2008-03-12

Think Of Your Personal Finance Like Running A Business—Thumbtacks Are Only Thumbtacks

If you were running a business, how much time would you spend monitoring how much your business was spending each year on thumbtacks? How much time would you spend researching the best price for thumbtacks—or other office supplies?

Okay. It would likely depend on your business, how tight its profit margins were, and what your other responsibilities were—such as how much time you need to devote to developing the product or providing the service being sold, to actually making sales, or to other management. You would assess the relative importance of those different responsibilities, how much they each impact your business, and what kind of return you get for the amount of time you might spend on each task.

You can approach your personal finance in the same way—like running a business. Your personal finance has revenues and expenses. You would like your revenue to be more than your expenses! That’s the idea—positive income…

But it’s important to remember that there are two ways to accomplish that. Decrease expenses. Or increase revenue.

It is possible for people—and businesses—to become overly focused on the expense side. My company controls its expenses pretty well. Just from memory, its annual expenditures have come within, say, 3% of its budget each year for the past several years. Pretty phenomenal really. I’m not sure we can really be doing much better on the expense side. And any additional blood we might squeeze from the turnip at this point would have such a small impact on our net income that we might barely notice it. Or worse, we might cut expenditures that are important for growing our business—and inadvertently hurt our revenue.

Yet I have sat in company meetings where people seemed to feel compelled to go through budgets and try to find places to slash expenses. Even when no one had asked them to do it. Even when it was taking a lot of time to do it. And even though it was no fun to do it.

It’s human nature. Expenses feel like something we can control. They are something we can look at on a piece of paper and immediately come up with ideas for change. We can pass down edicts that we will spend less in one area or another, and it feels like we have done something productive. Something important. And we have. Especially if a business (or a person) is young, is saddled with debt, or has not yet developed discipline around its spending, it is extremely important to focus on expenses.

But there is a point at which we’ve developed some good habits around spending. (Okay, how about just some half-decent habits where we still splurge here and again but stay out of big trouble?) At that point, we have to tackle the revenue side too.

The revenue side is much more difficult for most people. Increasing revenues often requires new ideas—and moving outside of a comfort zone. How do I get ahead in my job? How do I gather the nerve to ask for a raise? Should I leave my comfortable job for a new higher-paying job where I don’t know the people—and where I could fail? How do I earn revenue from sources other than my job? How do I learn more about investing in the stock market—enough so that I don’t feel like I’m throwing it all down the drain?

I can see how it’d be easy to procrastinate on tackling these issues and know that I do it myself. But I am trying to remind myself to spend plenty of time and plenty of focus on the revenue side. For us at least, the revenue side is the only way we’ll be able to make real headway toward our financial goals.

Thumbtacks aren't going to do it.

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