Run Your Personal Finances Like a Business
Wait a minute! What?! How would that even work? In order to understand this concept and how it applies to your personal finances, it’s important to understand how businesses and business owners run their finances and make financial decisions.
Successful companies all across America are very different when it comes to business model, products, services, etc. But most of these companies all share very similar characteristics when it comes to running and managing the books of their company.
First, lets look at a company’s burn rate and profit margin—arguably two of the most important numbers in determining the current and future success of a company. These concepts are very similar: how much money is being thrown away (burned!) on unnecessary expenses and what is left at the end of a month or year. The difference between revenue and expenses is their profit margin–the larger the gap, the more successful the business is now and most likely will be in the future.
These successful companies spend a significant amount of time reducing necessary expenses and eliminating unnecessary expenses. They have many different ways of accomplishing this never-ending goal. They primarily use income statements (determines how much money they earned versus spent over a period of time) and balance sheets (a snapshot of assets, liabilities, and equity/net worth). Once they know that information, they comb through every single source of income and every single expense they sent out the door. Then they evaluate what expenses need to be reduced or completely eliminated.
Here’s the trick they use to determine what to keep and what to cut: they make purely mathematically-driven, logical decisions and do not let emotion interfere.
How does all of this relate to your personal finances? Good question. Regardless of income, the most financially successful people in life create the largest gap (profit margin) between their income and their expenses—and they save it. They spend time weekly (or monthly) looking at their personal income statements and balance sheets. They evaluate what money is coming in, what money is going out, what’s important to keep, what’s not, and if there is anything that is necessary to keep but can be reduced (ahem—your $250/month Comcast bill or your $6/day ($180/month) Starbucks).
But most importantly, those that are going to be the most financially successful people in this world are going to be the ones who, like businesses, make their financial decisions based on mathematics and logic, not emotion. Unlike many things in life, if mathematics says it’s true—it’s true. After all, 1+2 will always equal 3.
Would you like more info on retirement or planning your personal finances?
Reach out our friend Ross Gaddy at WestPoint Financial Group!
Ross Gaddy is a registered representative of and offers securities, investment advisory services,
and financial planning services through MML Investor Services, LLC, Member SIPC (sipc.org).
Supervisory office 900 East 96th Street, Suite 300, Indianapolis, IN 46240 Phone (317)469-9999.
WestPoint Financial Group is not a subsidiary or affiliate of MML Investor Services or its affiliated companies.