In business, the simplest measurement of success is profitability. And the math is easy, too: Revenue – Expenses = Profit.
Although you may not have made the connection before, the same holds true for your personal finances. Any money you have leftover at the end of the month or year, after expenses, is your personal profit. (This includes your savings and investments, by the way.)
But really successful business leaders aren’t just happy that their companies are profitable. They take steps to protect and multiply their profits—and you should, too. Just incorporate these four boss moves for managing your money.
1. Track your expenses, then slash them.
Operational expenses, from rent to payroll and taxes, take a big chunk out of a company’s profit. So it stands to reason that the easiest way to increase cash flow is to decrease those expenses, whether that means lowering the cost of materials or laying off workers. As long as revenue doesn’t slip, any reduction equals an immediate profit increase.
It’s not difficult to see the personal finance parallel: To bump up your net worth, look at your expenses and identify places to cut.
Let’s say you earn $45,000, contribute $2,250 to a retirement account and spend the rest. Disregarding any investment gains or losses (for simplicity’s sake), you’ll have a 5 percent profit margin at the end of the year. But slash your expenses by $187.50 per month—by, say, renegotiating your cable bill, having fun for less, comparison-shopping and/or renting vs. buying clothes or entertainment—and your profits double. Many CFOs would love to achieve that kind of increase.
The challenge, of course, is actually saving the money you’ve just freed up in your budget, says Neal Frankle, a Certified Financial Planner and editor of WealthPilgrim.com. So take willpower out of the equation.
“The best way, hands down, to actually save the money is to set up an auto-deposit into your savings or investment account,” Frankle says. “This way, you hit your savings goal and get the money safely away from yourself, so that you can’t spend it.”
2. Grow new revenue streams.
Savvy business leaders are always looking for new income sources. Best-case scenario, this boosts the company’s bottom line, but it also insures against an economic downturn or changing tides: If one area of the business suffers, a second or third revenue stream may even it out.
There are a couple ways to diversify your income. The first, as you probably guessed, is picking up a side hustle. Provided you keep related expenses under control (and your day job helps you break even, at least), any money you earn from your side gig, minus taxes, is profit. Another way to diversify is by pursuing passive income streams, like investing in high-dividend stocks and bonds or renting unusued space.
“By having a side business or investments that pay you interest or dividends, you reduce the risks involved [if you] lose your regular income,” says Ted Jenkin, a Certified Financial Planner and founder of oXYGen Financial in Atlanta, GA. These additional sources may not add up to your salary, but they can replace at least a portion of it until you get back on your feet.
3. Build a cushion.
The second part of preparing for lean times or unexpected expenses is amassing a cash cushion. This way, businesses can survive a rough patch without reaching crisis territory. You can mirror this by building an emergency fund to cover your essential expenses for three to six months—and not touching it unless there’s a real need. (Sorry, a vacation does not count.)
Worried it might take a while to fully fund this account? That’s okay; aim to hit a smaller goal first. “Think about your financial life over the last 10 years,” says Frankle. “What was the most expensive emergency that you had to deal with? [Save] at least the equivalent of that cost to prevent yourself from cannibalizing investments or going into debt when the inevitable emergency strikes.”
4. Invest in R&D.
Business executives know it’s imperative to be competitive today and stay relevant tomorrow. One way they do this is by spending money on research and development (R&D). An R&D department is tasked with finding improvements for current products (think: new features that roll out with each new iPhone) and creating new products altogether (think: Apple making the leap from iPods to iPhones).
In your own life, R&D can translate to investing in developing skills, contacts and expertise that keep you competitive and relevant in the marketplace. It can also mean purusing new interests altogether that might eventually blossom into additional streams of income.
“I’m a big fan of investing at least 1 percent of your yearly income in you,” Jenkin says. “Whether it’s health and wellness related, continuing education or something more personal, a part of growing your income is being able to grow yourself.”
August 8, 2016