To keep your personal finances in the best condition possible it’s important to examine them in fine detail and carry out regularly reviews (so rock ‘n’ roll!). Changing the way you look at your finances can have a huge effect on your decision-making and should help you to be more efficient with your money. I try to look at my personal finances like that of a company because in accounting terms they are really no different (just simpler). For the sake of this exercise, try to picture your finances of that as a company of which you are the CEO. You decide what gets spent, how much is invested and how you manage debt.
Like any ordinary business you have income and expenditure. In the majority of cases the income will be from the salary you get from your job. There may be other sources of income too like a side business or shares dividends.The expenses will be everything from the essentials (food, rent, healthcare) to the desirable (iPhone, holidays, morning coffee from Starbucks). The first step in reviewing your finances is to track what is coming in and more importantly what is going out. To make things easier you can even try one of the many budgeting apps available. When you sit down and examine exactly where your money goes you may be quite surprised. Once you have identified where money is being wasted you can look to cut back spending in that area and redirect the money something more beneficial, such as investing.
In addition to income and expenditure you will also have assets and liabilities. Your assets might consist of a house, car*, valuables (e.g. jewelry) or even shares. Liabilities will be some form of debt, such as a mortgage, car finance or credit cards. It’s important to note that not all assets are created equal. Some will appreciate in value, as has been the case with property over time, and some will depreciate, such as a car. In order to keep and accurate record of your assets and liabilities it’s important to review them regularly and factor in any change in value. As well as the cost of depreciation you will also have to consider any maintenance costs when deciding how worthwhile the purchase of an asset may be. The deeper you go into your “company” finances the greater chance you have of identifying areas to reduce costs and increase income.
If you are able to reduce expenditure and increase income then you will be generating surplus cash (company profit). The key factor in whether you build wealth or not is what you do with this surplus. Most of the time when people have more money available they go out and buy nice shiny things. Having lot’s of shiny things may make you feel more wealthy at first but a few years down the line you will probably wish you had done something more productive with the extra money. Resisting the urge to spend will reap rewards and the longer you do it for the greater the rewards will be. In my article how to invest with little money, I show some examples of how your money can grow through investments. Providing your liabilities are not also growing you will be increasing your net worth. The greater your assets exceed your liabilities, the greater your net worth.
By taking charge of your finances today you can make immediate changes which will be hugely beneficial in the future. The amount of money you have available for the future doesn’t just depend on what you earn in the future. Most of it will come down to what you spend today. Put yourself in the shoes of a CEO and decide how best to run your “company” to ensure it’s profitable and growing for years to come.
If you’re thinking of getting into investing I highly recommend learning Warren Buffet’s number one rule.