Companies throughout the world all operate under the same principle which is to make money, but more than that, to turn a profit. Making all the money in the world doesn’t do you any good if you’re still spending more than what you make, and this is the same in personal financing. You’re very much like your own little company. You have expenses and revenue, and these need to be properly balanced to keep you out of the red.
When companies are first getting off the ground, it usually takes some time before they begin to turn a profit. An initial loan or funding is used to get the company off the ground, get the concept launched and the word out there about the service or product. The rate at which this initial funding is spent is often referred to as the burn rate. The faster the funding is burned through, the quicker the company must increase revenue to counter it, or the company will not long survive.
The trouble with personal financing is that increasing your revenue is quite as easy as it can be for a company. Unless you take on an extra job or get a higher paying one, your revenue is going to be static. For this reason your burn rate must be minimal. Using up your resources too fast will leave you unable to manage, where upon you’ll reach the equivalent of a company going out of business, bankruptcy.
This wasn’t so much an issue in years past, where credit was harder to come by. With no credit, it was all but impossible to spend more than you were earning. But in this era of cheap credit, that’s no longer the case. You can easily live above your means for a long stretch of time, as many people have, eventually hitting the end of the line where even the credit gives out and you hit rock bottom.
The other thing that separates you from a company is that you have something that must be planned for long term, which is you retirement. So not only do you need to not spend more than you earn, but you should be spending less than you earn. As long as a company is at least breaking even, they’re not in terrible shape. Their stockholders may not be happy, but ultimately they’re no worse off. They don’t have that end goal that must be met like you, and the time is always running out on meeting that goal.
Since time is of the essence, you must be setting aside a certain amount per year, which could be called your profit margin. Based on your income and how much you want saved away for your retirement, you could be looking at a desired profit margin of anywhere from 5-10%, which will be used to fund investments.
If your current profit margin simply isn’t cutting it, then you need to cut your expenses. Again, you don’t have the luxury of increasing revenue, so this is the one option open to you to reach your margin. This is again all about balance. You need to cut expenses in a way that won’t be detrimental to your living, by cutting things you can do without. Start with reviewing your VISA credit card balance for example. What extras have you been buying that could be cut out? The opposite of poor retirement planning is over planning. Do you really want to live like a hermit for 20 years just so you have a few comfortable years at the end of your life? Make a plan that’s comfortable and that you can stick to. If that means working a few extra years or something along those lines, then so be it.
Author: Michael BenifezThis author has published 3 articles so far.