that you did not make and every decision leads to a result, good or bad.

Consequences start at a young age. Things you have control over but often don’t have the maturity to appreciate, like the importance of good grades, for example. Once we move on to the next level in life we choose our major in college or career in life, and we would do well to choose wisely. How many people are willing to go into debt for an education that may not provide the means to easily pay back that debt? That one decision will have ripple effects throughout life.

How many people delay investing in their retirement accounts early in their working lives because they think they can’t afford it, because it will negatively affect their lifestyle? The fact is that their lifestyle will be much more adversely affected in old age if they wait too long. It’s not that they can’t afford it now, it’s that they won’t be able to afford it later.

Taking a What Next approach to decision making is to weigh as many options as feasible, and to choose carefully. Asking What Next means you have a long term outlook and understand the ramifications decisions have. In financial planning terms that means understanding the future value of a decision. Put simply, the future value of a dollar invested today at 10% interest is $1.10 one year later. The future value of not going into debt to fund your education is the ability to start saving earlier and building your retirement nest egg sooner.

I don’t have children but I think I might have spent more time talking about the consequences of that decision with Julie, than most people who do have children. I’m not sure I can think of a weightier decision than the choice to have children and yet I wonder how many people treat it with the reverence it deserves.

The everyday choices we face today will affect the life we have later. Buying a house, a car, toys, taking lavish vacations, all diminish your ability to save for the future. Whether you stay in your home for a long time or move frequently, whether you buy a new car every couple of years or hang onto it for a decade, will determine your level of success. It is a balance between now and then.

The question for you is, are you well balanced? (I know what some people say about me – so let the jokes begin) Do you have a long term outlook on life? Are you confident that your choices today will still look correct a year or five years from now?

Share some examples of long term decisions that have paid off for you and some that didn’t.


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Options to Track Your Spending

I don’t like clichés. I try to avoid using them. One cliché I might use and is appropriate for this post but is rather gruesome when you think about it is, “there’s more than one way to skin a cat.” First of all why would you want to do that and second, why would you want to know all the different techniques?

Applying this to the topic at hand I would modify it to read, “there is more than one way to keep your spending under control.” As clichés go this one is not that good, but it’s true and a lot less bloody than the previous statement.

I have seen plenty of blog posts and advice columns that state the definitive method to keep spending under control, stay within budget, and get your finances in order, but is there really only one way? Most of them are correct, not because the others are wrong but because each person is different and responds to different incentives.

I don’t really care where you spend your money but the key to success is that you know where you spend your money. Tracking your spending is crucial to success. Below are what I call the big three methods of doing this with pros and cons for each. Pick the one that works best for you.

Credit Cards only:

This one is my favorite, it’s the method I use but has one big problem, it doesn’t work if you have credit card debt. If you can’t pay off your credit cards every month, this isn’t the choice for you. If you carry a balance on a credit card, for even one month, skip to the next method.

By using your credit card for all your purchases the tracking of those expenses is automated. I still recommend importing that information into a spreadsheet or financial program such as Quicken because of the ability to see reports and to aggregate all your other bills and expenses.

The added benefit of this option is that if you have a credit card that offers rewards, you are adding value to purchases you would be making anyway.

Debit Cards only:

These are the same as credit cards but with the added benefit that you won’t be paying interest. I’m beginning to lean toward this as a better option because some banks are offering incentives to use debit cards such as higher interest rates on savings accounts. Which is more important, the higher interest or the rewards? You decide.

The downside to this is that you can’t spend any money you don’t have. That’s a good thing but if you need to make a purchase today but aren’t getting paid until tomorrow that can be a pain. The other downside is that you must be aware of your balance at all times. The moment you have an overdraft charge, just one, is the moment you stop using this method.

Envelopes:

This method is a bit antiquated in the digital age of debit cards but offers something the others don’t – discipline. If you have trouble with the previous two suggestions such as not paying your credit card off in full each month or overdraft fees, then this is your best choice.

In this method you simply take out the cash you expect to spend over the next month and divide it into envelopes for the various expenses such as eating out, groceries, entertainment, clothing, etc. You can be as detailed as you like. If you didn’t take out enough it’s ok to go to the bank as long as you’re only taking money that you know isn’t supposed to be used for something else like the mortgage or rent.

Each method offers something but don’t forget that your daily expenses are just one aspect of your overall expenses. I would still use a program like Quicken to keep track of everything. Knowledge is power. If you know where you’re money is going you will make better decisions.

Have other ideas or methods? Let me know!


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Stalking Your Money

 
Being successful simply is not possible if you don’t have your finances under control. I’ve said it before and I’ll say it again, success is not determined by how much money you have, there’s a lot more to it than that, but how you use the money you have plays a big part in success. If you’re playing catch up but never make progress, are in debt, or simply don’t know where your money is going, you’re putting yourself at a disadvantage.

In a previous post I made it clear that budgets often don’t work and that you will be much better off if you tracked your spending. If every transaction is accounted for then your budget is taken care of. You know exactly where your money is going and how to make adjustments.

The video below is a follow-up to a previous video and will show you how to use Quicken personal finance software to begin keeping track of your spending. If there is anything you resolve to do in 2012 make it tracking your spending. Here’s to a very happy and successful New Year.


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Spending Vs. Budgeting

An important part of success is money. I’m not saying that we all need to be millionaires but managing your finances is an important part of success. Many people struggle with their finances because they either underestimate the difficulty, thinking it’s so easy to manage their money that they end up getting into trouble, or they overestimate the difficulty of their finances, thinking it’s too hard to figure out, and also end up getting into trouble.

The real problem with managing your finances is simply knowing where your money is going. It’s not a budgeting problem, it’s a tracking problem. If you know where your money’s going you’ll be able to see in what areas you’re spending too much, what areas that need to be reigned in. If you aren’t keeping track of your spending you’ll just wonder why you don’t have enough, you’ll wonder where all your money’s going.

The video below has been permanently added to my video page. More will follow.


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