How to Run Your Personal Finances Like a Fortune 500 Company

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in Budget,Savings

Photo Courtesy <a href=rednuht at Flickr.com" title="stock_market" width="500" height="266" class="size-full wp-image-759" />I’ve spent over half of my professional career working for a Fortune 100 company and have had the dubious role of managing budgets north of 100 Million dollars. While I would be careful to apply anything to do with big business to my personal life there are certainly lessons you can learn for dealing with your own finances.

Establish Your Fiscal Calendar

Financial statements in large companies are typically based on a Fiscal Year or Budget Year rather than a typical calendar year (January through December).  My companies Fiscal Year begins in July and runs to the end of June.  For establishing your own budget year this might be much smaller in scope and relate to pay periods.  Most budget and financial software packages are setup to deal with monthly rollups but you may want to tailor your fiscal calendar to be based on your weekly paycheck, bi-weekly, or monthly paycheck.  The point is there are no specific rules as it relates to how you manage your finances so pick a time frame the works.  You may find that it works much better to track your finances more often or once a month will suffice. 

Develop your Fiscal Plan

As the end of the Fiscal Year approaches it’s time to think about next years budget including new projects, maintenance on existing investments and ongoing expenses.  Based on that combination of information the budget owners will submit a preliminary plan for the next years budget request.  A budget request will travel through multiple groups, business owners, executives, senior leadership teams and will often look drastically different then the original request.  What will come out of it is a defined dollar amount for particular budget categories.  The budget owner then needs to take that high level plan and map that to the years expenses and projects creating what is commonly known as the Zero Based Budget.  Essentially starting with the amount of money you can call your income and mapping that to the expenses for year and hoping that at the end the amount left will be $0.

For personal finance this would be starting with your income based on your Fiscal Calendar you set above and mapping your expenses for that pay period.  So if I make $2000 in this pay period I can be directing where my expenses will go rather than hoping for the best.  If you feel like you need some more help in this area be sure to check out my 3 part series on Zero Based Budgeting.  It’s incredibly helpful to have some tools to get your budget in place and regularly monitor your progress.  I personally use You Need a Budget it’s financial software focused specifically on building your zero based budget and also will import your expenses/income from your bank or financial institution.  It’s a one time charge and works offline.  If you are looking for a free way to get going Quicken has recently made their Quicken Online financial software free.  It has some cool features like text message account balances, and will help you with a fundamental budget framework.  They won’t even ask for a credit card to sign up it’s indeed free.

Monthly Budget Meetings

Each month the budget owners are responsible for reviewing with Finance their expenses and adjusting the next months budget accordingly based on their guidance.  Think of “Finance” as your spouse or significant other or accountability partner and review your finances on a set schedule.  The more detail oriented numbers person (geek, nerd, what have you) can prepare the initial budget but it’s absolutely key that you hold a meeting to talk about what you lay out.  It’s very easy for one of you to inadvertently or purposefully sabotage your budgeting efforts.

The budget should not be used as a method of control of your spouse or significant other, it’s purpose is to control your money.  While the first few budget sessions can be confrontational and difficult at first I think you’ll find that you have entered a new arena in your relationship that you can talk about things calmly and then actually start looking toward the future.

Build Cash Reserves

It’s important for companies to be operating with a significant Cash Reserve so that it can respond to new opportunities, acquisitions, deal with lawsuits, pay for the unforseen incident.  Personal life is no different.  Cars, houses, kids, have a funny way of requiring more money.  An emergency fund is just that it’s your ability to protect yourself in the case of an emergency such as a job loss, car repairs, hot water heater failures an on and on.  Standard guidance is to build 3-6 months of expenses and put that in a location that you can easily get to it.  Ideally this would be some form of high interest savings account not something like a CD or mutual funds.  Online savings rates aren’t what they used to be but you can try Ally Bank, Bank of Internet, Ever Bank, HSBC Direct or WT Direct.  They all earn right around the same rate anywhere from about 1.4% to 1.7% based on today’s rates.  Importantly they will be earning you a little interest, but even more important it will be there when you need it.

When Times are Tough Cut Expenses

In these tough economic times companies are slashing their expenses to become more lean operating companies.  Cutting back on travel expenses, reducing raises, cutting out morale programs, etc.  This is obviously directly applicable to personal finance as well.  If you are having trouble paying your bills it might be time to seriously consider if you need 385 channels on cable.  Whether you need to eat out every night, or whether that shiny Harley sitting in your garage is really a necessity.  There is a season for everything and there certainly is something to be said for scaling down your lifestyle for future gain.

Manage Debt Load

It’s extremely beneficial for a company to be Cash Rich and minimize their amount of outstanding debt via bonds or other debt instrument.  In the personal finance world this will equate to credit cards, car loans and mortgages just to name a few.  At FiscalGeek we are rabid proponents of living a life debt free.  A journey I’m driving towards with reckless abandon.  If you are interested in reducing your debt footprint or being debt free, you might want to read:  The Debt Snowball Saved my Marriage: Spreadsheet Tell-all.  I detail the method by which my family and I are working our way out of debt.

Invest in Future Markets

Large companies will often spend a considerable amount of time planning for future investments or exploring emerging markets that they can move their business towards.  In a similar vein you should be thinking about that day when you’ll be able to stop punching the clock and can spend your time at your leisure.  Once you have your financial plan in place it should include how you plan to retire and what kind of income you’ll have based on your investment vehicles.  This includes taking advantage of your companies, 401k’s, setting up Roth IRA’s, traditional IRA’s etc.  One helpful idea is to see what your money would like like over time.  For more information you can check out: Calculate the True Cost of Debt where I provide some tools to show you what your future dollars may look like if invested appropriately. 

Looking to Future Markets might also be an opportunity for you to explore different avenues with your career.  Your income is your largest wealth building tool so maybe a side job or some Seasonal Employment might be a way to augment your financial plan.

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ontheroadto1m 2009/08/27 at 5:29 pm

I’ve absolutely loved the comparison between personal and big-company budgets. Budgest are sometimes dreaded because they seem boring, but the fact they’re needed even (or specially) at Fortune 100 companies hopefully shows that they’re also essential at home -in the same way as other activities, like filing your taxes, which you don’t stop doing just because they’re boring.
I’ve used Quicken for a while, but never got quite used to it. I don’t know if it’s my fault for not having discovered the coolest features, but I didn’t think it was much more useful than just checking my accounts online. I was hoping to use it with my brockerage account, but it was not possible to connect to it (I had the correct version, but the institution I’m working with doesn’t support a connection with Quicken), and I got bored of entering the trades one by one. So I’m basically not using it any more.
.-= ontheroadto1m´s last blog ..Book Review: Double Your Income Doing What You Love =-.

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Matt Jabs 2009/08/28 at 12:33 am

Spoken like a true corporate man. 🙂

If one is looking to get a firm grasp on their own personal financial situation… establishing some form of a family budget is paramount. The budget helps you to understand where you have been, where you are, and also helps you determine where you want to go and how to get there.

Consider running a race without knowing where the finish line is. How would you prepare for the race, and how would you pace yourself once you start?
.-= Matt Jabs´s last blog ..Vermicomposting Worm Farm ““ DIY, Easy, and Frugal =-.

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