Run your personal finances like a business. It sounds a bit odd, I know. But guess what? It works! But just one point to note: you want to model your personal finances on a well run business not one that’s in chaos!
So what does a well run business look like? First we’ll cover a few aspects of a well-run business, then we’ll look at how you can translate those to your personal finances.
Well run businesses have:
- Someone looking after the money. Some businesses employ bookkeepers or accountants, and sometimes it’s the business owner or their partner who keep the books up to date so you know what’s coming in and going out.
- A plan for the future. It’s not necessarily a full blown business plan, but they know where they’re going in the short and long term.
- An understanding of the difference between a fixed costs, overheads and debt. Payments are prioritised accordingly.
- Money put aside to meet both the business and the owner’s tax commitments. They know in advance how much tax is likely to be paid in the next year (or longer) and they save to meet that commitment.
- An owner who’s working towards an exit strategy. At some point in time they’ll sell or retire from the business, so they are constantly monitoring and looking for ways the business can run without them. That means they’ll be able exit with either an income stream or sufficient cash resources to support their future plans.
In your personal finances, you can:
- Appoint a household banker. Who’s the person responsible for managing the money in your house? Who makes sure the bills get paid on time? Who checks to make sure you’re maximising any early payment discounts and that you’re getting the best prices for things?
- Set goals as a family. What do you want to achieve? Is it to be debt free? Acquire income generating assets? Sell everything and travel the world? If you don’t have a plan it’s really easy to drift along and it doesn’t really matter if you spend everything on ‘stuff’ because you’re not aiming for anything.
- Differentiate between fixed costs, overhead, and debt. Fixed costs are the things that have to be paid: expenses like rent, mortgage, power, insurance. You don’t really have too much control over the payments, they are generally the same amount every month, you can review them but you can’t really exclude them. Debt is very much like a fixed cost, you don’t want to get behind, as it gets very expensive very quickly. Overheads, or discretionary costs are the areas that you have total control over and you can decide how frugal or extravagant you want to be.
- Pay (tax) yourself first to save for the future. Do you know how much you need for retirement? And are you tucking it away on a regular basis?
- Provide for your exit strategy from work life. Just like a business owner, at some stage you will want to stop what you’re currently doing. What you choose to do then might not generate you as much income as you currently earn. Retirement is the big one to think about here. What are you doing to maximise the resources you have now to provide for your future? Are you frittering it all away? It’s so easy to not not worry about the future – it feel so far away.
It’s important to have structure and processes in your personal life to become not only financial secure but financially stable as well. Stability gives you peace of mind and the freedom to make the choices that are going to serve you the best.
If you’re feeling a little financially unstable, you only need to pick up the phone and give us a call.