How I manage my finances
As we head into the weekend, I thought I would totally switch gears. Instead of talking about blogging and business strategies, I wanted to talk about a basic matter of handling your finances.
Hell, it could save you some money. It could help you have more money for later. But, I think basic management of one’s accounting is just one of those things we all need to know how to do, whether it is for a business or just our personal finances.
There’s a basic law of finance. I don’t know who the hell came up with it. Maybe nobody. But, I know it is true. It goes like this:
We will tend to make the amount of money that we need.
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And as a corollary…
We will tend to spend what we make.
People will tend to do whatever it takes to make the amount of money they need to pay the bills. But, on the other hand, we will tend to spend what we make. If you make extra money, you’ll find a way to spend it!
Man, we all do it. You should try owning an RV sometime. 😉 No shortage of crap you can buy, lemme tell ya! Now, before my wife sees this, let me continue…
But, there’s also the saying: Pay yourself first.
So, I think, as a baseline, you should try to put 10% of your income away into reserves. This is money you put aside for later. Call it retirement, whatever you want. This is money that isn’t assigned to any budget item… it is just there for savings. For future big purchases or what have you.
Now, the “trick” here is that you have to turn this into an actual budget item. Treat it with the importance you would your electric bill, or your internet bill. It just HAS to be paid. It is a BILL. Pay yourself first.
I confess, I have not always been good at this. Not even a bit, really. I have some investments and they have made me some money. But, in terms of reliably putting aside 10% every month into reserves, this is something we’ve just recently implemented. My wife is now handling the finance fully and takes care of this for us. And I’m happy as a clam to have her do it. I’d rather just focus on the business. She’s good with the numbers.
OK, so that’s 10% into reserves. And to be clear, that’s 10% of income. Almost like tithing. If it’s a business, then take 10% after expenses. In other words, 10% of profit.
Now, there’s another account that we’ve been very successful implementing. I call it “Reserved Payments”.
We all have bills that we need to plan ahead for, but we don’t have to pay until later. It could be taxes. Perhaps annual renewals.
We’ve likely all had times when a big bill comes due and you have to sort of “eat it” because you didn’t plan for it ahead of time. I’ve done that with taxes in the past. I just didn’t plan for it adequately, so when that IRS payment comes due I cringe when I have to write the check.
Or, perhaps you have a membership or other renewal that takes place annually. Many times, this actually saves you money. You can reduce your effective net monthly budget by paying some things annually rather than monthly. Thing is, you have to manage the money so that when that annual renewal happens, you don’t get caught with your pants down.
The solution is “reserved payments”.
Set up a separate bank account. Then, take your annual fees, divide them by 12 to turn them into a monthly payment. Then, each month, you “pay” your monthly bill by transferring that amount into the “reserved payments” account.
EXAMPLE: Let’s say you have something you pay that runs $995/year. Once per year, you’re going to get that $995 billed to your credit card. Well, $995 divided by 12 months works out to about $82.92 per month. So, every month as part of the monthly budget, you would deduct $82.92 from your main operating bank account and transfer it to your reserved payments account.
Over the course of the year, you build up to a full $995 in that account… already earmarked toward that bill. Then, it no longer hurts when that renewal takes place. The money is there.
On a super small scale, I use Cyfe as a little stat dashboard for my business. $19/month for the account. But, annual it is $168/year. That works out to only $14/month. So, I can save $60 per year by paying annually. No problem… I just deduct $14/month into reserved payment and then pay once per year and save the money.
This is easy-peasy stuff, but many people don’t do it. Many don’t actually operate with a budget. They don’t plan for things. They just fly by the seat of their pants… look at their bank account as a piggy bank and make financial decisions on the fly.
But, that’s not much different than a kid with a piggy bank and some loose change in there. They don’t usually think ahead either. Just because your numbers are bigger and the bills more regular doesn’t mean your financial “planning” is much better.
So, those are 2 simple tactics you may wanna implement.
They work for us.
But, they make things easier. Less surprising. And, it actually makes your income stretch further and allows you to get more done.
– David Risley