This article is written by Udemy instructor Emilie Schrevens-Wester and is part of The Entrepreneur Masterclass.
I cannot stress enough how important it is to know how to handle your finances, as a normal citizen and as an entrepreneur. Here’s some tips I gathered along the way.
1) Planning your finances
You don't go into battle without a plan and you don’t go through life without a financial plan. Both as a business owner and as a citizen, you need to keep an eye on what goes in, and what goes out, meaning income, and spending.
If you are aware of what is on your bank account, then you can control your spending more easily. Keep an eye on your bank account at least once a week.
At the end of the month, focus on spending a maximum of 5% of your monthly income to treat yourself. This includes going shopping, ordering food, going to restaurants, bars, seeing a movie, etc.
A lot of people I know, especially younger people, struggle with long-term gratification. Saying no to excessive spending for a couple of years could save you enough money to buy a reliable second hand car, or anything else that you deem vital. Lots of people don’t seem to understand that being uncomfortable for a few years will help them be comfortable in the long term. It is the same for people going to the gym for a week and giving up after realizing that muscles don’t come right away, and fat doesn’t burn instantly.
At the end of the month, check your account and establish how well you did. Did you spend too much for yourself, and it caused you to miss a car payment? Did you respect your goals? Take a look every month and figure out how you’re doing and what needs to change.
2) Get rid of your debt
Having monthly payments taken away from your paycheck because you have debts is really annoying. I know in some countries, many many students or parents have debts and it’s not always something that is avoidable. However, learning to manage your debt can help you immensely.
Planning your month based on your debts is a good way to see what you REALLY can afford to spend, track where your money is going, and pay your debts first if possible.
If you have multiple debts, it is wise to tackle the big one first instead of putting a little bit of money monthly into multiple debts. You need to get rid of debts as soon as possible. If you can afford to pay back the smallest debt, do it, don’t make your debts drag on. List all your debts and figure out which one you could pay first with a financial sacrifice.
You can also opt for paying the debt with the highest interest rate first to avoid paying too much interest money. It’s all up to you, but you need to figure out how you plan to pay your debts.
Make sure you don’t forget to pay your debts as it could lead to a higher interest rate and other expenses will pile up. Set up a reminder in your online calendar, an alarm on your phone, anything that works for you. If needed, reach out to a debt counselor that will help you figure everything out. If you are sacrificing savings to pay debts, then you definitely need another pair of eyes to look at the state of your finances.
If you spend money as a way to relieve stress or are a shopping addict, you can start setting limits on your credit cards, and finding a new hobby to take your mind off your spending addiction. Hopefully you can pick up a hobby that will become a skill and can make you extra income.
When you get your credit report, double check it to make sure that there are no mistakes in the report. Spotting a mistake could be in your favor. If something is unclear, clarify things with your bank.
3) Automate things to save time (and therefore money)
Sometimes we’re stuck in the middle of a situation like “I am not knowledgeable enough to do (specific task) correctly, and I’m also unable to pay a professional to do it”.
Spend some time to research and figure out how many hours of learning would you need to be able to do this task. Better yet, search for a tool to automate the task you have to do.
Do you maybe have to make the same payments every month to your insurance, landlord, or others? Automate it. Since you now picked the habit of weekly checking your bank account, then you will spot the mistake if there is one.
If you’re the kind of entrepreneur who writes every single invoice one by one in Excel or Google Docs, think about it. By learning a bit, you could learn how to automate fields being filled, automate prices, VAT calculations depending on the country, and more. If it takes you more than 5 minutes to produce a quote/invoice, then you need to do something about it.
It may look like not much, but automating invoices means you can spend more time doing your core activity, meaning the thing that brings the money in. Imagine if your core activity is something you ask $50 an hour for. If you save two hours a week by automating your invoices, it means you have time to potentially make $100 (per week, that’s $400 per month).
A lot of people think that if their days are busy, they’re doing things right, but not always. In business just like in life, you need to aim to improve things around you so that you have the maximum amount of time possible to do what you love (aka your core activity).
