One of my big dreams has always been to set up my own business; already as a teenager, I had been looking for some opportunity or some way to make an additional buck. In the end, I never seriously pursued any opportunity when it was available because I was simply too hesitant.
Then again, maybe it is good just as it was. During many episodes of my life, I had not been good with money at all, and perhaps I would have made some big losses. Anyhow, when I first left home, or rather when I got my first job, I realized that in the end, I am running a business, and a very versatile one: myself.
The idea of running my household like a business first came to me about a year after I took on my first job. After one year of monthly salary payments, I still didn’t quite know where my money was going to, it seemed as if it evaporated. I always had insight into my bank account details, as I could access them online at all times, but I really didn’t know where my money was going, and I had a hard time planning anything. After a year of working hard, I didn’t have the impression I had saved anything.
Therefore, I started creating a plan, and the things I needed to run my household more like a business. This included adding transparency to my finances, and continuously working on the income side, the expense side, and my net worth.
The first step to run your household like a business is to create visibility. I created my own system with Excel, but you might well use a program like Quicken, which is much advanced and offers many more opportunities. The beautiful thing about such software is that you can track any aspect of your finances over time: your income, your expenses, real estate, investments, retirement, etc.
Creating a budget
The second step to running my household like a business was to create a budget. I knew exactly what I earned, and how much I needed to repay my student loan. By tracking my expenses over a 3-month period, I got some very good insights into my spending behavior; I then started to analyze my behavior, and to identify whether I was spending as much as I needed to spend, or whether I was spending too much. In my case, I was spending too much on items I really didn’t need. Therefore, I created a budget on what I think would be an acceptable amount to spend each month. Additionally, I tried to identify other areas where I would be able to cut down my expenses, and over time my expenses started to decrease dramatically.
I have to admit, I don’t usually stick to my budget, but I stick to it for about 95%.
Working on income
The other side of the business is the income side. If you are like me, your main income stream will be your day job. This, of course, does not mean that I will keep this salary for the rest of my life. One aspect of my income stream is to see where I can maximize my main income stream, perhaps through a salary raise, or through additional projects. Although this is not an option for myself, you might even want to consider switching to a higher paying job. This is up to you.
The other aspect is to create additional income streams. I am building up additional income streams by investing in dividend-paying investment funds. Also, you might think of creating an additional income online via the internet, or perhaps by investing in real estate and renting it out. Some people do freelance consulting on the side.
How you want to achieve additional income streams is up to you, but the possibilities are out there, and they are endless.
When subtracting your total expenses from your income, the result is either a profit or a loss. Naturally, you will want to make a profit, else you will risk bankruptcy. If you make a profit, quarter after quarter, you can save that money on a cash account, or invest it to create additional income.
When it comes to my own personal household, my aim to increase my net worth over time. If I see my net worth increasing, year after year, I know I am running at a profit, and that I am growing financially. Of course, I want my profit (in percent) to be higher than the rate of inflation. This might mean, that I will still need to work on myself, that I need to keep living as frugally as I can, and that I should take the opportunity to invest my profit in order to allow my money to work for me.
Many people really do not know where their money goes; they live their lives and often accumulate debt, without knowing it. Life, in a sense, is much like a business, with revenue streams, fixed and variable expenses, investment opportunities, and short-term or long-term debt. Running your household like a true business could allow you to get a tighter grip on your finances, and to grow financially over time.