Can Your Client Run Their Personal Finances Like a Business?

Do you have some successful clients who have built successful careers, yet their personal finances are a disaster?  Perhaps they should consider running their personal finances and household budgets like a business.  The idea makes business sense.  That’s something business owners, professionals and middle managers can relate to easily.

Your clients likely work with budgeting at work.  They might have an accounting department in the background, yet operating the business comes down to comparing line items on a spreadsheet, paying close attention to those columns labeled “projected” and “actual.”  To keep the numbers in line at work, you seek to control the variables. 

Ten Strategies from Work That Can Be Applied at Home

Home life is different from running a business.  You cannot downsize your family.  Family members are more like partners, less like employees.  You need buy in to get things done.  Here are ten strategies that would translate from business to personal finances from a financial planning perspective.

1. Where do we want to be five or ten years from now?  Every business should have a strategic plan.  Management consultants talk about SWOT, an acronym for Strengths, Weaknesses, Opportunities and Threats.  You develop a vision for the future and tactical plans to help get you there.

Personal Finances:  What is the pot of gold at the end of the rainbow?  Retiring to a house on the beach?  Sending all your children to medical school?  How are you going to make this happen?  What needs to get done by when?  This is an aspect of in-depth financial planning where advisors can help.

2. How does income compare to expenditures?  In industry people strive to “hit their numbers” because they are team players and bonuses are often based on achieving specific targets.

Personal finances:  Income isn’t tough to measure.  If you are in sales, your income could be cyclical.  Your pay might be structured as salary plus an annual bonus.  Although expenditures can be analyzed in deep details, the basics would be how much money came out of the checking account used for bill paying and how much was charged to credit cards and withdrawn from Home Equity Lines of Credit (HELOC) to make ends meet.  If expenses continue to exceed income, you need to make cuts to bring the numbers into line or increase income.

3. How are you going to pay for capital improvements?  Businesses expand.  They build factories and add office space.  They replace computer equipment and vehicles periodically.  These are planned, not emergency expenses.

Personal finances:  It’s been said families should budget 1% of the value of their home for repairs on an annual basis.  Appliances wear out.  Roofs need replacing.  Both the interior and exterior need periodic repainting.  It should be assumed these will be done on a timetable.  There might not be a need now, but money should be set aside in a separate account.

4. Suppliers are raising prices.  What can we do?  This is a problem everyone is facing.  Businesses are seeing higher shipping costs.  Suppliers are pushing prices up.  The business still needs these inputs. Shorter term, they might pay the higher prices, but longer term they look for different suppliers.

Personal finances:  Grocery prices are going up.  Utility providers might be raising prices.  Service providers are adding in fuel surcharges.  Make a serious effort to shop around.  You have a long history with your providers.  You pay your bills on time.  Find cheaper grocery store chains (they are out there).  Comparison shop wireless providers.  Ask your current company if they will match the deal you found.  Think of yourself as a purchasing department.  You are doing the legwork but are essentially soliciting requests for proposals.

5. Fuel costs are increasing.  What steps can we take?  Businesses need to keep the lights on.  Some power plants follow a dual fuel strategy, shifting as prices dictate.  Others have fuel delivered to them and buy in bulk when prices are low.  They secure pricing when possible.

Personal finances:  Shopping for gas for your car is the easiest problem to solve.  If there isn’t a website tracking local gas prices, checkout Costco or other big box stores with gas stations attached.  If you buy home heating oil, track prices.  You can stock up when prices are low when buying on the spot market. (The price your heating oil dealer is charging today.) If prices are rising, try to lock in pricing by signing a contract.  Can you shop around?  Does your oil tank have capacity for you to store more than you need for the next few months?

6. How can we get our tax bill down?  Businesses strive to pay the lowest tax rate possible and still comply with all the laws.  They have accounting departments.  They hire management consulting firms.

Personal finances:  Accountants add value, especially when all your earning don’t come through W-2 forms at the end of the year.  If property taxes rise sharply, sometimes you can challenge the increase.  Hire a good accountant with experience working with people in your profession or local area.

7. Debt service costs are rising.  What can we do?  Many businesses borrow lots of money.  Long term municipal bonds often carry 10-year call protection.  In the corporate world, bonds are often callable much sooner. When rates fall, companies issue new debt and pay off the older debt.  When rates rise, they likely try to convert variable rate debt to a fixed rate.

Personal finances:  HELOCs can be the homeowner's variable debt nightmare.  Paying it down or talking with your bank to convert it into a fixed rate loan may be a good idea.  If you have a good credit rating, explore shifting your outstanding credit card balance from a higher rate card to a lower rate competitor.  Work to get your interest rates down.

8. Our service providers are unreliable.  Businesses today do not maintain the parts inventories of days gone by.  Many operate on a “just in time” delivery system.  If a business is constructing a building, there are often penalty clauses if work is not completed on schedule.

Personal finances: Certain services like wireless, trash collection or cable TV come from a limited number of providers.  They are often regulated businesses.  Many others, like building contractors are not.  Try to get penalty clauses built in.  Stagger the payments, aligned to specific milestones for work completed.  Don’t pay everything in advance if possible.

9 What are we doing to be good citizens?  Many businesses make charitable contributions to organizations in the local community.  The logic is we should make a return to the towns where our customers live.  This builds goodwill and brings in customers.

Personal finances:  Americans are generous.  Many give to charity.  When money is tight, this looks like the easiest expense to cut.  You might give less but try to keep giving.  The expenses at charities might go up when money is tight.  Try to be a reliable, long-term donor.

10. How are we training our people?  Your company wants their employees to be competitive within the industry.  They support advanced education.  They may require continuing Ed.  Helping company employees grow builds loyalty.

Personal finances:  You are educating your children.  You want them to have the best opportunities in life.  This involves commitment on their part and support from as many sources as possible.  You can encourage your children to get good grades.  Setup college savings plans early so family members who want to help can contribute money to an account that is ring fenced for education. This is another area where financial advisors can help.

You cannot apply all the lessons you’ve learned about running a business to personal finances.  You can apply many.  This is an area where financial advisors can add value and created “aha” moments.

Related: Seven Deadly Sins Clients Commit in Down Markets