You are probably concentrating so much time on your job, your family, and dealing with day-to-day stresses that your personal checkbook takes a back seat. More than once you have been shocked when you didn't have enough money to cover all the bills or an emergency cropped up. You need to become your family's Chief Financial Officer.
Here are my five rules for treating your personal finances like a business:
1) You Have A Board of Directors.
Your family members comprise your Board of Directors. To make good decisions, you must know what you're trying to achieve. In business, Boards of Directors write mission statements to keep the company on track with goals. At home, it's up to you and your Board of Directors 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 as well because, let's face it, most goals involve money. Does your car need new tires soon? How much will they cost? How much do you need to set aside each pay to save up for them? You get the idea?
2) Know Your Operating Costs.
How much money flows into your household and how much do you spend every month on average? Businesses know this because they project their budgets based on historic spending patterns. Chances are you don't know what it costs to keep your household running on a profitable basis.
Have you ever made out a detailed budget only to find out at the end of the month that you broke it in the second week?
Dump the budget. Instead, create a "cash flow statement" that records how much you actually spend each month broken into several categories. This, I promise, will be an eye opener. You will readily see where you are bleeding cash on nonessentials like eating out four times a week.
3) Know Your Net Worth.
Companies measure progress toward goals through balance sheets which list their assets and liabilities. A balance sheet is where you list everything that you own and its market value. List your checking and savings accounts, investments, motor vehicles, your house, etc. minus everything you owe.
Ask yourself - "If I had to sell everything today, how much cash could I raise after paying off my bills?" Your debts are your "liabilities" on your balance sheet. You cannot balance when debts are greater than assets.
A balance sheet will give you an idea of what you are worth at any given time. Track your net worth quarterly to make sure you're moving toward your personal goals. Without this step, you will not see the impact of negative spending decisions until it's too late.
4) Forecast the Possible Results of Your Financial Decisions.
This is like fortune telling without the crystal ball. When a business makes important decisions, they use a process called "scenario planning." In plain English, they look at the possible financial impact of one choice compared to another. You can use the same process to make smarter money decisions. For any choice, pick two options, and then look at what each answer would do to your cash flow and net worth. Bad choices put you farther from your goals. Good choices get you closer. It's really simple.
5) Give Your Family an Annual Report.
Companies report their outcomes to their shareholders in their annual reports. You need to review your list of priorities with your shareholders, your family members, every year. Make them part of the solution. Congratulate them for helping to make your household profitable. Have you accomplished any goals? Have your spending patterns changed? Did you spend less than you earned? Did you save as much as you planned?
Reminder: If you follow these five steps, your household will be like a financially successful company and your Credit Score will be improved as a bonus.
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