In this post, we will talk about money and the key aspects to be in control of your finances. In a post before I mentioned that money is not important while I do believe this to be true, I also understand money is important in certain aspects of life, that’s the way the world works today.
The reason for me to write this post about managing your financials and wealth accumulation is that I feel this topic is very important. As an (aspiring) entrepreneur, your financial situation is pivotal to the success of you and your business. The lack of money (or cash flow), ultimately is the reason that businesses fail, and acquiring the skill to manage money well will not only serve you well in your personal life but also your professional career.
Below I will share several tips on how to manage your personal finances, in a follow-up post I will talk about basic financial tips for (aspiring) entrepreneurs.
A personal note
I have had my fair share of not managing my money well and making expenditures without covering certain basics first. Currently, I am far from there yet, but I have picked up several things that changed my mindset and pushed me to make changes in my financial strategy. I do not claim to be an expert, I am far from that, but I hope this post pushes you to analyze your personal situation and make changes where required.
The advice in this post is not legal financial advice, before doing anything you should consult with a professional. The nature of this post is inspirational.
Finance 101: Save first, spend later
This may sound like a cliche, but how many people do not follow this simple principle. If you receive money, this being a paycheck or any other form of income, first save money (if possible, and it should be). Many people have a mindset that is something like this:
Income – fixed & variable expenses = money left to spend – other indulgements = potential money to save
The scenario above is for many small businesses and families all too common. A better way to approach your financials would be something like this:
Income – 10% of income dedicated to savings = money left to spend
But truth is, many families and households do not save much at all. The average amount of savings of American families is $3,950.00 and 25% have no savings at all. To me, those numbers are very shocking.
If it is one thing that I realized in Asia, it is that many local families here have a strong ability to save money. The average household in China, for example, has substianly higher savings compared to many families in the West. Now I do realize that factors such as the lack of social security and high education fees contribute to this phenomenon.
To become in charge of your own financials, start with saving money before you spend any of it. This might sound like a cliche, but truth is, it is the detrimental factor to acquire and maintain wealth.
“A penny saved is a penny earned”
– Benjamin Franklin
Understand the power of compound interest
Now you realize that becoming the master of your personal finances starts with saving, we will now discuss the importance of compound interest. For those who are not familiar with compound interest, it is basically the interest you earn over your principal so that in time you will also receive interest over previously added interest to your principal.
So basic example, you have $100 you put it somewhere for a 5% return after one year you will have $105. But for the second year, you will receive 5% return over $105, which would give you $110.25. After the third year, you would have $115.76. Now this is of course still a very basic and small example.
Hypothetical compound interest case
Let’s meet Kevin (24) and his father Aaron (52), their financial situation is as follows:
|Contribute per month||$80||$500|
Now for the calculations, we assume that the monthly contributions will not change for both Kevin and Aaron and that interested is calculated annually. Kevin decides on a more conservative investment portfolio and plans to yield results on the long-term, Aaron has a more aggressive approach and wants to retire as soon as possible.
Now Kevin and Aaron will have acquired the following with their investment portfolio:
Now that is incredible, with a principal of only 4% of the principal of Aaron, Kevin is able to generate 66.6% of his fathers total savings. A principal of only $1,000 is very small and the monthly contribution that Kevin adds is also small and has remained unchanged over all these years. A more detailed calculation
A more detailed calculation that considers growth in Kevin’s income and therefore, his monthly contribution would have an even bigger impact on his net worth. The key to being the boss of your finances is to understand the importance of compound interest.
Be frugal with your finances
Warren Buffet is arguably one of the best investors of all time, yet Warren Buffet is also famous for being frugal. He still lives in the home he bought in 1958 and is known for not having an expensive taste in cars or luxury products. So if one of the richest men on earth isn’t splurging his cash, why should you?
Now I do understand that there is nothing wrong with spending money on certain things, I do the same sometimes. But be considerate on what you spend your money and if this is necessary for you. The best investment you could make is in yourself and you should not be frugal with that.
The key to being in control of your finances is to spend less money. That doesn’t mean not spending money at all, but it does mean that you should be considerate of how you spend your money. Being frugal also means not spending money that you don’t have. Don’t buy things on credit and only buy things that you can actually afford right now.
How is this related to online business?
Starting a business can be a costly and lengthy process before you start to gain any traction. Starting an online business could significantly reduce those costs but it could still mean that it could take some time before you are starting to see any financial results.
If you want to give your business any success it is vital that you create enough runway for yourself to make sure that you do not run out of money before you start earning any money, being in control of your finances helps with this. Furthermore, the principles above can also be applied to ensure that you are control of the finances of your online business.
Good luck with applying these tips to your personal finances and reinvesting the money in your business. I am looking forward to hearing your tips on how to ensure that you are in control of your finances.