How to take charge of your personal finances

Managing your business can be overwhelming. It requires a huge commitment of time, money, and effort. All those responsibilities often short change the other areas of your life. None more than personal finances. In fact, most business owners believe they can’t save and invest for retirement because their business requires all of their mental and monetary focus. If you feel that way, read on.

With a change in mindset, proper planning, and self-discipline, you can take charge of your personal finances and still grow your business. Use these tips to get your personal finances back on track and gain peace of mind.

Change your mindset

Everyone has a personal issue that they’d like to address, such as the need to exercise, diet, or to change a relationship.

Real change requires us to become uncomfortable. If you start to exercise, for example, you’ll be physically uncomfortable. Likewise, straightening out a bad relationship requires difficult emotional conversations.

At some point, however, the pain of not changing becomes worse than the discomfort you’ll feel by making a change. Sure, exercise will make you uncomfortable, but carrying that extra weight creates medical problems that are even worse. The first step to take charge of your personal finances is to alter your mindset. Choose to be uncomfortable.

How? By taking a long, hard look at exactly where you are now.

Face the numbers

No one wants to be reminded of bad news, and your current financial situation may appear to be tough to solve. However, you can’t fix these financial issues until you know the extent of the problem.

Pull out all of your credit card statements, loan documents, and bank records.

Then—in a spreadsheet, on paper, or through an online tracker and planner—list every debt, the required monthly payment, the interest rate, and (hold your breath) the total amount due.

Be sure this review only includes personal transactions by separating your business activity from your personal finances. That means separate bank accounts and credit cards. This approach helps you generate accurate company financial statements, and allows you to correctly file business and personal tax returns.

What does this look like in real life?

Meet Julie, who is just starting to take charge of her personal finances

10 years ago, Julie opened Reliable Carpet Cleaning using nothing but her own savings and a lot of determination. Today she employs 10 people who provide carpet-cleaning services and have helped her build a company primarily through word of mouth.

Over time, Julie has taken on these debts:

• Credit cards: $5,000, 15%, $170 minimum monthly payment
• Car loan: $10,000 10% interest rate, $250 monthly payment
• Student loans: $30,000, 8% interest rate, $400 monthly payment

Business owners like Julie have the added financial struggle of a fluctuating income. This complicates the process. While Julie’s business is well established, her income is not consistent. In the last four years, her income has fluctuated between $65,000 and $90,000 annually.

Create a monthly budget

Create a monthly budget to control your spending and to fund a savings account for emergencies. To make your budget, go back through your credit card statements and bank statements for the last three months. Create a category for each type of spending and fill in the average monthly expense.

Once you have a complete list, separate your categories into fixed and variable expenses.

Julie’s car payment, student loan payment, and her minimum credit card payment are fixed expenses, along with insurance premiums. She also has variable spending categories, such as meals and entertainment.

The last item in your monthly budget is a savings amount that will fund an account for emergencies. Try to save 5% of your gross pay each month, and set a goal of building a $1,000 savings account for emergencies.

To reach this goal, use the concept of “paying yourself first,” which means that the most important category in your budget is your savings—even if you need to make other spending cuts in a particular month.

Cut your spending

To finalise the budget, put your monthly net income at the top of the page.

For a business owner, your monthly income should be a minimum expectation—an amount that you think you can reasonably earn. Subtract all of your expenses, and see if the difference is a positive or negative number.

Assume, for example, that Julie’s monthly budget—savings included—ends up with a $150 negative balance.

To remove the negative balance, review the variable spending categories in your budget and … make some cuts. Now, cutting requires you to change your habits.

Rather than buying coffee every day, Julie decides to brew coffee at home twice a week. She also decides to eat out once a month, rather than three times, and eliminate some music and magazine subscriptions.

You can also look at reducing fixed expenses, but these are more difficult. For example, speak with your insurance agent about lowering your premiums by removing coverage that isn’t necessary.

Paying off debt

If your business generates extra income, and you earn more in a particular month than you’ve budgeted, you have three choices.

You could spend the extra dollars, pay down debt, or fund an investment account. If you’re serious about taking charge of your personal finances, spending the extra money isn’t a useful option, so focus on the other two options.

The best choice is to pay down debt, rather than fund an investment account. By paying a bigger portion of the principal balance on a loan, you’ll reduce the interest charged. Paying less interest means that you can pay off the debt faster, and once the debt is gone, you can start to invest.

Which debt do you pay off first?

Pay off the smallest balance first and then use the dollars available to make bigger payments on the next largest debt.

This strategy is referred to as the snowball method: Like a snowball that rolls downhill and picks up more snow, you pick up more dollars as you pay down smaller debts.

If Julie has a good business month and generates more income than her budget, she should pay more on her credit card balance. Once the $5,000 credit card balance is paid off, she can use the available $170 monthly amount and increase her car loan payment.

Julie’s ultimate goal is to pay down all of her debt, eliminate the interest expense, and free up dollars to save and invest. Many people use a strategy of paying off every debt, except for a home mortgage, and then start investing. Since a home loan takes 20-30 years to pay off, most consumers leave that large debt outstanding and make the monthly payments.

Work with a financial advisor

When you reach a point where most or all of your debts are paid off and you have dollars to invest, meet with a financial advisor.

The investing options for business owners are complex, and you need a financial advisor who can explain your choices. Business owners have the option of setting up and funding a company retirement plan, or a self-managed super fund.

An advisor can explain your investment options, the dollars amounts you can invest each year, and help you choose a portfolio of stock, bonds, and other investments. You’ll also need help to determine your risk tolerance for investing.

A proven method

If the thought of starting this process sounds difficult, remember that thousands of business owners follow this method for getting back on track financially. This method works: start with where you are, create a monthly budget, pay down debt, and plan to invest. With effort and self-discipline, it can work for you, too.