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One Way to Run Your Personal Finances Like a Business

December 2, 2011 Leave a comment Go to comments

In a link post this morning I came across The Digerati Life’s post 7 Ways to Run Your Household Like a Business. Things like avoiding procrastination are always good (except when they aren’t). But discipline isn’t the real  difference between businesses and households. As Thomas Stanley points out in The Millionaire Next Door series, many people get wealthy by running a business and applying the same concepts to their personal life. It’s definitely worth learning how more about how to do it.

Not everyone needs to do this. Running a business well takes a lot more creativity and responsibility than doing what people tell you to. But the rewards if you do this are more control, freedom, and options. Since I study management intensively to improve my own business, I apply similar concepts at a personal level and this made me think about what I do.

Households that are not economically productive are mostly guided by what sounds fun and what needs to be done to avoid losing things. The essence of a good business is to find an advantage involving exchanges between people, and magnify it as much as possible in order to create an increasing value over time. Ok, this post is done! Oh wait, if you don’t have 40 years of management experience to tell you exactly what that means maybe I should add some details 🙂

A lot of good, strong, and successful businesses look kind of dumb and boring. They usually don’t involve a lot of special tricks, just something that seems completely obvious once you hear about it but no one bothered to do it before. It typically involves doing something that isn’t too hard, but someone else gets a much bigger benefit by paying for it instead of doing it themselves. Spending time on anything else is not profitable. The businesses that seem like they take a genius to run or constantly do lots of different things usually have a high failure rate.

The personal application is obvious. Any financial plans that can only be accomplished by the smartest person in the world, like figuring out which stock will have the highest growth rate in the next decade, are not right for you (sorry but you may only be the second smartest person in the world). If it works it doesn’t matter if others laugh at how simple it is.

You should find what you are good at and work with that. If you have capital and you’re patient, you can make money by letting others use it. If you have a unique skill and not much else, you can focus on increasing your income. It’s all about finding what you have that others don’t and figuring out how you can be rewarded for helping others.

Good businesses are boring because they mainly involve doing simple things as consistently as possible by establishing a system. There are endless debates about how smart and creative your employees need to be, but a business creates value by giving employees rules to do things they could not do on their own. The rules represent the ideal way to do something that avoids waste and increases profit. They can be adjusted from time to time but changing them too frequently or not following them will ruin the business. Some people succeed through creativity alone, but they have a job and not a business because they can’t teach anyone else to do the same thing in less than 20 years.

For your personal finances systems and rules are good. If you know the best way to do something there’s no reason to do it differently every time. With systems in place you don’t need to think and remember as much (if you set up automatic transfers you don’t even have to do anything). And even if you’re unable to do something you can set out rules for a trusted person to follow to get the same results. If you don’t want your personal finances to be your full-time job, systematize as much as you can.

The final thing that a business manager must do takes this idea a bit further. The one thing the manager should never do is the actual work. Now this isn’t just to be the big man with all the power over others (at least not with good managers). A business needs to get many people doing the work so they can create more value. The manager is there to help them and remove any obstacles. If the manager is doing the work it’s limited by one person’s time (bad) and they can’t help everyone else who’s supposed to be doing it (even worse). If you’re a business owner, the best way to grow your business is to always figure out how you can get someone else to do what you’re doing now (often better than you) so you’re free to do other things.

In your personal finances this starts by automating simple things that shouldn’t take a person to do. Then you need to get help from advisers who can save you years of mistakes in a couple of hours. At a higher level you want to reduce the difficult and time-consuming parts over time. For most people earning an income takes up a lot of time, so you want to take steps that will reduce that time in the future such as building your investment income.

If you follow these rules it won’t look like you’re doing anything special at first. But they give you an advantage that compounds over time, until people start wondering how you got so far and looking for the secret to your success (they probably won’t believe how simple the truth is). When things change you do need to adjust, but most of the time maximizing the advantages you have (as consistently as possible) will take you a long way. And you might even be able to use the same ideas to start a business and increase your income.

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