Congratulations, you’re in business!
Maybe you didn’t realise it, but you’ve been in business for a long time. That’s right. Whether we like it or not, every household is in business, the business of life.
The thing with this business is, you can’t resign!
You’re stuck managing this business till the day you die. Because of this, you’d wanna start paying attention to it, to make it easier on yourself.
I’ve always had an interest in finance, ever since I can remember. I figure it’s such a big part of our life, for our whole life, it just makes sense to learn about it. It even makes sense to get good at it.
Money affects us so much that it’s literally the reason most people are (grudgingly) getting out of bed each day!
Wake Up… You’re In Charge!
First of all, like a business we need to earn money to stay alive, pay our bills, and fulfil any future plans or goals we have.
Although no-one told you and it was never officially announced, you are the CEO of your own life.
The buck stops with you.
You get to make decisions every day over which way your business (your life) is headed. It also naturally follows that you are the Chief Financial Officer (CFO), of your own personal finances.
Like a business, we have a choice what we do with our earnings. We can spend the earnings and hope nothing goes wrong with our business.
Or, we can keep some of those earnings and invest to create more future income. By investing, we’re increasing our households future profits.
Household Profits – How Does Your Household Stack Up?
Usually, most households are run at a small profit. Here in Australia, the average household savings rate is around 5%. This can be thought of as household profits.
To be honest, this is pretty dismal!
This number is the reason most households are going nowhere fast.
We earn, we spend, whatever is left is the profit for our household. This profit is usually disposed of in the future, in the form of more (unnecessary) spending.
Alternatively, these profits can also be used wisely, to earn more income, in the form of investments. Or the profits can be used to reduce our costs such as by paying off debt, or used to purchase cost saving technologies like solar panels.
These choices helps us generate larger household profits in the future.
Strength In Profits
The larger the profits a company has, the stronger that company is. They have many options available to them, and little to worry about. Because they know they can deal with anything that arises.
The same goes for households.
A company with no profits, or small profits, is arguably in a very weak financial position and are exposed if something goes wrong. This applies to us too, in the business of life.
If we have no surplus income, no investments, no savings… we’re screwed if something goes wrong.
Successful businesses will always look for ways to be more efficient to increase their profits. A household can do the same. By reducing costs, we increase our household profits aka our savings rate.
Managing money is a skill that takes time to build, but pays huge dividends for the rest of your life. The better we become at running our household more efficiently, the larger our household profits will be.
This has a few powerful flow on effects…
For a start, it greatly strengthens our financial position. If any big expenses come up, we’ll have it covered, because there will be a large surplus of cash every month after the bills are paid.
This results in much less stress, more optimism about the future, and it’s just a generally happier situation to be in.
Having a higher savings rate also translates into a reduced length of slavery… I mean working life.
Running your household with lower costs and higher profits, means the pool of investments you need to retire is much less. See here – Why Savings Rate is King.
As your profits (savings rate) rise, then more cash is getting ploughed into investments, bringing your financial freedom date forward by years.
Every business has goals and targets it wants to meet. We should adopt the same approach as a household.
Where are we now? And where do we want to get to?
As a household, one of your goals is naturally going to be “living a good life”. So it should be too!
Finding ways to achieve the same thing for less cost is a key to running a profitable business. It’s exactly the same for a profitable household.
They’re both the same, we just need to open our eyes and start running our households more effectively.
By using this principle of getting the same thing for less cost, we were able to drastically reduce our own expenses over the years.
Our household profits/savings rate shot through the roof to above 60% and our mandatory time in the workforce was massively reduced.
Look to the Future
You’re the CEO, CFO and all the support staff rolled into one. Your household business needs good decisions to make it thrive and give it a bright future. Where is your household headed?
Are you operating at a large profit? Or very little profit at all? More importantly, are you investing those profits for future income?
In many industries, the company who can operate at the lowest cost, wins. In real life, the households that operate at the lowest cost wins. What do they win? They win the race to financial independence!
Building the mindset that you’re in business is crucial. It makes you less likely to flick away cash here and there, making you more focused on your goals.
This powerful habit of constantly improving your finances is a key source of financial strength in dealing with whatever the business of life throws at you.
Note – I hope this little mental trick is helpful in how you approach your personal finances. I think the business approach is handy, because it makes income/spending seem more real and forces us to take it a bit more seriously… also because I’m a weirdo it’s fun for me to think of our household as a little business and find ways to increase profits 🙂