Personal finance guru Dave Ramsey says, “Adults devise a plan and follow it. Children do what feels good.” As a small business owner, you will never be able to gain control of your financial health unless you control your personal spending habits, as out of control spending is usually the main cause of financial calamities. For example, many celebrities and athletes routinely make millions of dollars during their hot streaks, only to file bankruptcy years later due to overconsumption. But bad personal spending habits aren’t exclusive to celebrities and athletes.
• According to a recent study done by Bankrate.com, nearly 80% of Americans are living paycheck to paycheck. In addition, based on the same study, nearly 30% of Americans have no savings at all and 44% have savings that cover less than five months of expenses.
• In a recent study completed by The Federal Reserve, nearly 50% of Americans report that they could not cover a $400 emergency without having to scramble to find the money through either the process of borrowing or selling off items.
For small business owners, bad personal spending habits can put you in an unstable financial ground, which can have a negative impact on your business if your personal credit is damaged, or if you start borrowing from your business to cover your personal shortfalls.
To control your spending habits you must determine three things: (1) if and how you are going to live below your means, (2) if you are going to have a family, and (3) if you are going to live based on a written budget. In this article, I will discuss these aspects in detail to assist you as a small business owner with budgeting your personal expenses.
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Live Below Your Means
At the core of controlling your spending habits as a small business owner is striving to live below your means. With this focus, try to implement some or all of the following:
• Stop trying to keep up with the Joneses
• Live in modest-priced homes or apartments
• Buy vehicles using cash, with established purchase limits
• Limit dining out and cook at home more often
• Strategically use coupons and buy in bulk
• Replace some of your vacations with staycations
• Choose recreational activities that are cheap or free, rather than relying on costly avenues
Also if possible, you want to try to avoid living in high cost of living areas, as it can distort your purchasing power. CNN Money has a very good tool to help you compare the purchasing power of the same income between two different cities. Best Places has a good tool to measure cost of living indices, which are based on a baseline of 100. If your city’s basis is under 100, then your city has a low cost of living, if it’s higher than 100, then your city has a high cost of living.
Managing Family-Related Costs
Family-related costs are very important, as the costs to raise one child can tally around $250,000 up till age 18, even before contributing to their college fund, according to the U.S. Department of Agriculture. Keep this information in mind to help you budget for raising children.
You Can’t Manage What You Can’t Measure
The final aspect in controlling your spending habits is the creation of a written budget. A budget is simply a forecast of expenses that are soon to materialize. A budget should include all of the following categories of your personal expenses:
• Housing (includes cost of the property itself, such as rent or a mortgage, taxes, utilities, cable/internet, maintenance/repairs, allowance, property/renter’s insurance, and furniture)
• Insurance (includes health, dental, vision, auto, and life insurance costs)
• Food (includes grocery and external dining)
• Personal Items (includes all personal items, electronics, etc.)
• Entertainment and Recreation (includes all forms of recreation)
• Debt Payments (includes installment, revolving, and any tax/judgment lien payments)
• Emergencies/Other Expenses (sometimes things happen that are out of our control, thus, included with the budget should be monies that are set aside to handle emergencies)
• Telephone/Cellphone Costs
• Transportation and Gas Costs
Within all categories listed above, you should establish estimated spending amounts in each category, strive to stay within those established limits, and come up with further innovative options to further reduce costs in each category while still maintaining levels of quality.
Taking the First Step
With nearly 80% of Americans living paycheck to paycheck, nearly 75% of Americans having either no savings or savings that cover less than five months of expenses, and 50% of Americans not having enough savings to cover a $400 emergency, controlling your spending habits is as important today than ever before. Creating a workable budget is the first critical step in controlling your spending habits going forward, and ensuring your financial well being and, by association, that of your business.