Category Archives: Personal Finance

Budget Like A Small Business CFO

A small business, as defined by the Canadian Revenue Agency, has an annual revenue stream between $30,000 and $5 Million. Of all the individual Canadians that filed tax returns more than 99.98% fell into that same income bracket.

However, unlike individuals, small businesses account for their income and expenditures on a consistent and regular basis. Revenue is earmarked to “produce” and “operate” while our individual revenue is called “disposable.”

Disposable – designed to be discarded.

Is that how you want to think of your hard-earned money?

Related: A course in frugal financial management

Chief Financial Officers (CFO’s) purchase what their business needs to operate. Using this same mindset, you can align your purchasing decisions with items that will grow your business, either through equity growth or personal growth – something with a tangible return.

The CFO’s Prime Responsibility

Money management is all about making decisions about where to allocate your revenue in order to realize the best returns. The first place to start is to identify where revenue is being spent. That means consistent tracking into appropriate categories or “cost centres.” If your operating expenses are greater than your revenue, your business will suffer a loss.

Rule #1 – Track what you spend

How much does it cost to run YourFamily LTD? Businesses set up targets for their relevant categories. Whether you track each individual item – coffee, gum, lottery ticket – or consolidate your purchases into more general categories, the operating expenses for most families are broken down into three sections – savings, fixed expenses and variable expenses.

Savings

A regular monthly RRSP contribution is first and foremost a payment to yourself and your future. This will serve as part of your future revenue when you no longer have a constant income stream from your employer.

Related: A saving and spending formula you can live with

A common rule of thumb is to contribute at least 10% of your income to retirement savings, but newer advice is to ideally save up to 20%. You should be familiar with your tax bracket and aim to, at the very least, contribute enough to get into the next income bracket directly below your current gross salary.

Rule #2 – Understand which tax bracket you fall into, and pay yourself first

Other savings categories are created especially for you. The money that accumulates here will go towards a major purchase – down payment on a home, wedding, vacation, new car, or new couch. The targets here will fluctuate depending on your goals.

Fixed Expenses

Fixed expenses are costs that stay relatively the same month to month. Rent/mortgage payments, loans, child care, and transportation costs come immediately to mind but, fixed expenses are not always necessities.

You may subscribe to HBO or Netflix, but that is your entertainment. Likewise, you may have a housecleaner come in weekly. The point is that these expenses are consistent and stay the same regardless what you do – whether your parents come for a visit or you take a vacation for a week.

Naturally you will negotiate the lowest cost for these expenses, which brings me to:

Rule #3 – Never let anyone else’s formula or opinion convince you that you can afford something without doing your own calculations

Banks, auto dealerships, credit card companies, etc. are for-profit organizations that want you as a customer for life. You’ll be “approved” to pay as much money as possible in interest (plus fees and penalties) on their lending proposals.

Related: Of course . . . But maybe

If you can eliminate a fixed expense – then do it. Do away with your mortgage, car loan, and credit card debts and you will have real control over your revenue stream.

Variable Expenses

We have a lot more control over how much we spend on variable expenses. Your grocery purchases can be made at a specialty organic grocery store or at a no-frills, warehouse-type supermarket. You can purchase an exotic coffee daily on route to work, or you can fill a thermos instead. Some people need a large clothing budget, others make do with fewer purchases.

These are categories where we have choice, and have the option to reduce or even eliminate them entirely for a period of time. Overspending in these variable categories can lead to the addition of another fixed expense – the credit card payment.

Every spending decision we make today has a future cost. Would you give up four hamburgers a week for a new winter coat? Would you do it for an extra $68,000 in your retirement fund?

Rule #4 – Think before you buy, and never waste your money

Make it a family affair. Involving your spouse and/or children (especially teenagers) in the financial decision making is key to obtaining a buy-in for your collective goals. Success is dependent on the participation of all team members and reinforces their individual contributions to the family.

Final Thoughts

We all want the ability to buy nice things, provide for our children, and have the peace of mind that comes from the knowledge that our financial house is in order.

Related: Have you had your financial awakening?

The only way to do this is to put together a plan that takes into consideration everything required to fulfill your goals. Take control of your finances and establish a system to evaluate every purchase you make.

Of Course . . . But Maybe

Comedian Louis C.K. closed his 2013 comedy special Oh My God with a hilarious (albeit crude) bit called, “Of course . . . but maybe.” I thought it would be fun to apply the same thinking to personal finance and some of the situations we run into every day. On sense of entitlement Of course