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01 February 2014
Three Fundamental Laws Of Success in Financial Management
Everyone knows how to be healthy: Eat Right, Exercise, and maintain positive mental health (sleep, stress, etc.). Very few people know the three keys to financial success, but they are equally as simple, and, after you read them, they will be perfectly obvious.
There are three things required for financial success. It does not matter if you are an individual, a family, a business, a non-profit, or a government, there are only three things you need to be a financial success. Best of all, they are simple.
Make more money than you spend
Invest the difference
Understand where you are and where the money is going
Rule #1: Make more money than you spend
This is obvious. But, we have all had times in our lives when we probably spent more money than we were making. Unfortunately, most Americans do this all the time. The evidence is staggering and most people are in credit card debt because they cannot seem to follow this first basic rule.
The real problem is, that this (over-spending or under-earning) cannot go on forever. There will come a time when the borrowing will run out, when your investors will no longer fund a money-losing enterprise, when your parents will cut you off, something happens that brings this imbalance to an end…and so you change.
You adapt, and, as individuals, we rarely lose our cars, have our televisions repossessed, or, worse, become homeless.
Individuals understand this better than businesses, and business understands this concept better than governments. Somehow, when it is your money, it is very serious. Yet, small business owners, who start businesses with their life savings (according to some studies as much as 77 percent of small business owners invest their entire net worth in their business), sometimes fail to understand rule number one and run out of cash.
Why does that happen? Take a look at rule number three.
Rule #2: Invest the difference
As an individual, this is easy to understand, but very hard to do. Fewer than 7 percent of Americans are automatically investing on a monthly basis. Business owners do a better job. They understand that in order to grow their business, they need to purchase new equipment, invest in training programs, and hire new people.
The problem for small business owners exists when they start with Rule #2 rather than starting with Rule #1. In it’s most obvious terms, you cannot invest what you do not have to begin with. In many business circles, this is referred to as the “chicken and egg” problem. Which comes first, the investment that generates the profits, or the profits that generate the cash for investment?
I will argue that in most cases, this is not really a valid argument. At some point in history, someone, in your business (or a business like yours) scraped together enough money, investors, loans, etc. to start their business and get to profitability. The focus must be on a minimum investment (which comes first) in order to get to profitability as fast as possible. So, investment comes first (in business), but it must be tempered by a mad dash to profitability.
Rule #3: Understand where you are and where the money is going
The number one reason for our nation’s sky high divorce rate is not a cheating spouse, but stress about family finances. As a business owner, I can handle successes. I can also handle problems and trouble. What causes me stress is the unknown. When I get surprised by something, I get stressed, and then it gets worse, I start worrying about what else I am missing. Stress causes me to make bad decisions, become irritable, sleep poorly, and generally live a miserable life.
Tracking your individual income and expenses along with your personal balance sheet (what you own minus what you owe) will eliminate much of the stress about your personal financnes. Additionally, keeping close track of your Company’s income and expenses and your Company’s balance sheet will cut down on your stress at the office. Most importantly, knowing the numbers allows you to make good decisions.
Good decisions make you money. Good decisions lower stress levels, and good decisions make life fun.
While they are obvious and incredibly simple, I am constantly amazed at how few people follow these simple rules. If you want to be different, if you want to be successful, and if you want to reduce your stress, follow these three rules in everything you do.