Mind your own business

Just mind your own business… please!

No I’m not being rude I just want to drive home a point…

You see ‘Mind Your Own Business’, more commonly known as ‘MYOB’, is an accounting software package that helps business owners track and manage every aspect their business’ finances.

Why am I mentioning a piece of accounting software? Well it’s because whether you realise it or not you run a business! Yes, even if you’re an employee you run a business – I’m referring to your own ‘personal business’.

Think about it, you make income, you have personal expenses, and you have assets and liabilities – and depending on how you are doing with it all you’re either turning a profit or making loss each financial year.

Not convinced? You have a Tax File Number [TFN] and submit a personal tax return every year don’t you?

In fact, not only do you run a personal business, if you’re married or in a de facto relationship [especially if you share income, expenses, assets or liabilities] you also run a joint business – that’s right your spouse is your business partner! Remember that little joint venture contract you signed at the altar 🙂 ?…

It makes sense right? But the truth is most people never think of it that way and so they never end up running a profitable and thriving personal business.

You see, despite record low interest rates, times are tough at the moment and the reality is only those with a well-managed ‘personal business’ will survive and thrive.

Just as it is with traditional business it’s not about how much income/revenue you make, it’s how much you get to keep – your profit! There’s plenty of people on 5 figure incomes living month to month or worse falling into further debt each year.

What to do?

The first step is to realise and acknowledge that you do in fact run a ‘personal business’. The next step is to MYOB! …that is treat your personal business a bit more like a traditional business and start managing it to the best of your ability.

You need to understand what comes in, what goes out and how much you have left over each month. Then set a goal for where you want to be in 12 month’s time and put in place a plan, better still a set of strategies, to help you get there. After all you can’t improve what you don’t track and measure!

I’m not saying you need to run out and buy MYOB, QuickBooks or the like [although it’s not a bad idea] but if you want to improve your personal finances there’s a range of steps you might want to consider.

Introducing the powerful yet simple…

3-Step Personal Finance Business Plan

There are many methods by which you can go about achieving a better financial future but the philosophy is essentially the same; spend less than you earn, save the difference, and use your savings to pay down your bad debt and to invest.  Here’s how to do it;

• Step 1. Spending Management – This step addresses your spending habits and behaviours in relation to your everyday expenses, big and small. The goal is simple; decrease the amount of money you spend each month so you have more of it available to either save or pay off debt. The best way to achieve this is through expense monitoring and budgeting.
• Step 2. Debt Management – This step addresses your current debts and liabilities [quiet often large expenses]. The goal is to decrease your monthly interest repayments and overall debt levels to unlock more cash flow for you to put towards paying down your ‘bad debts’. The best way to achieve this is through debt reduction strategies such as; debt repayment reduction, debt consolidation and overall debt re-structuring.
• Step 3. Investment – You can’t save your way to a wealth – you have to invest to get there. The goal of this step is to leverage the increased cash flow and equity you’ve built over time by following Steps 1 & 2 in order to buy appreciating and income generating assets. There is no single best way to achieve this, as it will depend on your knowledge, skillset and risk profile – but it’s fair to say most people who build wealth do it via either property investment, equity/share investment, or business.

Step 1. Spending Management

The first thing to do is to track your cash flow; how much money do you personally generate each month, where do you spend it, and how much is left over. Once you know these numbers then you can start working on ways to improve your cash flow and profit.

You should always try and increase you income, however the most immediate and effective thing you can do it focus on reducing your expenses – it’s usually the area where you have the most control and leverage.

We recently wrote detailed piece on why and how you should set up a personal budget and automatic savings plan. In it we provide a link to our free budget planner. Feel free to use it to help get things going, otherwise you can easily set up an Excel spreadsheet to track and update your expenses each month.

Step 2. Debt Management

Once you’ve focused on reducing your everyday expenses you should look at ways to reduce your current debts.

But remember not all debt is created equal. Generally speaking there is two different classes of debt; ‘good debt’ and ‘bad debt’.

Good Debt

• Often referred to as ‘investment debt’ or ‘deductible debt’, good debt is acquired when you borrow money to buy investments or assets that appreciate in value and/or create income.
• Generally these assets put money in your pocket, so by definition most real estate, shares and business debt is considered good debt. They also increase in value so as you pay down the debt over time your equity and therefore overall wealth position improves.
• Good debt is tax deductible.

Bad Debt

• Commonly referred to as ‘consumer debt’ or ‘non-deductible debt’, bad debt is acquired when you borrow money to buy consumer goods that don’t appreciate in value or create income.
• Generally these items suck money out of your pocket, so by definition even your personal home loan debt should be considered a bad debt. Other types of bad debt include personal loans, credit cards, store cards and any other type of consumer finance. Items purchased using bad debt decrease in value faster than you can pay off the debt, as a result you either end up with no equity, or worse negative equity and thus reduced overall wealth.
• Bad debt is not tax deductible.

Dealing with Bad Debt – what are your options?

There are a range of strategies you can explore in order to reduce your ongoing interest repayments and overall debt levels, saving you thousands. These include;

• Refinancing your debts to a lender with cheaper interest rates
• Changing the type of loan you have ie. Switching to a Line of Credit, Offset Account
• Changing the frequency of your loan repayments
• Converting your home or investment loans to interest only
• Consolidating high interest debts into your home loan.
• Fixing your interest rates
• Combining multiple strategies

…Stay tuned for our next post where we’ll discuss each of these strategies in detail.

Good luck and have fun!

Sam & Matt
Urbantech Group >>  Adelaide’s Best Home Loans +plus more…