This is Part 2 of a 2 part series called “It’s Your Business!”
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Part 2 – It’s Your Business!
In Part 1 we asked “If your personal finances were a business on the stock market, would people invest in it?” We outlined a couple of ways that you could reinvent your business to make it profitable, attractive, and fulfilling.
We are looking at the finances from this perspective because it allows you to ask yourself hard questions, and it allows you to see your finances in a less personal light. It forces you to think “If the whole world could see what my finances actually looked like, would they laugh?” Now we are going to talk about the methods a bit more in-depth.
Why Is Debt Good For Companies But Bad For You?
Many businesses use debt as leverage. The idea behind leverage is to use someone else’s money, usually a bank, to invest at a higher rate than the debt. What this does is allow you to invest more capital than you have, or place more of your capital somewhere else. This can be very profitable for a business, but consumers operate in a different way. Chances are, if you have debt, then you used your debt for consuming.
Credit card debt is a good example. People rarely use credit card debt for investment, but they use it often for buying stuff. The problem with buying things is that the money is completely gone, and now you have to come up with the money to pay it back. If a company uses debt to invest, and the investment falls in value by 50%, the company still has 50% of the money left to pay back with, meaning that they only have to come up with the other half.
When you buy with your credit card, you need to come up with 100% of the money spent, unless you can sell what you bought (this doesn’t work with Big Macs and Electric Bills). Additionally, Big Macs and Electric Bills won’t increase in value if you hold onto them.
Lower Your Debt Positions
This sounds like an obvious step towards wealth building, but for some reason, people still continue paying the minimum balances on their credit cards and student loans. We’ve heard the excuses about building credit, yadda, yadda, yadda. Why pay someone to say you’ve been a good boy/girl?
Consumerism is the only area of finance where we’ve heard people talk about good debt and bad debt. Generally people invest in companies with low amounts of debt. The companies with high amounts of debt get washed out when the markets go down. Just look at Linens n’ Things Versus Bed Bath and Beyond.
People get good at cutting costs when times get tough, but the true measure of a persons restraint is how well they can cut costs when things are just fine. Look at Wal-Mart and McDonald’s! Part of their daily thought process is to figure out ways to streamline processes and lower expenses, consequently they are the leaders and the driving forces of innovation in their respective industries!
They drive home two ideas: Efficiency, and consistency. These two behemoths didn’t end up as the leaders by accident or by coincidence. They became leaders because they did the same thing everyday, and that was to improve their efficiency and lower their expenses.
Monitor The Finances
It’s not enough to simply lower your debt and cut expenses. Without tracking your progress you won’t know if you’re moving forward or backward. We’ve stressed it before to do it by hand on a whiteboard, but if you are against writing with your hands you can absolutely use a software to keep track of this.
We highly suggest implementing a budgeting system. A budget will allow you to more easily track your progress, and give you systematic way to quickly jot down the good, the bad, and the ugly for that month. Keep a running chart of your progress to see how things are going.
Set & Achieve Goals
What good is tracking if you’re just heading towards positive infinity? We’d all like to go to positive infinity, but without goals you’ll feel like you’re running a never-ending race. You need to set moderately difficult, but attainable goals, then work towards them. Once you reach a goal, set a new one. If you find that you are always reaching your goals then set larger more lofty goals, but be careful to not set the limits too high. This will help to keep you on track.
With the above steps outlined, you can take yourself from being the Enron of the neighborhood all the way up to the Wal-Mart of the neighborhood, or Apple, whatever is cooler in your part of town. You might also be interested in reading our list of 10 ways to improve your finances.