Manage your personal finances like a CEO
Posted by Tad Johnson - Mar 15th, 2008 at 6:03Google vs Costco. Two giant businesses, both very profitable, (both from California) but with a fundamental difference in strategy. Google is all about revenue growth–they release many new products each year and add customers to drive top line growth. Costco, while also focused on growing revenue, places a larger emphasis on driving down cost for bottom line growth.
Each strategy has its benefits and constraints, but both produce results. As a vicenarian, you too should be thinking about both strategies. As CEO of your personal finance, you need to manage both revenue (your paycheck) and cost (your expenses). You’ll never achieve your financial goals unless you take both into account.
Most of us like to think of the revenue side of the equation first. Everyone dreams of the big fat paycheck coming at the end of the month. The problem is, that’s only half of the equation. Ask the hundreds of movie stars, pro athletes, and rock stars who’ve gone from million dollar paydays to broke–when your expenses exceed your income, you’ve got a problem.
Borrowing another term from corporate finance, consider your personal margin–the difference between income and expenses. If you can arrange your lifestyle to provide a healthy margin, you should consider yourself rich, regardless of your income. Since you have more direct control over your expenses than your income, it’s easy to see where to start. A unifying theme among all the get-rich books and blogs out there is to live below your means. To put it a different way, focus on maximizing your margin, not maximizing your income.
T.W Hanson discovered this in his first year out of college, working in an industry that paid well but required high personal expenses as well (emphasis mine) :
When picking out my New York apartment after undergrad, I had heard that approximately 1/3 of your income should go to rent. Rules of thumb like this do not account for student loans. I unfortunately took the 1/3 advice, and my first 12 months in the city were difficult. I was in more debt after twelve months of work than before I arrived.
You’re the CEO of your personal finance and you’ve got shareholders to satisfy (which, conveniently, are also you). Don’t blind yourself by thinking only about growing your income–it’s the margin that’s most important.
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Very good advice! Costs are far easier to decrease than growing your salary, especially in the short term.
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