When I turned eighteen and was seen as an adult, the credit card offers began flying in. I did not truly understand how credit cards and money work. Worst of all, I didn’t know how personal habits and temptation played right into the hands of credit card companies. Shortly after being considered an adult, I found myself with ten thousand dollars of credit card debt. It was a lot of money, especially for a broke twenty-year-old college student with a job that paid close to minimum wage, which was about less than five dollars per hour. I felt like I was being held back and all my ideas would just remain as ideas and eventually end up in the idea graveyard. This hard-learned lesson thought me a lot about the importance of managing my personal cash flow and making smart purchase and investment decisions.
If you want to pursue a side venture, learning how to manage your personal finances and cash flow is extremely important. Most people learn about finances the hard way, as I did, and if you’ve ever been in debt, you know how challenging it can be to pay off. Once I felt the freedom of being in control of my finances, I promised myself that I would not be in that situation again. You need to manage your finances like a business and treat your income in the same way as you would treat business revenue. Start by figuring out how much of your income is profit at the end of each month. The higher percentage of your income you can maintain as profits, the faster you will generate wealth. This is called cash flow, and it is the key to managing your finances. I have dedicated a full chapter on this topic in my upcoming book. These are some of the key takeaways.
Do a deep analysis of your bank statements for the past six months. This analysis will consist of putting each line item in your bank statement into a category so you can see how much you have coming in and going out at the category level. With this analysis, the first thing you should do is minimize any wasted expenses.
Audit your position. This means taking an analysis of your bank statements and layering on top of how much you are making, your debt and how that debt is divided, your savings, and if you have money going into a long-term retirement fund—such as a 401K. Then, you either need to eliminate your debt or consolidate your debt to reduce your monthly debt payments. Do not enter the world of entrepreneurship with unnecessary credit card debt. Learning how to operate thin in your own life will pay off when you have to operate lean to get your side venture off the ground.
Savings and an emergency fund. Savings are incredibly important, and you need to be able to cover at least six months of your expenses if you decide to leave your job. You’ll also need another bucket of savings to be able to get your side venture started and finance all of the costs associated with setting up a business.
Taxes. Tax planning should be part of your financial planning strategy. Try to gain an understanding of how the system works and how politicians impact the tax system.
Even if you don’t end up pursuing a side venture, managing your personal cash flow can allow you to start enjoying and experiencing things you might have thought were reserved for the super-rich.
The simple strategy no one has told you before
Start by writing down your take-home paycheck and split this into take-home cash and retirement. Next, write down all of your fixed monthly bills (cell phone, care payment, car insurance etc..) not related to your house or apartment. Add up all of these monthly expenses and subtract them from your take-home cash, and you’ll get the figure for the amount of cash you have available monthly.
Then, make a list of your credit card debt and your monthly payments. Add up all your credit card payments and subtract it from your free cash flow available after your fixed monthly payments. Next, you’ll want to add up your living expenses and subtract these from the updated cash flow you came up with after your credit card payment. Now you have your true available cash. If this number is shocking, that’s the whole point of the exercise.
Experts say that 20 percent of your take-home should go into savings, but if you can, try to go higher. After savings are deducted, your new number is the amount of cash flow you have on a monthly basis for your personal expenses. Depending on how many paychecks you get a month, divide the total from each of the categories by two or four. This will give you a breakdown of how each of your paychecks covers these expenses.
The system to manage all of this money going in and out is a separate bank account for each bucket of expenses described above. Be disciplined enough not to touch the non-personal expenses accounts and only use the funds you have in your personal expenses account for daily expenses and leisure.
I have developed a calculator to guide you in figuring out how much you need to fund each of your bank accounts. The calculator will be available to everyone that purchases my upcoming book.
If you’re fixed monthly payments, credit card bills, and living expenses are more than your income, you are in no position to try and start a business on the side. You should seek out professional help to explore your options.
Please note, I’m only sharing with you what worked for me. For professional advice, please contact a financial expert who will be able to provide you with personal guidance.
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