Should You Run Your Personal Finances Like a Business?

As a Chartered Accountant, and Chief Financial Officer of an award winning financial advice company, Josh Burton has seen firsthand the profound impact diligent financial management can have on both businesses and individuals. One of the key practices that can make a significant difference in personal finance is treating it with the same rigour and discipline as you would a business.

Wealthy and successful individuals often use the same methods to assess their personal finances.  

So, let’s look at why running your personal finances like a business is crucial and how you can get started.

A business uses financial reporting in three ways:

• To look back at historic financial performance to better understand future requirements
• To assess its current balance sheet and understand its financial strength
• To forecast and budget for the future

The Importance of Personal Accounting

Clarity and Control

Just as businesses need to know their financial health to plan for the future, so do individuals. Having a clear picture of your income, expenses, assets, and liabilities, is essential for making informed decisions and gives you clarity and control over your financial situation. Achieving clarity allows absolute control over your financial life and can help to relieve anxiety you might have about the future.

Goal Setting and Tracking

Businesses set financial goals and track their progress towards achieving them. This practice is equally beneficial in personal finance. By setting clear financial goals, such as saving for a home, retirement, or a holiday, you can create a roadmap. More importantly, you can measure your progress regularly.

Your goals might include traveling the world, giving time to charitable causes, securing the next generation of your family’s future, or a combination of all these ambitions. Realising these ambitions in the future requires structured planning and ongoing assessment in the present.

Budgeting and Cash Flow Management

A business needs to manage its cash flow to ensure it can cover expenses and invest in growth opportunities. Similarly, personal budgeting helps you ensure that you’re living within your means and saving for your future. Effective cash flow management prevents debt accumulation and helps you allocate funds to important areas. Unless an emergency occurs, it should never come as a shock to you if you run out of money or need to seek short term financing.

Preparing for the Unexpected

Businesses often have contingency plans and reserves to handle unexpected events. For your personal finances, you should build an emergency fund, ensuring you’re prepared for unforeseen expenses such as medical emergencies, job loss, or urgent home repairs.

Professional Assistance

Just as businesses rely on financial professionals to manage their accounts, seeking the help of a financial adviser can be invaluable for personal finance management. A financial professional can provide expert guidance, help you create a robust financial plan, and offer personalised advice to achieve your financial goals.

How to Run Your Personal Finances Like a Business

Drawing on his many years of experience, Josh has compiled an 8-point checklist to help you achieve your financial goals.

1. Create Financial Statements

Start by creating your personal financial statements:

• Profit & Loss / Income Statement: Track your income sources and expenses to determine your net income.
• Balance Sheet / Statement of Financial Position: List your assets (e.g., savings, investments, property) and liabilities (e.g., loans, credit card debt) to calculate your net worth.

2. Set Financial Goals

Define your short-term and long-term financial goals. Short-term goals might include saving for a vacation or paying off credit card debt, while long-term goals could involve buying a house, funding your children’s education, or retirement planning.

3. Develop a Budget

Create a monthly budget that outlines your expected income and expenses. Categorize your expenses (e.g., housing, utilities, groceries, entertainment) and allocate funds accordingly. Review your budget regularly and adjust as needed to stay on track.

This should hopefully leave you with a surplus budget each month. If it doesn’t, you need to answer to the fact you are most probably living beyond your means. This is a common problem that expatriates find themselves with, but is usually easily resolved.

4. Monitor Cash Flow

Track your actual income and expenses against your budget. A simple excel spreadsheet can be used to do this. Regularly monitoring your cash flow helps you identify areas where you can cut costs or increase savings.

5. Build an Emergency Fund

Aim to save at least three to six months’ worth of living expenses in an easily accessible account. This fund acts as a financial cushion, providing peace of mind and security in case of unexpected events.

6. Invest Wisely

Just as businesses invest to grow, consider investing your savings to build wealth over time. Diversify your investments across different asset classes (e.g., stocks, bonds, real estate) to manage risk and achieve your financial goals.

7. Seek Professional Guidance

Consulting with a financial professional can provide you with tailored advice and strategies to optimize your personal finances. They can help you navigate complex financial decisions, consider future tax consequences, ensure you're on track to meet your goals, and provide support in creating and maintaining a comprehensive financial plan.

8. Review and Adjust Regularly

Conduct regular reviews of your financial situation, at least quarterly. Assess your progress towards your goals, analyse your spending patterns, and make necessary adjustments to your budget and financial plans.

The Benefits of Personal Accounting

• Improved Financial Health: By understanding and managing your finances better, you can improve your overall financial health and stability.
• Reduced Stress: Knowing where you stand financially reduces anxiety and helps you make confident financial decisions.
• Increased Savings: Effective budgeting and expense management lead to higher savings, enabling you to achieve your financial goals faster.
• Better Preparedness: An emergency fund and wise investments ensure you’re prepared for the future, no matter what it holds.
• Expert Guidance: Professional financial advice can optimize your financial strategy, offering insights and recommendations tailored to your unique situation.

Running your personal finances like a business might seem daunting at first, but the benefits are well worth the effort. By applying the principles of business accounting to your personal finances, you gain clarity, control, and confidence, setting yourself up for a secure and prosperous future. Start today by setting up your personal financial statements, creating a budget, and setting clear financial goals. And remember, consulting with a financial professional can provide you with the expertise and support needed to make the most of your financial journey. Your financial future is in your hands—manage it wisely.

The Value Of Having A Financial Mentor

Sometimes life gets in the way of us looking at things as important as this or we are just too anxious to start. Just as a business operates with a Finance Director or Chief Financial Officer, its often so beneficial to operate with a financial mentor for your personal life. If you’re unsure where to start, want guidance on the basics or some more unique financial matters applicable to your circumstances – please reach out for a complimentary introductory session.