Let’s clear up any potential doubts immediately. This article is not telling you to quit your job and start up your own business. This article is telling you to manage your own personal finances as if they were a company and you were the CEO.

It’s not about learning a new set of skills. Everything that you need to know, you already know. The same principles and rules that we follow in being successful professionals and running successful companies, apply to managing our own personal finances successfully.

Companies all over the globe run pretty much identically.
They start out, learn to manage their expenses, and over time - hopefully sooner rather than later - become profitable. As human beings, we are the same. We want to manage our expenses, and hopefully immediately, become profitable.

So what steps do we need to take? Let’s see.

 

1. Have a Business Plan
   
   The first step to getting anywhere is knowing where you want to go. This applies to a company by way of a business plan and to you by way of your own financial plan. Once you know what your goal is, or multiple goals are, you’ll be able to prioritize your tasks, assign your efforts, and restrain your costs on non-essential expenditure.
   
   In personal finance, this means know your cash flows - both in and out.
   For your inflows, this will primarily refer to your salary and/or business income. The best way to take care of this income stream is to be dedicated, and skilful. Be a team player, enhance your skills, take on the opportunities that come your way, and you will take good care of your career. If your current place of employment isn’t offering you any further growth or learning opportunities, just like if a current market isn’t offering you any further revenue growth, it might be time for a change.
   
   Outflows are assessed in the next step - knowing your burn rate.
    
2. Know Your Burn Rate
   
   One of the best efficiency indicators, or lack thereof, is the burn rate. To put it very simply, this is the rate at which a company loses, or burns, capital. According to Wikipedia, ‘the term burn rate can also refer to how quickly individuals spend their money, particularly their discretionary income’. It helps to classify you as a saver or a spender. For example, Indians 3 generations ago were savers. Indian youth today tend to be spenders.
   
   By tracking how fast funds are being spent, it’s easy to tell how soon a company will be broke. It’s the same for personal finance. Very often, financial planners are hired to help successful, smart people who somehow are spending more than they are earning. No matter how important that big ticket item is, if you don’t spend less than you are earning, sooner or later your personal finances are going to ‘go out of business’. It is absolutely vital to save.
   
   You might think you are not in this category, of people who spend more than they earn, but look back at your investment redemption habits as well. You might find that you have dipped into your savings and into your liquid funds more than you think. Also, keep your credit cards in mind. Basically, know your burn rate. Having a budget helps here.
    
3. How Much Are You Paying The Taxman? & What’s Your Net Profit?
   
   For a company, there are two types of profits. The first is a bigger, nicer looking number. It's your gross profit. The second, real number is your profit post taxes. Your net profit. The same thing applies to you.
   
   If there’s one thing a company absolutely has to be good at to make the most of its profits, it’s saving taxes. Luckily for us, our Income Tax Act has very clear deductions and exemptions such as the ever popular Section 80C, infrastructure bonds under Section 80CCF, your HRA if you are living on rent, Section 24 if you have a home loan, Section 80D for your mediclaim premium, and many more.
   
   If you save an additional Rs. 20,000 taxes every year by making the most of your deductions & exemptions, and invest this money, then in 20 years you will have a corpus of Rs. 14.41 lakhs (assuming a 12% per annum growth rate) - generated purely out of your tax savings being invested.
   
   Never lose sight of the fact that it’s not just about leftover cash in the bank, it’s about how you use (read invest) that cash to achieve your life goals.
   
   Being financially free of all obligations, worries or concerns is an excellent feeling. We should try to get there as safely and quickly as we can.
    
4. Have an MIS
   
   This is crucial. Management Information Systems are key to overseeing the workings of a company. MIS will help you see what you’re doing and see where you need to make changes.
   There can be different kinds of MIS to report different aspects. For example, Business MIS will show you sales performance figures.
   Personal finance MIS (a budget and an investment report) will show you what you’re saving, where you’re investing and how the investments are doing.
   
   A Master MIS - i.e. your financial plan - will first and foremost assess your risk appetite and tolerance, and proceed from there. It will show you exactly how much you’re earning and spending each year, how and where you’re investing, towards which goals, and how the investments are growing towards achieving your specific goal corpuses. You should review your Plan once a year to ensure you account for external changes (market fluctuations) and internal changes (changes in your personal situation).
    

Conclusion

Some of the smartest investors we know treat their own finances like they run their own companies. So remember to follow these 4 simple rules and become the CEO of your own successful personal finances.

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Comments
shredhar@cbn.net.id Jan 07, 2012 Hi, interesting and thought-provoking article. ultimately i feel that wealth creation is  all about regular investing as a discipline--of course the financial planner is required to show the pros and cons of using different paths to reach one's goal, and also to recommend the most suitable path. regds
shankar.h49@gmail.com Jan 07, 2012 Fundamental - but worth a read, I submit !
smanimaran1979@gmail.com Jan 10, 2012 good article for the beginner,
dm-suzhou@ce.net.cn Jan 19, 2012 Now we know who the sensible one is here. Great post!

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