Here’s another post from my friend and staff writer, SherryH. SherryH lives near the coast of North Carolina. Her family consists of her husband, their two adult sons, and the requisite writer’s cats. In 2013, she survived a brain tumor that destroyed her eyesight. She’s determined not to let that slow her down and recently started blogging at Blind Not Invisible.
For several years now, my husband and I have participated in our local Small Business Roundtable, a weekly discussion group for small business owners and entrepreneurs in our community. He owns a small business doing residential design and contract drafting, and I’m starting one as a freelance writer, so we’ve both gotten a lot out of the discussions.
But it’s also interesting to me how many of the business principles we discuss can be applied to personal finance. In many ways, running a household is like running a small business.
Household like a Small Business
I don’t mean that you should hold board meetings and give your spouse and kids annual performance reviews, though that could be interesting. But just like a small business, a household needs to track income and expenses, maintain a cash reserve for unexpected events, and plan for expansion.
Last week, our facilitator handed out copies of a great article from Business News Daily, 5 Common Money Mistakes Small Businesses Make.
In this post, I want to look at each of the five mistakes with an eye to how they apply to family or personal finance.
- Not having enough cash reserves. In personal finance terms, this is your Emergency Fund. Without it, a sudden crisis or unexpected drop in income, even temporary, can spell disaster for a business – or your family’s budget. As the article says, “Don’t fool yourself with wishful thinking that the money will somehow be there.”
- Being plastic dependent. Credit cards certainly have a place in the personal finance arsenal. If you can pay them in full every month, they make a great tool for tracking and categorizing purchases, and you can even rack up substantial rewards. But it’s also easy to rack up a substantial balance, and interest and fees can be a real drain on your budget. If at all possible, save for major purchases or find another way to finance them.
- Mixing personal and business finances. This one is a little trickier. In theory, all the household finances are your personal finances. But consider this: If you don’t budget for them specifically, it’s easy for some financial goals to get shoved to the back of the line. It makes sense to have a specific line item for retirement savings or a new car or an Emergency Fund, and not to let other items siphon that money away. Separating the funds will also make it easier to track your progress toward each goal.
- Shorting yourself on compensation. Paying your bills and retiring debt are important goals. But if every penny you bring in goes right back out the door, you could hit retirement age without a retirement income and find yourself stuck working through your golden years. And if you don’t budget in a little leeway for fun and extras, you might fall victim to frugal fatigue and indulge in some rash financial choices that could take months or years to pay off.
- Not having an organized accounts receivable system. Clearly, if you own a business or even a side hustle, you should make sure clients know how much money will be due when, and how it should be paid. But what if you work for someone else and receive a regular paycheck? In that case, you should know who is responsible for cutting paychecks and when, how and when to report your hours and submit receipts for reimbursement, and what to do if there is a problem. You should also check for and resolve any discrepancies as soon as they appear.
More Great Advice
The article gives one final piece of advice, and it’s as applicable to an individual or family as to a budding entrepreneur: Educate yourself.
- Reach out to other people who are working toward frugal living. Find out what they’ve tried and what’s worked for them. If you have a financial question or dilemma, chances are someone out there has had it before you.
- Don’t forget to share what you’ve learned, too – including your mistakes!
- Read personal finance websites and books on frugal living. Don’t forget blogs!
- You can learn a lot from experts, too – accountants, lawyers, real estate professionals, investment gurus. Don’t stick to one source, and be careful to evaluate whether a particular piece of advice will work for you.
It’s easy to fall into financial traps, for businesses and households alike. Being aware of potential pitfalls can save a lot of trouble in working toward your financial future.
Have you learned any great personal finance lessons from unexpected sources?