#21 – Michael Joseph – 3 Steps To Manage Your Finances Like A Small Business

Do you have trouble saving money? Can’t seem to get out of the paycheck to paycheck loop? It’s not because you are incapable. It’s not because you have low will power. It’s because most people assume that all of the money in their account is for whatever they want. Whether it be rent or eating out, money is money.

WRONG!

All of your money is not for spending. Money is not just something we have. Money is something we use. It’s a tool and should be used as such. In this article, I am going to tell you how managing your finances like a small business will change your perspective around money and help you save.

1. Identify your cost of living — If you can’t track it, what’s the point?

Too often people lack the ability to save due to lack of understanding in terms of their spending. The lack of awareness causes them to spend more some month and less other months. It’s not sustainable.

Excel Is a great resource to figure this out yourself. The program has a couple free budgeting spreadsheets to give you a snapshot of where you’re currently at!

A great way to divide your money is into three categories: Fixed Expenses, Variable Expenses, Savings.

2. Set up 3 bank accounts — Money movement

  1. Small business account — Income — Fixed expenses / Reoccurring payments

2. Employee/ Labor — Variable expenses/ Spending money

3. Savings/Equity — Emergency Fund / Investments

This is where the small business piece comes into play. Dividing your money into 3 accounts will allow you to prioritize how and when to use your money.

The First Account you should have is called your “Small Business Account.” For most of us, this is our primary checking account. This account is your income flow account. You will direct deposit into this account and run it like a small business. You (your small business) earn for example ($4000) per month, but you have to cover your overhead, your labor, and miscellaneous/ emergency expenses.

Examples of expenses

– Rent, utilities, car payment, insurance, phone, retirement, (anything on a reoccurring payment)

– The only nonfixed expense coming out of this account should be your student loans or credit cards. This is due to making a monthly payment but having the option to pay down more on debt if you choose.

The Second Account you should have is called your “Employee / Labor Account.” This is a secondary checking account. This account is your spending account (variable expense account). This is the account you use to pay yourself. Based on your detailed budget, you should have a set amount that you transfer from your Small business account: weekly, biweekly, or monthly with a set amount of money. I do this every two weeks so it mimics my pay cycle. This account is anything you swipe a card for. It’s anything you choose to purchase or consume. This mostly includes food, alcohol, gas, groceries, consumer goods, clothing. The amount you transfer each cycle is all you get.

For Example:

If there is something expensive you want to buy, you should not use money from the Small Business Account or Savings. In a business, an employee would not be able to pull money from the business or assets of the business. Unless they are stealing! Your finances should be looked at the same way. To create a healthy system, you have to operate under the rules a business would.

By doing this, you will consistently save by transferring money to your savings and not touching it

OR budgeting within your employee account to save over time to purchase things you want.

For Example:

You want to purchase a new mountain bike for $2000. Based on your budget you have 1000$ in the Small Business Account, $1000 in Employee/ Labor, and $5000 in your savings account.

Even though you have the money in savings, you should not use that money to buy the bike. Each account has a purpose, and the purpose of the Savings and Small Business Accounts do not warrant that type of spending.

In order to purchase your mountain bike, you will need to find another area to cut back and save within your Checking 2 account. For Example: If you are spending $600 per month eating out or going to bars, there’s a good chance you can scale that back to $200 per month. This will allow you to cater to eating out but save for what you ultimately want to purchase. Yes, it will take 5 months to save up for your new bike, but this is how you can consistently save to build up 3–6 months of expenses in your savings account without compromising your financial security.

Too often people fall into the trap of thinking they have the money to purchase something and not planning accordingly. Then, when a real problem arises, it puts the individual in a very tough and stressful situation.

The Third Account you should have is called your “Savings / Investment Account”

The purpose of this account is solely to build an emergency fund. If the worst-case scenario came to pass and you need money in a hurry, this account is here to help.

Examples of worst-case scenario are: Losing a Job, emergency/ expensive fixes on home or car, family emergencies, etc.

The goal for this account is to have 6 months’ worth of expenses or income saved (individual choice.)

When you have hit your 6-month limit you must look at that amount as your new minimum. Any time you dip below your priority must be to move money back to maintain that amount ASAP.

Anything over the 6-month amount should be allocated to investments, retirement or eliminating debt.

This should be done will the goal to turn your money into more money.

With 6 months of income saved, you are more than stable. This extra income will go towards relieving future financial stress that a lot of individuals deal with later in life.

Time is your friend with investments. The more time they sit, the more they will be worth in the long run.

3. Track Your Profitability / Make adjustments

Like all companies, it is important to make sure you / your business is profitable. It is important to keep track of your profits to ensure that you are using your money correctly, and your business / finances are healthy.

Summary: Following these steps will help you manage your money consistently, buy the things you want in life, help build savings, and reduce the stress and shame from your daily life.

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