This week has been insane in the DD household with news of two potential raises and a possible home purchase around the corner. I’ll be back to posting soon, but while you’re here, I have a great guest post to share with you from Joe Chantry (bio below). The topic is why we should treat our personal finances like a business.
Most people have heard that 9 out of every 10 new businesses fail in their first few years. This is a statistic that commands the attention of any entrepreneur and often strikes fear in people. Many people who dream of one day starting their own business never do because they are afraid of failing. They would rather keep their job security than risk losing their savings and credit on a failed business.
Have you ever wondered why so many businesses fail in the beginning years? I’d be willing to bet that more than 75% of these failures are due to one big problem: cash flow. Cash flow is the lifeblood of any business. A business must be able to generate enough income to cover all of the operating expenses AND have some profit left over. If the business income is only enough (or not enough) to cover the expenses, then the business owner does not get paid. There has to be profit left over, otherwise there is no reason for the owner to be wasting his/her time running the business.
Every business must have cash flow or it will eventually fail. There are no ways around it. A business might be able to make it through a few years before becoming profitable, but over the long term a business absolutely must have cash flow.
One fact that many people never realize, is that each and every person is his or her own business whether they like it or not. If you have a job, bills, and a household to run… then you are basically operating a business. Your job generates income. Your costs of living are your expenses.
Here is an example of a basic person’s monthly income statement:
John Doe’s May 2017 Income Statement
Salary from job
Total Net Income
John Doe’s total expenses for the month were $2,895, which left him with $105 left over. So in this case, John Doe had a positive cash flow of $105. Although $105 per month may not be a whole lot of money, it is much better monthly cash flow than most other American’s today are getting.
In today’s society, as we have mentioned in previous posts, American’s on average spend 104% of their annual income. This means that the average American has a -4% annual cash flow. So what would happen if a business had that same negative cash flow? It would not be in business for very long.
If someone wants to learn to build wealth, the most important concept that they need to grasp is to treat their personal finances like a business. You need to generate a positive cash flow every month. That will most likely mean cutting back on expenses, increasing income, or a little of both.
With this positive monthly cash flow, you should be paying yourself first. Set this cash flow aside in a separate savings account so it cannot be touched. This money, in time, will be the seed money that you will use to start accumulating income generating assets. Check out one of our previous posts on wealth building guidelines from The Richest Man in Babylon.
To sum everything up, take the first step and start treating your personal finances like a business. All businesses depend on cash flow to survive, and so does your financial future.
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Check out more of Joe’s work on Your First Million.