Treat Your Personal Finances Like A Business

What are the three most important numbers in the business world? While there are a lot of numbers, the three most important ones in my experience are revenue, costs, and profit. Or you can sum it up all into one word: cash flow. And these three numbers should be the most important numbers for you too when it comes to your finances. If your personal finances are a profitable business, then you’re building wealth — otherwise, you’ll be accumulating debt.

So how can you improve your finances by thinking like a business owner?

Cost Control And Cost Cutting

When the economy went south this past year, you constantly heard things like company X is laying off 5,000 employees and company Y is shutting down plants. At work, you probably hear things like cutting bonuses and raises, stopping 401(k) matches, or halting all non-essential trips and meetings. Why? Companies cut costs because it’s the quickest and easiest way to maintain profitability.

If your finances are in the crapper, you should think like a business owner and look for ways to save money. If you search around the web, there are literally thousands of ideas on how to reduce your expenses. Here are a few articles to help you get started:

Personally, I have a simple two-step process that I use to cut expenses:

  1. Look at recurring expenses first. These are things that occur monthly. I like to reduce these first because you get the multiplication effect each month that follows. For example, rent, mortgage, telephone, utilities, subscriptions, etc.
  2. Look at non-essential expenses. These are the nice to have, but not necessary things. For example, eating out, entertainment, cable television, etc. These are your latte factors. You’ll survive without them, so consider reducing these expenses.

After you go through these two steps, you’ll have to look harder. If you are not tracking your expenses and don’t have a budget, follow these steps to start a budget. You may think budgeting is unnecessary, but ask yourself why businesses keep track of their income and expenses. Believe it or not, budgeting will help you reduce your expenses and improve your finances. Here are some budgeting tools you can use:

My personal recommendation is to pay a little bit of money and try You Need A Budget (YNAB) which offers 60-day money back guarantee if you’re not satisfied.

Earn More Money

The second part of the equation is income. Besides cutting costs, companies constantly talk about how to improve their revenue. They try to improve their products and services, and introduce new ones. Likewise, you should be doing the same by thinking about ways to improve your existing income and build new income streams.

To improve your existing income, continue to build up your skills and move to a higher paying position or negotiate for a raise. Here are a few tips:

You can also add to your existing investments so that they will give you more in return. To build new income streams follow this guide on how to earn more money. If you just want some ideas to work on right away, here are a few good lists:

Cash Flow Is King

To sum it up, cash flow is king whether you are running a business, or managing your finances. Without positive cash flow, you cannot effectively pay down debt or build wealth. As such, your first priority in the process of trying to improve your finances is to (1) reduce your expenses, and (2) increase your income.

Topics: Personal Finance

9 Responses to “Treat Your Personal Finances Like A Business”

  1. The problem comes when we try and run our personal finances like a start-up business. We go get a bunch of debt to create an initial flux of cash flow. Then, only when we can’t afford the debt payments do we start to think about reducing costs. How much easier it would be if we started our finances without debt.

  2. That One Caveman

    Thinking of personal finance as a business makes a lot of sense, especially when it comes to employment. You are a vendor of hours that your company is purchasing at an agreed-upon rate. If you don’t like your rate, it only makes sense to try to increase it by asking for a raise.

    Great post and thank you for including my article!

  3. TStrump

    I think people also need to take emotions out of the equation.
    You have to be able to take a hard look at your self and be objective to save money and improve your net worth.

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