What comes to mind when you think of personal finance?
Allow me to take a stab at it. You probably think of people like Dave Ramsey or Suze Orman. You hear horror stories of college graduates being inundated with mounds of student loan debt only to take on more debt on their way to law school or medical school. In addition, you have probably heard of a few elderly couples nearing retirement who now have to go back to work because the market crash killed their 401(k) plans.
In today’s economic climate, it is imperative that people understand the inner workings of their personal finances. The stock market crash and real estate bubble alone should motivate you into becoming more fiscally responsible in your own life.
More importantly, if you truly wish to be a successful entrepreneur, you ought to at least know that if you pay out more than you bring in – you are in debt!
Before you run a company, you need to be able to run your life. If you are having financial issues or you just want to learn about personal finance, consider running your financial life as you would your new business.
Understanding these concepts and how they affect your business ventures can also help when applying for a business loan or even when pitching your ideas to venture capitalists. Bankers, investors, and VCs will all want to make sure you handle their money well.
So, let us see how a young entrepreneur might go about getting a handle on his or her finances:
Get Out of Debt
First and foremost: get out of debt. Have you ever heard of the debt snowball? Get Rich Slowly gives a great account of the process here. Basically, you want to pay off your debts smallest to largest. Why smallest to largest? Because it allows you to set milestones and see your progress. If you are stuck under a pile of debt, say from a student loan, and you feel like there is no way out no matter how much extra you put on the principal each month – you are likely to give up. Set small goals and celebrate as each debt goes bye-bye!
Stick To A (Mostly) Cash Diet
OK, so you have gotten out of debt. Now, what is the next step? Go out and buy a 70-inch 3D TV from Best Buy on store credit to celebrate? If you really need me to answer this question, just stop reading this article right now.
The next step is to pay cash for most things, like food, gas, and your mortgage/rent. Trust me: this will be very difficult. The propensity we all have to take out our credit cards and swipe is, quite honestly, a fundamental flaw in our society that is being engraved into the minds of our young people. Ditch the habit and force yourself to pay cash. This is a commitment and a learning experience for your new company. Do not complain. Just do it, as Nike would say.
Can I Use My Credit Card(s) At All?
Living on cash is difficult. That is why not everybody does it. The idea is to wean you from the constant use of credit cards and their extremely high interest rates. If you cannot pay cash for it, more than likely, you do not need it. You should only use credit cards as a last resort.
How This Translates To Your Business
There is a method to my madness here. Maybe it is better if an entrepreneur and millionaire explains it for me.
As MJ DeMarco, author of The Millionaire Fastlane: Crack the Code to Wealth and Live Rich for a Lifetime and creator of The Fastlane Forum, explains: “‘Live below your means’ also extends to business, not just personally. In other words, spend money only when you need to spend money in activities that have a beneficial return.” For DeMarco, he lived by this mantra as he created and sold Limos.com.
DeMarco adds, “Will spending money bring in more customers, streamline operations, and enhance customer value? Or is this money spent useless and really about ego? One company I was affiliated with spent a fortune on custom water bottles and T-shirts and the first question I could ask was “Why?” While these items were “cool,” they did nothing to improve the valuation of the business in terms of both the owners and the customer.”
As you probably know, starting a business is about the value your product or service can bring to the consumer. But, it is also about the value you can squeeze out of every dollar spent. The same goes for your personal life. Are your dollars chasing essentials – things to make the business of “YOU” work? Or are they chasing things to pump up your ego — like fancy cars or the newest TVs?
These are essential questions that need to be answered – not tomorrow, but today! Procrastinating will only hurt you – and your business – in the end. Though we may not want to admit it, how one conducts his or her life is a sign of how he or she will conduct their business.
David T. Domzalski is the founder of The Financial Bin, a website dedicated to helping Main Street get a better grasp of the financial world. You can check him out on his blog and on Twitter @FinancialBin to learn more about the recent developments at The Financial Bin and his other projects.