Run your Personal Finances like a Business

One of the reasons there is an overabundance of stuff in the developed world is that people manage their money like children.

"I want that car, even though I can't afford it - so I'll buy it on finance."

"I NEED this big house in a high cost-of-living area, even though I'll be working till I'm 70 to afford it."

"I DESERVE a nice all-inclusive holiday to that 5-star resort in Dubai. I worked my ass off last year (even if it was to pay off the previous holiday)."

WHHAAATTT?

These decisions are moronic at the best of times, and at worst complete financial suicide that could leave you needing to work YEARS longer in order to afford such an unnecessarily opulent lifestyle.

Money, and specifically the subject of keeping hold of what you have and aquiring more of it, is a serious subject - so it should not be approached with the mentality of a child. Everybody wants a new car or a nicer house, but you should have the discipline to know what you can really afford. This means being smart with money, and running your finances like a business.

A business operates in a fragile balance between income and costs, and in order to survive, incoming cash flow needs to exceed outgoing expenses. If the balance is tipped slightly towards expenses > cash flow, then the business will start to lose money (how long the business lasts depends on existing cash reserves). It's that simple.

Your finances are also a business. You need to cover outgoing expenses (bills, mortgage, food etc), while being able to make a profit and build up your own cash reserves and investments. Businesses track their expenses and cash flows, have a budget, build up an emergency cash reserve, pay dividends to shareholders and invest wisely. We can utilise these methods in the personal finance world, too.

Create a Budget

Track your expenses and have a very good understanding of where your money is coming from and where it is going. Create a budget based on this understanding. Aim to save and invest a fixed percentage of your income (the higher the better). This is the first step into managing your finances, as it gives you a clear picture of your financial health.

Set Financial Goals

These should be long-term goals that are realistic and can be used as daily motivation to improve your personal finances. Build into this long-term thinking short and medium-term goals that can be "waymarkers" along your journey. You are far more likely to achieve these goals if you have a written plan.

Pay Yourself First

The first, and most important rule of building wealth is to pay yourself first. This means siphoning money into a savings or investment account from your pay check before you do anything else with it. This reduces the temptation to spend any spare cash you have after bills and other financial needs are paid for.

Create an Emergency Fund

Have a financial contingency in case you lose your job or some other financial burden unexpectedly hits you (like having to fund a big repair bill on your car). 3-6 month's worth of expences are recommended in a high-interest savings account. Do some research to find the highest interest payment easy-access savings account.

Invest Wisely

Once your Emergency Fund is fully paid into, consider learning how to invest. This DOES NOT mean learning how to stock-pick individual companies (which very few people can do successfully). More likely, it means investing into a low-fee index fund that tracks the stock market. Where to invest is a personal preference, and while I do not provide professional financial advice, I'd suggest Vanguard Index Funds like VUSA or VWRL which track the US and Global stock markets, respectively.

Of UPMOST IMPORTANCE is taking the time to do the research when investing. Do not invest unless you understand what you are buying and where your money is going. There is no such thing as a get rich quick scheme, despite what you may hear about in social or mainstream media. The most reliable way to build wealth is to use time and the global stock market to your advantage - hold investments for a long time in the knowledge that the global stock market grows by ~8% per year, on average.

Review your Finances Monthly

Make regular reviews of your finances to find trends or changes in your spending habits and to see whether you are on track to meet your financial goals. This is an important process in maintaining your financial literacy, and may bolster an interest that can lead to further reading and research.

These steps are very simple, and just require some diligence and discipline to work. It's shocking to me that there is so little wealth in the UK: the latest ONS survey found that 35-44 year olds in the UK averaged £26,709 of savings/ investments. With a reasonable job and through managing their finances like a business, people should be reaching this goal by their mid-20s. These are the kind of inspiring goals you should aim for.

Your money is precious and not something to be spent frivolously - watch and track it like a hawk.