Managing your personal finances like a business is one of the best things you can do for your financial health. Successful businesses and successful people share a couple of key things when it comes to their finances. Here they are:
What Does Managing Personal Finances Like a Business Mean?
Let’s start by explaining why you would even want to manage your personal finances like a business. After all, there are thousands of companies that fail every single day around the world. But while that is true there are also thousands that succeed. And those that succeed will use similar tips for managing their corporate finances.
If you want to start managing your personal finances like a business, here are some things you can do to get started:
There is a great book by Mike Michalowicz called Profit First. If you have not read it yet I would definitely recommend it. It is structured as being a business or being self-employed, but it works for your personal life too.
The basic premise of the book is that before you take out operating expenses, salaries, taxes, and wants, you set aside a part for profit. A certain percentage that no matter what you make, you take out as profit. You then use this money to help your business weather the bad times, expand your business. Whatever you need extra funds that you normally wouldn’t have to do.
Applying this your Personal Finances
So how do you apply this to your personal finances? The answer is easy. Every single month find one thing that you normally don’t have money for and start setting aside a portion of your income to that. Whether it is paying off high-interest debt, or saving. Every month, before you take out any money for expenses like rent, food, and bills, put that money aside. Then treat what is left over as your actual spending money.
As an example, if you make $4,000 per month, set $400 aside, every single month. Then treat your expenses and your spending as if you actually only made $3,600 per month. That $400 never existed in your mind!
Doing this can help you accomplish what you never thought possible. You’ll be able to save in record time or pay off the debt you thought you were drowning under. You’ll also find that as your available funds are decreased you’ll spend less. All of this together will put you on the right track towards managing your finances.
So take your profit first.
Use an Accountant
This sounds silly, especially for those with an extremely simple tax situation, but do it. Using a good accountant who costs you a couple of hundred dollars could save you thousands per year. Accountants are accountants for a reason. They know the tax code better than any of us regular people, and they know how to use it to your advantage.
It may sound like a frivolous expense to spend a couple of hundred dollars when you could do it for yourself, but if it is the difference between a $1,000 tax bill and a refund it will instantly pay for itself.
How to Find a Good Accountant
It’s all well and good to say that you need to find yourself a good accountant, but how exactly do you do that? Especially when a bad accountant can have the opposite effect, causing you to owe even more money? Well, let’s start with a few basic things. First, don’t go to H&R Block! While they may be alright and you may get the maximum benefit, the chances are just as high, if not higher, that you’ll get a bad one.
So start by asking your friends and family. Word of mouth is one of the most trustworthy ways to find a new accountant. Ask your parents, or friends (or me if you’re in Alberta) who they use, and try using them. If you are worried about if the accountant is doing a good job you can take to Google and find a very highly rated firm within your local area. You could either switch to them or if they are significantly more expensive, just have them double-check the accountant you were recommended.
But long story short, get an accountant. Businesses do for a reason, you should too.
Track Your Spending
As any business owner will tell you, tracking expenses is everything. Every single thing you buy needs to be taken into account and tracked. This means keeping receipts, marking the categories they are going to be expensed to, and keeping track of what that item is used for. Just this simple step is a great starting point for people, without having to go fully into a budget.
Simply knowing where your money goes and how much money is going there can make all of the difference when it comes to managing your expenses. It can help you trim down areas that are higher than they should be, and know when to negotiate for a lower cost on something like a phone bill. Without knowing how much you pay every month for your phone bill, how are you supposed to know if it is too much?
Once You’ve Started Managing Personal Finances Like a Business (Advanced Tips)
So those are some things you can do to get started managing your personal finances like a business. But once you’ve started, then what? Where do you go from there? There are some more advanced or complicated things you can do. Once you have the basics figured out, you’re taking your profit first, you’ve hired an accountant, you’re tracking your spending, and doing that on a consistent basis, move on to these tips:
Optimize Your Tax Situation
The first thing to do, and it likely will come with the help of your accountant, is to optimize your tax situation. For some people, it may make more sense to structure yourself as an employee. Just take your T4, with the taxes already paid and run. For some, it may make more sense to be a sole proprietor. For others, it may make sense to incorporate. All of their own advantages and disadvantages when it comes to taxes. So sit with your accountant and look at how you can change your financials to best align with the tax situation you want to be in.
When pricing on products gets too expensive, what do companies do? They look elsewhere. Now more than ever companies will go above and beyond to get the same quality good for as cheap as possible. Whether that means changing cities, provinces/states, or even countries. Now, for you, this may not be a possibility, but if you live in a high cost of living area (Toronto, Vancouver, etc.) it should definitely be considered.
In modern times especially, after the changes the pandemic had on the way we work and earn a living the possibility of moving is more possible now than ever before. Most work locations have some form of work-from-home possibilities. And with these possibilities comes the possibility of moving to a low cost of living area. So price out your life and look at similar areas you could move where your expenses wouldn’t be so high.
If your job is truly remote you may even consider changing countries. When a company has cut its costs as much as it can in the country where it is, what is it most likely to do? Outsource. Outsource is where you take a portion of your business (usually manufacturing, or in the case of personal finance, expenses), and move it to another cheaper country. This move lets you deliver the same product, to the same people, in the same market, at a lower cost. In personal terms, this means being able to do the same job, for the same pay, from somewhere immensely cheaper to live.
Do your research well, but there are countries around the world where even a low-paying North American job will let you live like royalty! There are things to keep in mind, particularly if you have kids, but don’t take the idea off of the table. There are many international countries that would be happy to have you, and where you would be happy to be.
Acknowledge. Adapt. Overcome.
The final advanced tip for managing your personal finances like a business is to acknowledge, adapt, and overcome. In one word this breaks down to pivot. If something isn’t working, find a way to make it work. If you find that your industry or company isn’t working, change industries or companies. When your finances are no longer working for you, change them.
Good companies are always willing to adapt to change, and pivot as needed. So should you. By letting your life and financials get stagnant or being simply complacent you are likely to get left behind, like companies who do the same. Is Blockbuster still around? No. Why? Because when Netflix came and completely flipped the industry on its head Blockbuster refused to adapt. They thought what they were doing was fine, after all, it had worked all this time. they didn’t need to change. With hindsight being 20/20, we all know how that turned out.
So don’t let yourself become the next Blockbuster. Be questioning. Be adapting. And acknowledge that change is sometimes needed and that you will need to pivot.