You’re probably thinking the title of this post is crazy. I can practically hear you saying “I’m not a business!” In the technical sense, you’re correct. You probably don’t have Inc or LLC after your name. But in the practical sense, you’re wrong. A business is simply an entity that attempts to make a profit from its activities. Do you want to make a profit from your activities? If you don’t, not only are you looking at a rough retirement, you’re looking at a rough present if you ever lose your job or face any unexpected expenses.
Profit is simply the difference between revenue and expenses and if you don’t make any, then your bank account is empty at the end of the month – or worse. As crazy as this sounds, around half of Americans (residents of the richest country on earth) can’t come up with $500 cash to deal with an emergency. And $500 isn’t even much of an emergency. You could easily eclipse that number with something as ordinary as replacing the tires or a moderately expensive repair on your car. An emergency is getting in a serious car accident and winding up in the hospital for a week. Sure, insurance is going to cover the lion’s share if you have it but what about lost wages, deductibles, and other random items you don’t necessarily think about until you’re in the situation? You are almost guaranteed to be out at least a few thousand one way or another in that scenario. And what about a job loss? I’ve never taken unemployment but I’ve never heard anyone say it paid as much as the job it replaced, which means you’re losing money there too. You really don’t have the choice of not being a business; your only choice is whether to be a successful one or a failure. And the failure option is going to be a very difficult, stressful existence.
But not to worry. Being a successful business really isn’t that difficult. Revenue minus expenses equals net income. If net income is positive, your bank account or other assets are growing. If it is negative, you need to make major changes RIGHT NOW.
Once you start thinking about your business, you are already off to a good start. Most people don’t even do that. They just kind of exist and hope everything will work out. The stat I mentioned earlier about the $500 emergency is only one of many that illustrate what an ineffective strategy that is. Revenue is going to be mostly employment income for most people – especially early on. Increasing that is possible but it usually takes time. I’m going to write a post where I talk about as many ways to do that as I can think of at some point so stay tuned. But in the short term, you’re going to have much more success attacking your expenses. I’m going to write tons of posts about ways to do that.
Budgeting works very well even if it is unpopular. I don’t personally do it but that’s because I’m automatic at this point. I have annual targets and monthly targets for everything I do. All of it is in spreadsheet form but most of it is also in the back of my mind all the time. And it translates into me doing things in ways that automatically move me towards my targets. For example, if I go shopping, it is for a particular item or list of items and without even consciously thinking about it, I find the best intersection of price and quality and milk every portion of the transaction. Overall, I likely spend around half of what the average person does for the exact same products and services. You won’t get there overnight and if you aren’t as crazy as I am, it may never happen. But budgeting is very likely to help you move in the right direction if you aren’t already where you want to be.
If you’re ever trying to solve a problem, the first step is to figure out exactly where you stand now. This isn’t fun but keep track of all your expenses for a month – or preferably longer. Excel makes it pretty easy but if you want it to be easier, there are sites like Mint that can probably help. Once you have a month’s worth of data, you can start gleaning information from it. Total all the expenses and then compare that number to your total revenue for the month or whatever other period of time you’re looking at. This is your starting point. Categorize your expenses and you will be able to see where your money is going. Focus on the biggest numbers, look at the specific things you are buying/paying for, and start looking into ways to make the numbers smaller.
The end goal is to have the biggest possible difference between your total revenue and total expenses. This is the foundation of all financial success. Once you’re achieving it consistently, that difference will start accumulating and you will be ready to start working on putting your money to work for you. This will help you on the revenue side and increase your net income even further. No matter where you are now, you can work on moving in this direction and your situation will at least be improving. And improvement has a way of turning into real results if you can keep making it happen.