Approach your Job like a business!
Companies across the world operate in much the same way. They go into business, manage their expenses and try to turn a profit. This concept that can also be applied to personal finance. Think of yourself as your own business. To make your business a success, you need to take a look at your books. Let us see how!
Most start-up companies aren’t profitable. Their initial funding is spent to get the business up and running. The clock is ticking, and running out of money is the worry. The most important concern at this stage is “survival”. After all, to be successful you need to be alive. The rate at which a new company’s funding is being spent is referred to as the “burn rate”. This tracks how much money you are burning!
Applying this concept to your personal finances is a MUST. Think about your salary and view it as the seed money for your retirement, as reaching retirement with an adequate amount of money in the bank is your ultimate goal. If you “burn” through your money too fast, you won’t have any left for your savings and you will likely be headed straight into debt as you dip into your existing savings.
If you net Rs.150,000 per year and spend Rs.155,000, you are operating at a Rs.5,000 loss. How long could you possibly last if you are burning though Rs.5,000 in cash each year? Not very long! Unless, of course, you have a huge stockpile of cash called “PAPA”. This of course is not a very desirable.
At first glance, you may think it’s unlikely that you spend more than you earn, but easy credit and bad habits have put more than few people into this category. Also, for many, it is too easy to dip into their savings when a new product or service they want becomes available. Then the “need” and “must have” quickly merge.
Also, when you buy anything on credit, you pay rates of interest that is high. You spent the full amount. The minimum payment that you can make is just a harsh reminder of your mistake and is a very, expensive way to enjoy the usage of an asset. To get your personal goals on track, you need to sink your money into investments, not credit card payments. Cutting your burn rate is the key to making that happen.
In the corporate world, there are two types of profits – gross and net. Gross profit is your profit before taxes. Net profit is the after-tax figure. In the personal finance world, net profit is the one that matters.
The first step in figuring out your profit margin is to assess how much money you earn each month. The next step is to figure out how much you spend. The spending category includes everything – the big stuff like EMI/rent, car payments, credit cards and the small stuff like dinners and movies. You’ve got to subtract the expenses from the income to get the number that represents your profit or what you could put to your savings/ investments.
Also, just because you have enough money left at the end of the month to make the payment on your car, dine at a fancy restaurant and have those daily cups of expensive coffee doesn’t mean that your business is in good shape. To evaluate your situation further you must look at what ends up happening to that leftover money.
What’s Your Profit Margin?
Say that you net Rs.150,000 per year and you spend Rs.120,000 per year. By subtracting the expenses from the income, you come up with Rs.30,000 in net profits.
Dividing the net profit by the net income gives you your profit margin. That’s Rs.30000/150,000 = 0.2. Multiply the 0.2 by 100 to get the number as a percent. That’s 0.2 x 100 = 20%.
Why Are You in Business?
Look at your profit margin. You worked all year to earn it, and now is the time to see the results. Your net profit is the net accumulation of all of your efforts.
Are you happy with the number?
Is it enough?
Is that the number you had hoped for and planned for?
Will your business survive on that number?
On the corporate side, investors would not be that impressed if the company were only generating a GROSS profit margin of 20%. The greater the profit margin, the more attractive the company is. So, you again need to ask yourself whether your profit margin good enough.
To answer this question, you need to have a goal. You need to know how much money you will require to turn your goals into reality. If you don’t already know what your goals are, and how much you will need to save during your working years in order to reach it, now is the time to figure it out.
Improve Your Profit Margin
One you’ve figured out your profit margin and your retirement goal, it’s time to make a few adjustments. If your profit margin doesn’t provide enough revenue to properly fund your retirement savings, it’s time to reduce your expenses. Look at all of your expenses that you discovered in your burn rate and see what you really need and which expenses can easily be cut. You will often surprise yourself.
If your profit margin is adequate, increasing it will add a cushion to your plan and may even help you reach your goal early. Being financially free can be a great feeling, so why not get there as early as possible?
Unlike investors, corporations aren’t emotional. A solid business is set up to make a profit. Simply paying the bills and breaking even isn’t good enough. In your personal life (your own little business) simply paying the bills won’t ever be enough to achieve your end goal. Get past the emotions, focus on the numbers, and approach the endeavor in the same way that a company approaches its business. If it were a business your board of directors would ask you “are the assets in good shape”, “are you providing for depreciation, if they need to be replaced” “are you selling in the best markets”. Here you need to ask yourself “are you adequately insured” ‘do you need to join a gym” “have you had your medical check up”.
There are 2 investments which almost NEVER go wrong. One is investing in your health. The other is investing in good quality education. However please note, the operating word is “good quality” – not just any education. So if there is a good education that is waiting to happen – go and get it. However if you have to borrow $ 100,000 (Rs. 50 lakhs) to get a good education, you may have to look for various sources of funding. A rich dad here can be very, very useful, assuming you cannot get a scholarship, of course!
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