Personal Finance Management: Applying Business Accounting Principles at Home- Henderson Edition

2. Cash Flow Management: Keeping Track of Money Movement

Much in the same way like businesses check cash flow to make sure new money is coming in fast enough to cover new expenses, you should keep tabs on the money flowing into and out of your household.

Every expense; every income should be written down, either in a spreadsheet or in a financial app. You’ll soon see where you’re spending more than you need to, and be able to divert more funds to better things. Any money coming into your life should be more than money going out.

3. Balance Sheets: Understanding Your Net Worth

A balance sheet for a business entity lists all assets, liabilities and equity of a business at a given point in time. Creating your own personal balance sheet will give you a better understanding of your financial position.

List your assets: savings accounts, retirement funds, real estate, collectibles – everything with a dollar sign on it someone might want to buy and you might want to sell if a crisis arises. Next, list your liabilities: mortgage, credit cards, student loans, car payments and every other liability on which you currently owe some money. Subtract the total of your liabilities from your total assets; and you will get your net worth, a snapshot of your financial wellbeing, where you stand, and what you can aim for.

4. Income Statements: Tracking Performance Over Time

Income statements are used by businesses to track revenue, cost of goods sold, and expenses over a period, allowing the business to identify their profit or loss. For personal finance, creating a monthly or yearly income statement can help you see how much money you earn each month compared to how much you spend.

Determine total income, then subtract total expenses to determine whether you’re over or under budget for the period. This simple statement helps not only to track your financial performance over time, but also to make adjustments to your performance.

5. Cost Analysis: Cutting Down on Unnecessary Spending

Businesses routinely examine their costs to improve profitability, and a home version of the same process could reveal where you are overspending.

Take each type of spending line and ask if the amount allocated is in tune with your priorities. For example, do you really use the latest streaming service or would you be better off without it? Are there other ways to source the service at a lower cost? If your non-essential spending is lower, the funds you save could be deployed towards savings or further investments.

6. Saving and Investing: Building a Secure Future

Companies reinvest their profits to keep expanding their revenues and increase their future. Do the same with your money.

Try saving part of what you earn every month or so. Establish an emergency fund, which can help keep you out of debt when the unexpected happens. Look into stocks, bonds and mutual funds helping you grow wealth over time; make several different investments so your money can be spread out to help balance risk and reward.

7. Debt Management: Reducing and Eliminating Liabilities

Businesses managing their debt is vital to avoiding breaking point in how much they can borrow, while managing our personal debt is equally important to financial stability.

List all your debts along with their corresponding interest rates and minimum payments. Get rid of the high-interest debt first. Paying off high-interest loans will cost you more whether you make a small payment or a large one. The interest eats away at your money. Consolidating your debt – meaning, putting all your balances owed under a single loan – may reduce your interest rate and make payments more manageable. By partially paying off your debt or refinancing it at a lower interest rate, you raise your credit score and have more money to devote to other financial goals.

8. Financial Reporting: Regular Reviews and Adjustments

When businesses need to examine their performance, they produce financial reports. Likewise, if you review your finances at home on a regular basis, you’ll be able to stay on top of them.

Set aside some time each month or quarter to review your projected and actual budgets, cash flow, balance sheet and income statement. See how you are doing, look for problems and make adjustments as necessary. These reviews provide motivation to continue to stay on top of the finances and avoid letting bad habits creep in.

9. Setting Financial Goals: Short-Term and Long-Term Planning

All good businesses also set targets in order to help the business become successful. So, apply this practice to your own finances by setting small targets (short-term financial goals) and big targets (long-term financial goals).

For short-term goals, this could mean saving for a big vacation. For long-term goals, it could be paying off your credit card, buying a house, funding your children’s college education or saving for retirement. List your goals, create a plan on how to get to them and check in with your progress on a regular basis.

10. Risk Management: Protecting Your Finances

As with business insurance and back-up plans, it is wise to have a contingency plan for your personal finances.

Think of policies for health, life, property and disability protecting against financial vulnerability in the case of sudden circumstances. Also, keep a stash of three to six months of living expenses in an emergency fund, so costs can be handled without going into debt.

11. Tax Planning: Minimizing Liabilities

In other words, many businesses create strategies to minimize tax liabilities and maximize their after-tax cash-flows. You can do the same with your own personal finances.

Keep clear records of your income and expenses so you can file your taxes easily. If you are entitled to tax deductions for expenses going to higher education or, for example, improvements to make your home energy efficient,  learn about them. Consider hiring a tax adviser to help lower your taxes.

Applying the principles of business book-keeping to your own personal finances can help add some rigor and discipline. Keep at it, stay informed, make adjustments as circumstances change, and you can bring your finances under control. The rewards of a working financial regime will pay off in the long run: financial independence and a secure and comfortable future for you and your family.