Entrepreneurs aren’t great money managers.
That’s not to say they mismanage their business finances – most don’t – but they often struggle to effectively manage their personal economies.
My father was a serial entrepreneur. His businesses flourished, but at home he was constantly broke. When dad died, my brothers and I took over his final business, a small manufacturer of custom boxes. It supported us for years. (The company will celebrate its 30th birthday next year, and continues to support one brother, a cousin, and six other employees!) But despite our business success, the entire family has had trouble managing personal finances.
And it’s not just us Roths. I talk to business owners all the time, and find that many of them have similar struggles. For more than three years, I’ve written the “Your Money” column for Entrepreneur magazine – many of my articles are inspired by the stories I hear at conferences like last month’s Pioneer Nation. It’s a thing. For some reason, people are better at earning a profit for their businesses than they are at earning one for themselves.
I think part of the problem is perception.
As business owners, we understand that our companies have to earn money if we want them to survive. It’s not that profit is the purpose of business – the most successful companies have other motives – but profit to a business is like proper nutrition for your body. Food and water aren’t your goals in life, right? Yet you couldn’t survive without them. So too a business needs profit to grow and thrive.
I think what most people miss is that home economies are, essentially, small businesses. Let me explain.
To begin, most businesses have a mission statement. This mission guides what they do and how they do it. Harley Davidson‘s mission, for instance, isn’t “to make a lot of money” or “to sell motorcycles.” No, their stated purpose is to fulfill dreams of personal freedom. A company’s mission acts as a roadmap, helping the employees and organization make better decisions. This is true for all businesses, big and small. But on a personal level, most folks fail to find a purpose. Entrepreneurs might be clear on their company’s aims, but they don’t bother to set specific goals for themselves. I think this is a mistake. When you don’t have a personal plan of action, you don’t have anything to guide your decisions. Spending money on one thing – a boat, let’s say – is just as good as spending it on another. But if you have a clear purpose, your financial decisions become much easier.
Here’s another difference between business and personal finances: Companies pay close attention to where their money goes. They track their progress with a variety of financial reports. Most entrepreneurs loathe this sort of thing in their personal lives. That’s crazy! If it’s important to track the financial progress of your business, why wouldn’t it be just as important to do this at home?
Maybe the biggest discrepancy between business and personal finances, however, is the pursuit of profit. As I mentioned earlier, we all know that a business has to make a profit to survive. And we all know that, ideally, a business will make as much profit as possible. The larger our profit margins, the better we’re doing!
What you might not realize, however, is that profit margin is just as important in your personal finances. Only we don’t generally call these concepts “profit” or “profit margin” when we’re discussing our home economies. We call them “saving” and “saving rate”.
Companies that forget (or ignore) the importance of profit often become unable to meet their goals. Individuals need profit too. If you’re living paycheck to paycheck -?? or worse, sinking into debt -?? you’ll find it impossible to accomplish the goals you’ve set for yourself. Plus, today’??s profit acts as a safeguard to protect you against an uncertain tomorrow. It also provides flexibility, giving you more options and allowing you to seize more opportunities. What’??s more, you can invest a profit, growing the money for future needs, such as retirement.
If you ask your financial adviser, she’ll probably tell you that you should save ten or twenty percent of your income in order to prepare for retirement. What she’s saying is that you should aim for a ten or twenty percent profit margin in your personal life. I think this number is way too low. It’s a starting point.
At a saving rate of ten or twenty percent, you’ll need to work for about forty years to accumulate enough money to retire. (This is true whether you run your own business or not.) But if you bump your saving rate to 50 percent, you can achieve financial independence in about fifteen years. (Financial independence and retirement are essentially the same thing, by the way.) And if you can save 70 percent of your income? Well, then you only have to work ten years to reach that crossover point.
Does saving 70 percent of your income sound impossible? For a business, it might be. But here’s where personal and business finances diverge. A 70 percent business profit margin might be nearly impossible, but if you’re willing to make some short-term sacrifices, you can achieve this at home. I’ve met dozens of people who’ve done so. (The blogger Mr. Money Mustache is a very popular example of just such a person.)
The thing is, pumping up your personal profit margin helps with more than just retirement. By slashing your expenses and boosting your income, you increase your cash flow, and that money can be used for any of your goals. Maybe you don’t want to retire at age thirty. Maybe financial independence isn’t important to you. That’s fine. You can use this money to pursue other goals, such as world travel or putting your kids through college.
The bottom line: More business owners would find success with money at home if they treated their personal finances the same way they treat their money at the office. It’s a subtle shift in thinking, but it’s an important one.
Whether you hope to escape the chains of debt, to save for a one-year sabbatical, or to retire within a decade, you can have the financial freedom you desire -?? if you’re willing to accept the role and responsibilities that arise with becoming CFO of your life.