5 Ways to Run Personal Finances Like a Business

By | March 30, 2015
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Run Personal Finance Like Business-F

Many of us spend at least 8 hours a day putting our time and energy toward achieving the goals of the company we work for. Whether or not we’re directly involved in developing the company’s business plan, we can rest assured that much has been invested in creating a clear and reliable plan for the future of the business. The purpose of business plans is to give companies the best chance of being successful in meeting short term, medium term and long term goals. Any business seeking capital from investors needs to have a business plan in order to provide investors with confidence that they’re making a good investment.

For most of us the last thing we want to spend our free time on is business oriented thinking. I hope after reading this though, it’ll be clear that a solid plan for your finances will ensure you and your family are on track to achieve your goals.

Let’s explore 5 ways you can run your personal finances like a business.

1. Budget A – Capital Expenditures

One of the most important planning activities that all businesses perform every year is the creation of the annual budget. There are two main components to any budget: expenses and income. Depending on the state of the business in any given year, more attention may be given to either reducing expenses or increasing income in order to increase profit for the business. Sometimes it’s even necessary to increase expenses in order to increase income and to ensure the long-term livelihood of the business (more on this below when discussing Benefits and Investing in Growth).

Ever since the recession began in 2008, one of the primary drivers of profit for businesses has been to cut expenses. This has been prevalent across the board, but even more so with publicly traded corporations. An interesting example of this is the frequent scenario where a large multinational corporation announces it’s laying off thousands of employees and stock price instantly increase 3-5%. This shows that informed shareholders are fully aware of the relationship between a company’s expenses from paying salaries and the potential for the company to make profits.

One thing both businesses and individuals planning their own finances always need to keep in mind is the sensitive balance between cutting expenses and increasing the livelihood of the organization/individual/family. If expenses are cut to drastically, the long-term livelihood of the organization can be at risk. We need to be careful not to sacrifice too many of the pleasures in life today for future gains.

One way to keep expenses in check while adding to your livelihood is by checking out The Penny Hoarder’s Black Friday Portal for tips and tools to help you get the best Black Friday deals possible.

Managing expenses is a powerful tool to help you meet your financial goals and sometimes drastic measures are necessary.

Some expenses that my family has cut or reduced in the past are:

  • Cable television. The quality of content available via $15 rabbit ears and free or very low cost streaming services is simply amazing.
  • Eating at restaurants. We love to eat at restaurants, but often need to consciously limit the meals that we eat out.
  • Fuel costs and parking fees. We often use public transportation which saves on fuel and parking costs, is good for the environment, and is stress free.

Related: For other tips on saving money, head on over to www.mattmoneyman.com

2. Budget B – Revenue Projections

As discussed above, the second main component to any budget is projection of revenue for the year. Each year, upper management and finance teams are tasked with researching and analyzing potential revenue streams for the business. Once revenue streams are identified, the team determines expenses in both resources (employee time) and capital (cash) associated with bringing the various revenue streams into realization. Comparing the potential revenue with the associated expenses for each revenue stream and seeking the best return on investment is a great way to decide where to focus efforts to generate additional income.

As families and individuals, a good practice is to take inventory of your passions and unique skills. Next, up you should brainstorm and research ways these passions and skills could potentially earn additional income. Then, you’ll want to determine the amount of effort you think it may take to generate the added income and decide if you feel it’s worth the effort.

I encourage you to apply the above mentioned cost/benefit analysis every year or two, as our passions and skill set do change over time. Income streams to consider are a second job, working extra hours for your employer, or working extra hours for yourself on a new side hustle. Expanding your income streams will help immensely with income security and your ability to achieve your financial goals. Even an extra $200 per month would add $2,400 per year and $12,000 over a five years.

3. Benefits

All successful companies understand the need to provide a good benefits package to their employees in order to secure and retain talent. Company benefits usually come in the form of healthcare, vacation time, sick time, holidays, and 401(k) or 403(b) matching plans. Some of the more progressive companies of our day, like Google, Facebook and Genentech, also offer excellent fringe benefits like flex-time, free food, foosball and annual conferences in vacation-like settings.

The parallel found here, to personal finance, is the importance of living a life of great pleasures and experiences every year from now to your retirement and beyond. These pleasures do not need to be expensive in nature, but they do need to be plentiful. I’ve always loved the saying: “I don’t live to work, I work to live”. It’s always important to keep a happy and healthy balance between our work and pleasure.

4. Invest in Growth & Productivity

Run your personal finance like a business, strategy

So far we’ve been discussing near term planning implemented by businesses, individuals and families alike. This is all very important, but potentially more important is the extrapolation of the same degree of focus and intention to the long-term livelihood of the organization. All successful businesses invest a percentage of their income on future growth and productivity. The size of their investment in the future depends on the type of business and the stage of growth the company is in. But long-term planning can sometimes be de-railed by an unhealthy drive for near term profit at the expense of the future.

Again, the parallels between business and personal finance are clear. When individuals and families are creating their annual budgets it’s extremely important to ensure there is a reasonable percentage left over for investment in the future. As with business, the amount you’re able to set aside for your future will depend on many factors including your stage in life (i.e. recent college graduate vs. nearing retirement). One thing we all need to recognize is the amount of money we set aside for our future in any given year is the most important metric for determining our ability to achieve long-term financial goals.

Savings rate is more important than income level and return on investments combined. For example, if person A has a total income of $150K/yr and saves/invests $5K/year earning a healthy 10%/yr average annual rate of return, while person B has a total income of $75K/yr (half as much as person A) and saves $20K/yr earning a less aggressive, but more reliable, 6%/yr return, person B will reach financial independence much sooner than person A. See the table below:

Retirement Savings Balances

5. Short-Term and Long-Term Plans

Business plans typically include strategies related to three or four different timeframes. Near-term components of a business plan are updated and adjusted more frequently than long-term strategies in order to allow organizations to effectively navigate a shifting playing field. The intention is for those developing the near-term plans to always consider the long-term goals of the organization when putting plans into action.

When it comes to personal finance, the ability to plan for both near-term and long horizon scenarios is just as important for successfully achieving our goals as it is for businesses.

What are some strategies your using to plan for your near term and future goals? Have you used any of the tips discussed in this piece while planing your finances? Please share in the comments.

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