4) Adapt your lifestyle and adapt your goals
One day you might get more money than usual (thanks to a promotion, or maybe your side business is doing well), and you will consider a lifestyle upgrade. “Sell the Ford Focus and let’s buy a Range Rover”, “Let’s move to a bigger place” thought everyone who suddenly got more money than expected.
It is vital that you understand that this money bump is not guaranteed every month, especially if you live in a country where employees are not very much protected by law or if sick days aren’t paid. If your money bump comes from a side hustle, it might not work as well the next month. If you have an online store and there is suddenly a surge for a specific t-shirt, that hype might die next month and your sales are back to normal.
If you upgrade your lifestyle or make big purchases, you may not be able to keep up in the long term. Remember that if you have a sudden flow of extra money, it should be put towards paying your debts as soon as possible and investing in yourself or your business to keep it afloat.
Do not buy a fancy car. Do not even buy a new car. The moment it leaves the dealership, it has lost 10-20% of its value, that’s how the world works. The more fancy your car is, the less dealerships and parts you will find, therefore, service will be more expensive. High price does not mean high quality with every brand. You’re better off with a typical student car that has easily accessible car parts. If you suck at parking, don’t buy a long-ass car. You need seats and doors, the rest is optional.
By the way, look up how expensive it is to maintain a Rolls-Royce.
I always try to keep my rent costs at one third of my fixed stable regular income, aim for that, or even lower. Never count your “unstable” income, the one that you cannot control directly.
Even if you have a decent salary, and can live without being paycheck to paycheck, you need to always remember that being uncomfortable for a few months or years (financially) can benefit you so much in the long term.
Let’s imagine you make $3000 after taxes. You could technically afford a place where the rent is $1500 total, right? Yes, but is it a good decision? No.
Let’s take two people who make $3000 a month. One of them keeps and even downgrades their lifestyle by being careful about their expenses, and one upgrades their lifestyle.
Person 1:
$3000 - $1000 (rent), - $1000 (food, insurance, expenses, everything else). Money left: $1000.
Money left after a year: $12 000.
Person 2:
$3000 - $1500 (rent, because we upgraded the lifestyle) - $1000 (food, insurance, expenses, etc). Money left: $500. (and I didn’t even count moving costs, buying new furniture, selling the old one and the rest of the annoying things that come with moving).
Money left after a year: $6000.
It is a huge difference. One year of chilling and keeping the same lifestyle could save you a lot of money. Obviously this whole thing is easier to do if you’re single and live alone, you make decisions, you make the food, you choose what to buy, where to move, which couch you want, etc. If you are living with a roommate or with a family or partner, check with them beforehand.
If one day you are in a situation where your income is higher than average and stable, then rethink your finance goals. You might now consider investing money in stocks, dividends, even crypto-currency if you feel like it. Always pay yourself first and pay your debts if you have some.
If you had a money bump, could you maybe invest it in your side hustle? Into marketing? Into learning something new? Into paying some skilled person who will help you do your taxes?
I will tell you a little secret. Extra income can help generate more income streams. Imagine you got a nice extra $500 this month. You could use it to take a week off work, pay yourself and make a new course online, write a short ebook, set up a blog, design new t-shirts for your online store. For $500, you could hire up to two freelancers to translate your product to reach more potential clients, like, translate your website, your ebook, your online courses, etc… For $500 you could sign up to around 9-10 courses online and learn SEO, Facebook Ads, YouTube tricks to grow your audience, and more.
5) Learn to negotiate
Everything can be negotiated. Even if you are sure deep down that the person you’re doing a deal with is always going to win because they are a “salesperson”. If you have a loan, but your income has increased, you can contact your bank to negotiate your loan. You could pay a bit more each month and get rid of your debt faster. If you’re thinking of buying a car, try your luck as well. Just like when I share coupons for my courses online, I always think I’d rather sell a course with a big discount than turn a potential student away by refusing to lower the price.
Trying to sell an item or even going to garage sales? Getting in the habit of saving a few bucks here and there could end up having more income at the end of the month, income that you can invest in expanding your skills and your knowledge.
