Budgets and personal finances are not most people’s favourite subjects. Even so, it often surprises me how many entrepreneurs happily manage their business finances and yet fail to deal with their own money.
I’m a firm advocate of treating the family finances as if the household were a business. Looking at your money this way doesn’t have to be complicated or time-consuming (unless you want it to be). Simply being aware of where you really are and what you are trying to achieve can have a large impact.
Here are a few suggestions to get your started:
Be your own Board. To make good decisions, you must know what you’re trying to achieve. In business, the Board of Directors write mission statements to keep the company on track. At home, it’s up to you to define your mission and make sure you’re fulfilling it by writing down your goals. Not just your financial goals either, but your “life” goals.
Know your operating costs. Do you know what you spend each month on average? The majority of people don’t know what it costs to keep their lives running. Businesses do because they base their budgets on historic spending patterns. Detailed budgets are great if you’re into that kind of thing, but few peope stick with these for very long. Instead of doing a budget that dictates how much to spend, do a “cash flow statement” that records how much you actually spend each month. If you are comfortable with this, break it down into different categories for even more insight.
Know your net worth. Companies measure progress toward goals through balance sheets which list their assets and liabilities. Your net worth is your balance sheet where you list everything that you own. That means your bank accounts, investments, car, house, etc. minus everything that you owe. It’s a good idea to review your worth at least quarterly to make sure you’re moving toward your goals (in our household, we prefer to do this monthly but we’re bean-counting geeks). Don’t underestimate the importance of this exercise. Without it you might not see the impact of your financial decisions until it’s too late. It can also be a great encouragement when you can actually see the results of your efforts, such as paying down your debts.
Forecast results. When a business makes important decisions, they use processes such as “scenario planning” and “what-if analysis”. This simply involveslooking at the possible outcomes of one choice compared to another. You can use the same process to make smart money decisions. For any personal financial decision, pick two options and then consider what each would do to your cash flow and net worth. Remember, there are no “right” or “wrong” answers – only choices that put you closer or further away from your goals.
Track progress with annual reports. Just as companies assess their progress in their annual reports, you need to review your list of priorities every year. Have you accomplished any goals? Have your spending patterns changed? Did you spend more than you earned? Did you save as much as you planned?
Treat your money like you treat your business and you will see results. In the end, the time you spend being your own personal CFO is an investment in yourself and your dreams.
Article by Christie Lewis
Christie is Practice Manager at Alan Lewis Accountants . Besides accounting, her passion is for all things small business (and blogging, of course). You can contact Christie directly at christie@lewistaxation.com.au.
Christie has written 799 awesome articles for us at Alan Lewis Accountants – BLOG
Twitter: @christielewis
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