Financing 101 starts with a budget. It’s an essential and necessary component to having a successful and healthy financial outlook. I’ve long said that the best way to plan your finances is to run your them like a business. Take a well-run company like Apple, for instance, who has well-defined goals. Its leaders know what profit they’re aiming for this year. They know the earnings per share, return on equity, and other benchmarks they have to achieve. Their goals are clear and defined in absolute numbers and percentages. When I worked for Merck & Co. Inc., we had well-defined financial goals. We had budgets. As a department, we looked at our numbers monthly and quarterly, not just at the end of the year. A good financial plan will have well-defined goals and numbers attached to it.
However, as much as we plan, there will be things that come up that are unforeseen. It’s important to be adaptable and as prepared as possible. Obviously, it would be best if you planned for a general unforeseen circumstances, but it’s also important to maximize returns and utilize money in ways that benefit you. It’s not a good idea to have a million dollars laying around that’s not compounding interest.
When you’re making your budget, whether for for a business or personal, you should account for your expenditures, salaries, taxes, and what you put aside annually for your financial independence. Most business owners don’t do that, so they have a business that goes on for years and years and may grow very large, but they haven’t amassed the savings that they should have to ensure that they’re going to accomplish what they want. Granted, their business may be worth something someday. But it’s a big danger to bet your future on what your business might be worth someday. You could hit a rough patch in the economy or face stiff competition. You or other key people could fall ill, which could hurt the value of the business and ruin your plans for an early exit or when you’re close to retirement.
The bottom line is that the vast majority of people don’t have enough financial education or financial background to make informed choices about their finances, nor do they take sufficient time to sit down and really look at, “What kind of cash flow will I have coming in? And what do I have to do with it?”
Many people fall into the “people of circumstances” category—and those circumstances are sometimes not good. They’ve lived for fifteen or twenty years with excess cash flow. They’ve lived within a certain budget. They’ve even saved some money on the side. But then something happens: they lose their jobs, or their business falters. They have a tough time finding a job. Eventually they do find one, but they’ve had this interruption in cash flow, and if they didn’t have adequate savings put aside, that interruption can really damage what they have built up. Financial planners and managers can help you guide the way to help prepare for these unforeseen circumstances and help create a budget that allows you to adapt and change as necessary so that you don’t end up in a financial crisis.
For more tips on creating an adaptable budget, visit tswealth.com.