It is surprising how successful business people are often poor managers of their personal finances. We often encounter people who have shown incredible vision and management skills in starting and running a business who then do the exact opposite in managing and growing their net worth. As a result, they do not attain the level of financial independence warranted by their business success.
The key to helping these people get their personal finances in order lies in convincing them to apply those principles that have contributed to their business success to achievement of their financial goals. What they do well in their business works just as well in their personal finances.
See the Big Picture
Successful small business owners see the big picture. They know what works and what they do well and focus their energy and resources in this direction. They are exceptional at “prioritisation, assessment and restraint" when managing their business. Learning to apply the same skills to personal finances is the key to financial independence.
Prioritisation means being clear about where the cash flow comes from and staying focussed on ensuring that it continues and grows. For most people, cash flow comes from their primary place of employment. Ensuring that the cash flow continues and grows mean striving to be the best employee possible whilst availing oneself of training and growth opportunities. It may mean changing jobs if another employer values your particular talents more highly. Prioritisation means the assignment of greatest importance and resources to the major contributor(s) to your financial health.
Assessment is the skill of weighing the costs and benefits of an idea. Smart business people understand and appreciate the principle of opportunity cost. Dedicating resources to a new idea may be at the expense of other ideas. Therefore, the assessment process recognises that management time is not limitless. This keeps business owners from spreading themselves too thin. Smart business people strive to do a small number of things really well whilst many businesses fail because management try to do too much, too quickly.
The same is often true in personal finances. The assessment process involves weighing the costs and benefits of an idea. What is your track record or the track record of your advisor? Is it complex or simple? Do you truly understand it? How much time will it take to manage it? How much will it distract you from the job of generating cashflow? Will it impact on your family and leisure time, particularly if it goes wrong?
Restraint is the final big-picture skill of successful small business owners that must be applied to personal finances. Restraint in business recognises that revenues must exceed costs to make profit. In a business, each spending decision is assessed in the context of the revenues it can generate. Personal finances are a bit different in that we also spend for enjoyment. That is, we spend on non-wealth building assets. However, the basic principle still applies. To accrue wealth, spending must be less than income.
Successful businesses run ongoing, detailed budgetary processes yet it is surprising how few households operate to a budget. A household or personal budget is the key to restraint in personal finances. To build personal wealth, spending on non-wealth building assets should take place after other regular expenses and debt reduction expenditures have been taken care of.
Plan for tax
Successful small businesses undertake tax planning. They maximise after-tax profits by taking full advantage of tax deductions and credits. This maximises the amount they can reinvest in their business or pay out to shareholders. Less-well-run businesses tend to leave money on the table.
Those that manage personal finances well use the tax system to maximise the amount they pay off personal debts, invest for future enjoyment or spend now. Just like a successful business, they deliberately maximise tax savings.
The most important thing is to be organised. Waiting until you sit down to file your tax return is too late. Keeping records and filing receipts as the year progresses will make it much easier to assess your overall position in the run up to 30 June.
Superannuation is arguably the major tax advantaged form of saving in Australia. Before the end of the financial year, evaluate whether you have maximised your personal super contributions. If not, consider doing so if you have the capacity.
Timing income and expenses can also assist in managing down the tax bill. The same applies to the realisation of capital gains and losses. Holding an asset for more than twelve months halves the capital gains tax. If you have accrued a capital gain tax bill during the year consider whether it is worthwhile to take an offsetting capital loss prior to 30 June. Selling equities after they trade “ex dividend” can also be an effective means of minimising capital gains tax and benefitting from the tax advantage status of franking credits.
Given the complexity of the tax system, engaging an accountant is a good idea. Your accountant will know where to begin to look for deductions and credits. You can also start to educate yourself online by googling "the most commonly missed tax deductions."
Finally, we make the observation that the goal of tax planning is to maximise after-tax personal income as opposed to simply minimising tax. Many investment schemes established to minimise taxes have resulted in poor overall returns for investors as the underlying investment has been a bad one. Consider the quality of the investment first and the associated tax breaks a distant second.
Never Forget Your Major Asset - You!
Successful small business owners take care of themselves at all levels. They manage themselves in a fashion which ensures that they can go the distance in business rather than risk burning themselves out. They make time for the family and have their business and staff organised in a way that allows them to take a break.
The same needs to be true with managing personal finances. If you can’t take a break without contacting your stockbroker or financial planner then you may not have the stamina to go the distance with your personal finances too.
Applying the principles of prioritisation, assessment and restraint in both management of your business and personal finances should allow you to not just go the distance but to also enjoy the fruits on one’s labour along the way. This gives a taste of the financial independence you're working so hard for.
Stick at it
Successful business owners are determined to work as smart as they can utilising the principles of prioritisation, assessment and restraint. They keep their long-term goals at the forefront of their attention and continually monitor whether their choices are taking them towards their goals. They learn as much as possible about the opportunities with which they are presented so they can make informed choices. Underneath all that, they understand and care for their major asset – themselves. Applying the same determination and principles to their personal finances will see them attain their long-term financial goals sooner and with less fuss along the way.