- When it comes to your finances, view them from the standpoint that they are a business you are operating.
- Businesses do three things every year: they make sure they have positive net cash flow, they have working capital, and they plan and budget.
- Budgeting and planning every year ensures you are meeting the goals you set for yourself to build your wealth successfully, and that you can pay for both your wants and needs.
We’ll spend a lot of time planning a great vacation, doing all the research, and preparing an itinerary. But when it comes to our finances, we spend very little time planning for the year. It seems a little backwards, but that’s just the way we are when it comes to dealing with our personal items.
I want you to look at this differently. Try viewing it from the standpoint that this is a business that you are operating. How would you do that? Businesses have three things they do every year:
- They make sure they have positive net cash flow
- They have working capital
- They plan and budget
Let’s look at you personally. What’s positive net cash flow? It’s a pretty simple equation that looks like this:
If you have income left over after your expenses, that’s positive net cash flow.
What is working capital? It has a specific meaning in corporate finance, but I am borrowing the term to help illustrate what your personal working capital is. It’s an “emergency fund,” which is money set aside for unexpected expenses that come up in the future, even for major shocking events such as losing your job. Obtaining money through a loan or credit card cash advances can be difficult to obtain and very expensive.
The third thing businesses do every year is plan and budget. Let’s start with budgeting. You take your gross income, and you subtract from it the taxes you pay such as Federal, State and FICA. Then you subtract 15% for savings. You do this next as a forcing function to help you build that working capital we discussed. Then take away any debt payments such as credit cards, student debt, auto loans, mortgages, etc. Next, subtract living expenses such as rental payments, groceries, gas, etc. Finally, subtract one-time expenditures, which are things you know you will pay for over the year such as new tires, moving company cost if you are moving, or other expensive, one-time payments for the year. What you have left over is what can use to cover your wants for the year.
In terms of planning, it’s all about taking time, once a year, to look out at least a year or further. Think about the goals you want to achieve to build your wealth successfully, to have access to capital, to be able to build multiple income streams, and other things that you want to do. You can go online and find many different spreadsheets and programs to help you budget and plan, and to do this at least once a year.
Until next time, enjoy!