There is something to be learnt form large projects and companies. You may think that having a budget of other people’s money makes things easier, yet when you are accountable it is like having to manage your own. So what are things that you can learn from large companies?
They have budgets
Yes, I know budgets can be restrictive and as such go out the window about 5 minutes after they are prepared when it comes to personal finances. Yet budgets can be an amazing tool to keep you disciplined and focused on spending in the areas you need to be spending at.
The old way of making a budget is to go through each item you spend money on and allocate a figure – hopefully based on your past expenditures – that you need to stick to. Whilst budgets work like this in companies, your personal finances don’t need to be this detailed if that means that you get overwhelmed.
Instead use, what I call, a Percentage Budget. With a Percentage Budget you only have three main areas of focus. Your wants (30%), needs (50%) and savings (20%). What you need to do is divide up your after tax income into these groups.
Your needs are your must have items like, food, housing, utilities, transport and schooling etc. Your wants cover things like entertainment, holidays, new car, Gucci handbag, basically anything that is not a must have. And your savings are for creating a financial buffer and for investments.
Now with only three areas to manage, – I’d recommend to have separate accounts set up for them – it makes it a lot less overwhelming to get your finances on track. A small note, if your needs are costing you more than 50% of your after tax income you are heading to financial stress.
They have goals and targets
Companies have set goals and targets that they want to achieve, you may have heard of KPIs. The same goes for your personal finances. It is great to dream about having an amazing holiday or that flashy car or house, but do you know what it will take to get you what you are dreaming about?
Get clear on what you want, priorotise each goal that you decide on pursuing. When you decide what it is you want, do your research on how much it is going to cost you. These are fundamental steps to achieving anything in life as to some extent they all have financial implication, yet are often forgotten. Which actually ads to the reason why people feel like they are treading on the hamster wheel!
So once you know how much money you need for your goal set smaller targets. Companies set milestones to move their projects along, it helps them keep focused and also to plan the work that is required to be done for the achievement for each milestone. The same goes for you!
Break down your targets to payment increments that match your pay cycle. Automate your payments for these targets either into a separate savings account where you will collect the money till you reach your goal or into the loan account you are busting.
Then set your visual reminders. You may have seen countdown clocks or pretty charts to measure progress. Do the same thing for you. It helps you get and keep excited about the outcome, and just like the ‘big boys’, make sure that you set rewards for achieving your milestones, it reinforces positive behaviour.
They track expenditure
Companies track their expenditure constantly. They review contracts and renegotiate terms and prices as necessary when something changes. You need to do the same!
You know that gym membership that you never used, but is still coming out of your account! If you track your expenditure it is easily identified as an unnecessary cost and can be cut straight away. It is also a great tool to make unnecessary spending more visible, like buying your lunch every day.
Tracking also means that you review your mortgage repayments and your insurances, and if you find a better deal, you renegotiate your set up. I have saved thousands like this each year. My latest renegotiation meant that I am now paying 2011 prices for my home insurance, for same coverage as what I started with, even though prices have gone up quite a lot over the past 5 years.
Because a lot of personal spending tends to be impulsive and unplanned, I ask my clients to also track their emotions and actions that go with each financial transaction. This can identify spending that was triggered by something, i.e. buying food or alcohol to subdue the pain of that unexpected car repair bill.
When you become consciously aware where your money goes you can make better decisions about your financial outcomes.
Redirect unused funds to other projects
The first thing we need to consider here is the money you are setting aside for savings. I suggest setting up a buffer, which is like the contingency bucket in the corporate budget for unforseen events. I have seen recommendations for having enough to cover 1,3, 6 or even 12 months of expenses. I leave this up to you, what do you feel comfortable with.
After you have reached that goal, start investing! The aim of investing is to create another source of income. Just like an extension to a business, you want to see profits being created. Whether it is through shares, property or business is your choice, just make sure that you research them thoroughly.
You may also notice that there is a surplus in the other areas of your budget. Whilst having a contingency is great, you don’t want to have money sitting idle! So if your surplus is big enough to invest then put that money to work for you!
I know the sound of managing your finances can be a drag. Just think of all the fun you have with it when you run it like a company, it’s just like monopoly!
Check out the Free 7 Day Money Mindset Makeover Challenge to get your finances going.