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Don’t Run Your Personal Finances Like a Business

The title of this post probably has you wondering what on earth I’m talking about. In many ways, it’s good to run your personal finances like a business. You should track your spending, project future income, analyze costs, and look for ways to be more efficient. But in one very important way, you do not want to run your personal finances like a business, and that is your income:expenses ratio.

Let me start off by saying I know next to nothing about business finances. So I was shocked as hell when my company’s CFO put up a graph during a presentation that looked something like this:

Please note: this is not real data, I made up numbers to generate the trend lines

Your reaction may be similar to mine. I thought, “how can a business possibly be sustainable if they’re always spending nearly all the money they take in?” My company certainly seems successful, but I started to worry that we were spending too much money and eventually it would catch up with us. I also began to understand why our finance team is always checking the mail to see if any checks arrived and asking me about any bills that might be coming up in the next month for my department. The budget is so tight they need to have an accurate estimate of expenses for the coming months.

“Surely this can’t be a good business model,” I thought. So I talked to some people around my office with more business knowledge and they assured me that this kind of budget is perfectly normal in business. “But I’d never run my own finances like that!” I said. “I know,” they said. “But we’re a growth company, so we need to reinvest most of our revenue back into the company so we can continue to grow. The graph is actually very good because it shows that we’re continually increasing our revenue.”

Now it made sense. To grow and maintain a competitive advantage, my company needs to continually hire new employees, invest in research & development, invest in marketing, buy more computers and phones for its growing workforce, buy more software to automate business processes, and probably numerous other things I’m not even aware of. Of course my business’ budget looks nothing like my personal budget, I don’t need to do any of those things!

Every dollar a business spends goes toward the goal of increasing revenue. The hope is that the additional dollars spent on all the things I listed above will translate to an even higher dollar amount in revenue. So if you’re spending your entire paycheck, ask yourself if you’re putting your dollars to work in the way businesses do. Did all that money you spent help you get a promotion? A new job? A side business? If you’re spending all your money and it’s not helping you earn more money (hint: it’s probably not helping you earn more money), you should stop spending all your money. If your gut reaction to the above graph is not “holy shit, that looks like a precarious situation to be in,” then you’re either familiar with business finances already or you spend too much money. If it’s the latter, keep staring at it until it looks scary.

 

14 Responses to Don’t Run Your Personal Finances Like a Business

  1. I don’t think that trend line is bad. Many companies run that way in order to grow. You are right about your personal finances not being run the same way. It would be disastrous.

    • Gen Y Finance Journey

      Yep, there’s nothing wrong with the trend lines for a growing business. Very bad for personal finances (well, the continual increase in income is great, but not the continual increase in spending).

  2. I can see where the business model is coming from but I still would be on edge owning a business which teetered on edge because all the money was re-invested. What happens if something goes bottoms up? I would not run my finances like that but I have often said to think of one’s finances like a business from an accounting aspect though. Knowing how much the budget is, where the money is going, why etc… because without that how is a company supposed to know how they are doing, same goes with a family budget.

    • Gen Y Finance Journey

      I know, even with the reassurances from my coworkers, it still seems a bit precarious. I’m glad I don’t own the company, I’d be a nervous wreck!

  3. Sadly lots of people do run their personal finances this way, but aren’t getting the return like a growing business does. That new car or new tv isn’t going to increase your income for the next year.

  4. Being from the non-profit sector, that graph doesn’t look that surprising or “bad” to me. A lot of the non-profits I’ve worked with and for have had operating expenses that were very close to our profit margin (but I suppose that’s a non-profit model). It’s my opinion that non-profits should try to bring in my revenue so they can pay their employees better and more comparable salaries to the for-profit sector, but of course I’m biased ;-)

    • Gen Y Finance Journey

      Just get into management at a corrupt non-profit, that should work out pretty well for you. :) I know of a manager of a non-profit who was pulling in around $80k and he fired the one employee who ran the one program that actually helped the community. I’m not sure if the organization is still intact, but at least for a while he was pulling in $80k while the organization was giving nothing back to the community.

      • Only $80k? That’s a drop in the bucket compared to the big tax-exempt corp…err, I mean non-profits:

        American Cancer Society – John Seffrin, CEO – 2011 compensation: $628,374
        American Red Cross – Gail J. McGovern, President/CEO – 2011 compensation: $501,122
        Feeding America – Vicki Escarra, President/CEO – 2011 compensation: $524,052
        St Jude’s Children’s Research Hospital – Richard Shadyac Jr., CEO – 2011 compensation: $477,920
        St Jude’s Children’s Research Hospital – David McKee, COO – 2011 compensation: $522,334
        ($1,000,254 between these two guys at St Jude’s.)

        At least some, like Doctors Without Borders, have a lot more manageable salaries ($128,325 for the Executive Director and $130,925 for the Finance Director).

        I have no problem with people earning a half-million plus dollars a year. But being in the top 1% of all income earners while running a charity? For some reason that just doesn’t seem right to me. I used to donate to Feeding America. They sent out countless mailers about how each dollar donated translated into eight meals. Great, right? Then I happened to look on Charity Navigator (site where I got the above salaries) and noticed their CEO was making over half a mil. I couldn’t help but think Vicki Escarra was taking 4,192,416 meals away from people with her salary. I don’t expect her to work for free, but can’t the charity find someone willing to do the job for $200,000 per year? That could save $324,052, which, according to Feeding America’s own marketing material, translates into 2,592,416 meals for needy families.

      • Gen Y Finance Journey

        Well yea, those are definitely more extreme examples. But I’m not talking about the national director of a charity. I’m talking about the director of a small, local chapter making $80k/year and doing absolutely nothing. This organization has over 4,000 local chapters, and if each director is making that much, it amounts to $320 million. I’m sure many of the local directors actually do good for their communities, but it seemed like there was practically no oversight, allowing the local directors to make very nice salaries without having to actually do anything.

  5. Unfortunately a lot of individuals run their finances this way and it can only go on for so long. As a business (a heavy growth one especially) this can be sustained if they’re able to continue to experience that growth and widen the margin over time.

    • Gen Y Finance Journey

      Right, the business can keep doing this as long as there’s ample room for growth. Individuals generally aren’t increasing their income every quarter, so they should have a wide margin.

  6. As long as your biggest “expense”is yourself, then you can follow this trend. Just make sure you’re your own growth company, and you’re investing in yourself ;)

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