Tuesday, July 3, 2012

Run Your Life Like A Business!

Most folks think that balancing their checkbook every month means they are doing well.  If you manage your personal life as though it were a business, and you may see very clearly where all your money is going.

When I started my practice, I was completely unprepared.  While I knew the legal end of things, like most Lawyers, I had no idea about how the accounting side of things worked.   By the way, if they offer a course in Accounting or Bookkeeping in High School, College, or the local Community College - take it.  It will explain so much to you in life.  Hell, I didn't even know the difference between an Invoice and a Statement (do you?).  It pays to develop talents.

In short order, I realized that I needed to log and account for every expense associated with the business - and keep a sharp eye on expenses.  I also needed to track how much I was making and pay taxes in advance.   The motherly teat of "withholding" was withdrawn, and I was on my own for the first time.

And man, were there a lot of painful lessons!   Let me just say this:  It sounds easy, but it ain't.  And you don't want to get in the situation of not paying your estimated taxes on time, because you have no handle on your expenses and your income.

This rude wake-up call made me realize that my personal finances were in a similar shambles.  We made money - and we spent it.  And like most Americans, if we paid all the bills every month, we thought we were "doing OK".    We had no idea of what our debt load was, interest rates, or net worth.   We had no idea whether we were getting ahead or falling behind.   Our only financial document in our life was the check book register, and half the time that wasn't filled out right.

I took a course at a Community College on how to use Quickbooks, and learned that the hardest part of using the program was learning some basic Accounting rules.  That was the hardest part.   But once we got all our data entered, we could then see where the expenses were, and how much money we were owed (I was shocked that one client was nearly $90,000 in arrears!).

I also realized that hiring people wasn't making me any more money - but in fact, less.  People these days demand jobs as a "right" - but in many cases, they are a detriment to a workplace, not an asset.  And the folks who think a job is a "right" are most likely to be a detriment.

But I digress.

I realized that I needed to clean up my personal finances as well, so I set up a second "company" in Quickbooks (actually a third company, as we had our Sub-S corp that owned the investment Real Estate).  I started logging all our purchases and income and, well, it became readily apparent that a lot of our money was going to "Other" every month.

We would take money out of the ATM machine for incidental expenses - lunch or designer coffees, or small purchases at stores of things we thought we needed.   It was no small amount - hundreds and hundreds of dollars a month.

(And how often do you see this in life - people running to the ATM to take out $20 to spend on gas, cigarettes and a snack?   They put $10 in the car and buy ciggies, a soda, and chips.  Repeat, ad infinitum).

It was impossible to cut back significantly on the big-ticket items - the mortgage, utilities, insurance (although we did make some headway).   But "Other" - that was killing us - to the tune of hundreds if not over a thousand a month!

Tracking these purchases, with a debit card, was helpful.   Getting out of the starbucks habit, and buying lunch every day, was another.  We learned to make our own meals and live with regular (free) coffee - or tea.  Getting rid of bad habits - habits which most Americans have and think are normal was a big key.

We also started monitoring our net worth.  And this came about because my bank - the one I owned founding stock in - wanted me to submit a financial statement every year, showing my net worth, to justify them keeping my "callable notes" (and ulcer-maker if there ever was one) on the books.   The idea of calculating my net worth had never occurred to me, before.

When you start thinking like a businessman, a lot of things become crystal clear.   Suddenly, just spending money wantonly doesn't make any sense.  You spend money on one thing, it means you can't spend it on another.   So you have to choose what is important to you.  If you want the fancy car, maybe that means no fancy coffee.   Or maybe if you want money in the bank, it means neither.

I suspect a lot of these "paycheck-to-paycheck" Americans are living the way I was, and they will remain "paycheck-to-paycheck" by definition - not because of their economic circumstance.   If you have no financial discipline - and no means of tracking your spending, debt, and net worth, then you will, by default, be "paycheck to paycheck" for the rest of your life.  You will spend up to your income and never get ahead.

And it doesn't matter how much you make - you can live "paycheck to paycheck" on $172,000 a year.

And this was not some sudden revelation, like Saul's conversion on the road to Damascus.  It has been an ongoing thing of a decade or more.   Every day, it seems, I discover something new - a new way of looking at life that is different and clearer than before.

And it has been a fun and interesting journey.  I only wished some of these revelations came earlier in life.

Getting a handle on your finances, however, is key.  You need to know where you are spending money.  And no, I don't mean some stupid online thing like "mint" that just shows you pie charts of spending.   You also need to log your net worth, regularly, and see whether it is increasing - or going down.

When you run your life like a business, it is far easier to show a profit.