Manage Your Money As If You’re a Business: 7 Tips for Being a Great CFO
One of the best ways to do that is to start running your household finances as if you were a business, which essentially you are—You, Inc.—with you as the CEO and CFO (chief financial officer). If you share these duties with a partner, consider yourselves business partners of Household Inc.
Here are 7 ways thinking like an entrepreneur can help you super-charge your financial efficiency:
1. Get a simple system going. One of the key elements that helps a business run smoothly and successfully is having defined systems for—and automating—anything that’s done repeatedly (or should be). This speeds up processes so there’s more time for money-making (or enjoying life). These things should be systemized to a point where they require very little time and effort on your part. The whole idea is to get strategic, so you’re not just winging it and hoping you meet your goals. You’re making a plan to Make. It. Happen.
The great Catch-22 here is that most people feel like they don’t have time to stop the merry-go-round to put systems in place. But think of it as going uphill once so you can coast down the rest of the trip. Once it’s done, managing your money is forever simplified.
A great place to start is automating your saving and investing. You can set up your bank account to have a certain percentage of your income automatically sent weekly or monthly from your checking account to your savings and investment accounts so they grow without you having to think about them. (I like Ramit Sethi’s system; it’s essentially set-it-and-forget-it).
2. Spend money to make money. If you’re a business, your mind is on revenue, revenue, and more revenue. That means you want as many decisions and actions as possible to be revenue-generators. It also means that before you spend money, you’re thinking about the return on investment (ROI), and whether the expenditure will take you closer to your important goals or farther from them. At home, you should take the same conscious approach, asking yourself before every money decision whether that move will make you richer or poorer—financially, emotionally and/or spiritually. In business this would be called a cost-benefit analysis. This is where you figure out what the decision will cost you and weigh that against the benefit you’ll get from it. For example, will those new Michael Kors boots (while perhaps gorgeous) really enhance your life? (Probably not; see my article, “The Mighty Few)
In life, revenue can also include things that meaningfully raise the quality of your and/or others’ lives, and make you feel richer inside. It all comes down to what’s most important and meaningful to you. Spending can make sense when it helps propel you to what you ultimately want. (See my article on spending according to your values).
3. Build your capital. Put simply, capital is money that’s put away and available for investing, or is invested in the business. The more capital you have, typically the greater your financial strength. In your personal finances, that would be the money left over after your expenses are paid that can be put away for saving and investing. The more you can sock away while managing debt, the more stability you’ll have.
4. Only take on debt if it helps you grow financially or personally. A successful business uses debt strategically to move the meter on the company’s worth. The same should apply at home. For example, you don’t want to take on debt to pay for things that don’t get you closer to financial security (or have you stealing from tomorrow to pay for yesterday, as author and Senator, Elizabeth Warren, has so brilliantly put it). Typically, items in which the value decreases while you’re still paying for them is bad debt. A loan for courses or education that lead to a higher lifetime income (and isn’t stifling) may be considered good debt depending on your circumstances.
5. Increase your cash flow at any opportunity. Cash flow is the lifeblood of both business and personal finances. At home, cash flow is what you have left over after your expenses are paid that you can use to save for a rainy day, buy assets and invest, invest in yourself (and grow your human capital), and ultimately create the life you want. So take every opportunity to lower your expenses and/or make more money from a side hustle (doing something you love, of course) to get more green flowing in.
6. Flex your budget muscles. In business a budget (a.k.a. a plan) is critical to success. If you fail to plan, plan to fail, as the saying goes. And many businesses that don’t have budgets or business plans do fail. Planning is crucial to your personal finances as well and budgets are a great planning tool (forget the association with depriving yourself, that’s completely off). A budget is a plan for spending in way that helps you reach your goals. It gives you more freedom, not less—giving you permission to spend X amount in X area while staying on track. Consider it your GPS, telling you where you are and where you want to be. And it can be easily modified as your life and priorities change. (For how to create a budget, click here. Or for an online budgeting tool try Mint.com). If you can’t get past the word “budget” call it a spending plan or a financial freedom plan.
7. Make a date with your money. In business, you’d have weekly or monthly meetups with your partners or accountant to go over your company’s financials. Likewise, create a new habit where you set aside an hour on Sunday evenings or the first of every month, for example, to partner with your money for a mini-review to (1) look over your bank balances; (2) see whether you’re sticking to your budget, (3) make sure your expenses are as low as you can get them; (4) confirm that your income is on track for growth and if not, look at steps you might take to make it happen; (5) confirm that your net worth is growing, not depleting; and (6) that you’re moving toward the goals you’ve set. Better to nip problems in the bud and come up with a new plan than let issues spiral out of hand.
Just like in business, putting systems into place as the CFO of You, Inc. will help you get farther faster, and feel good about it.
What strategies do you use that are similar to business strategies? We’d love to hear from you in the comments below.