Learning to negotiate can be useful for your finances. You can negotiate the little things in life, your services with customers, and even more important business decisions for your company in the future. I would definitely recommend that you take a course in negotiation if you are in need of that skill.
6) Pay yourself first
Using the pay yourself first method means you set up an automatic payment to your savings every time you get paid, each month. This allows you to not be tempted or even able to waste savings money somewhere else. Transfer it automatically to a savings account on the same day you get paid. This way you ensure long term comfort and you can afford emergencies like not being able to work for a couple of months.
7) Differentiate profit and revenue
I see lots of people losing money or miscalculating because they don’t know the difference between profit and revenue. It seems basic to a lot of us but you need to make sure you know the difference before you decide on the salary you’ll give yourself, how you pay employees, and how your general budget is established.
So, revenue = quantity of items/services sold x sale price. Example:
January: You sold 50 SEO services packages for $100. Your revenue is $5000.
February: You sold 50 pairs of shoes for $50. Your revenue is $2500.
For the SEO services, you had to pay an assistant for a month and your SEO software: - $2050.
For your shoes, each pair cost you $15 to make: -$750
Profit = revenue – expenses
January: Your revenue is $5000 but you had costs/expenses of $2050.
Profit = $2950
February: Your revenue is $2500 but your costs were $750.
Profit = $1750
8) Get good habits
A lot of “richer than average” people I know have one thing in common: they keep track of their expenses. The only reason people usually keep track of their expenses is because their bank account is almost at zero. Why be careful about your spendings only when you are about to reach rock bottom? You should always keep an eye on your bank account.
Learning the basics of bookkeeping is a good one. After a few hours of training, you will be able to see more clearly where your money is going and how to do better with your money.
Also, spend some time reading the law about purchases. Know your rights as a customer, keep receipts. I am not sure about the law in other countries, but in the whole European Union, you have a legal warranty of two years on all electronic devices. Which means if your phone is one year old, breaks down, and you can prove your purchase, it would be illegal for the company selling the phone (or the reseller) not to offer you a solution. The customer isn’t always right, but they have the right to know their rights (this is what I would teach newcomers at work, hoping to set some sort of ethical thinking when they are on the phone with customers). Many times I have told customers I can’t do anything for them, but I explained what they can do and who to contact in order to be taken care of under warranty.
If you’re not really good with numbers, I am sure there is someone among your friends that would help you. If not, you could give the opportunity to an accounting/business/math student to have a look at your expenses for a fair price.
Also, don’t try to cheat on your taxes. This is something you do once you are a millionaire, right now it’s not necessary, and it’s risky.
What my “richer than average” friends also do is buying in bulk, and buying quality. I’ll give you an example on why not buying in bulk can cost money in the long run.
In the long run, customers buying solo products or “cheap” products that break quickly (and need replacement), will pay more money.
Now I understand, buying in bulk is not possible for everyone, this is why keeping track of your expenses and analyzing which purchase is the best is a good way to start. When you start buying in bulk, you save money, and you can reinvest this money into buying in bulk next time, you just need to make a small financial sacrifice to start the cycle! For example, you could hold on and not buy the new iPhone when it’s out, but maybe buy it a few months later when the hype dies and the prices go down a bit. Or even better, only buy a phone if yours is broken beyond repair.
9) Mixing your finances
Business finances are as important as personal finance. A big mistake people make is to mix up both of them, but your business is a separate entity. If you don’t keep your personal bookkeeping separate from the business bookkeeping then you can’t tell how well the business is doing. It’s also easier for taxes. Get separate bank accounts, keep receipts, don’t buy business things with your personal account, etc. Track things separately as well.
Your bookkeeping has to be clear because it provides info for decision makers, owners, investors, lenders, taxes, and is critical to business management. It helps look at the whole picture.
Figure out and write down how your business is organized (owner, partners, shares, partnership agreement, decision makers, board of directors). Make sure you do the following:
Track daily expenses/income
Update previous data entries
Prepare and optimize for when it’s time to declare taxes
Send/pay invoices
Process payments on time
Write down who owes you money, and who you owe money to
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