I don’t care if you get a W2 every year, you are still self employed — at least that’s how you should think about it.
We are all self employed and our business is ourselves. If you run your life like a business, understanding things like cash flow and investments, you will be very successful and you will not worry about your future.
If I watch television, I watch shows like The Profit on CNBC and Restaurant Impossible on Food Network. The common thing I see in these shows is how most of the business owners don’t know basic information about their finances. Since you are your business, do you know the basic information about your personal finances?
As a business owner I’ll admit that I may not be able to answer all their questions off the top of my head, but I have meticulous records and I could have an answer within minutes (probably seconds). Can you do the same for your personal finances?
Salary versus income
This is the first thing that people often get wrong. In business it’s the difference between revenue and cash flow. Say your salary is $100,000 a year, that’s $1,923 a week. But that is not what you take home. After taxes, health insurance and other deductions, like your retirement savings (you are saving for retirement right) you could easily be taking home only about $1,000 a week or less which is just $52,000 a year of spendable income. Spend like you have 100k and you’ll be broke all the time.
Here are my questions for you: what is your net worth? What percent of your gross income did you save in 2014? How much did you spend on eating out last year? If you can’t answer these questions immediately can you get the answer in less than a few seconds, how about minutes?
Forget the debate on whether a house is an investment or not, what some people do with their homes in the name of investment can be downright silly. For example, renovating the kitchen, bathroom, or basement might add some value to your home when it’s time to sell but it’s not an investment, it won’t appreciate beyond the value of the house as a whole. You can’t sell your kitchen renovation when you’re short on cash.
In business every investment has an ROI, return on investment, meaning that if you spend $100 on a new piece of equipment it better increase your income by $200 or more (because you don’t invest to break even). Then there are capital expenses and that’s more like the kitchen upgrade, it may not make you money but it’s necessary to function.
The popular term these days is side hustle but it used to be called a hobby. What I see is too many people confusing a hobby with a business. A hobby is not an investment even if you consider it a business. Unless there is potential for this hobby to be your sole source of income it’s just not an investment. I’m not against hobbies or even having a little side income but inflating what it is doesn’t help.
Stretching is for exercise
Too often I see people reach beyond what they can afford to what they want (even so called experts). They want a new car but the payments are too high so they lease it instead, a couple with one child in a two bedroom home say they’re outgrowing it and buy a bigger house they can’t afford, they want a vacation home and overestimate the rental income they will get.
All these examples are people who stretched to afford something but they all run the risk of pulling a muscle to keep the analogy going. Instead, buy the car one model lower, stay in the house longer, only buy the vacation home if you can afford it without renting it out, and still rent it.
Successful business people look at every expense carefully, they don’t spend unless it’s necessary or will lead to more income.
What are some things you feel people could do better if they ran their lives more like a business?
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