I'm currently pursuing a career as a Financial Analyst, but I also want to genuinely help people with their finances. Eventually, I'd become a Certified Financial Planner, but for now I'm doing some financial coaching while I start the process to get my certification. What I do for my clients is create a plan to build a financial future for their family. This helps my clients become better stewards of their finances and holds them accountable. I use the same process that I'm using with my family, and help others build wealth, not for the simple sake of building wealth and hoarding it, but to be generous both with their time and money. If you could retire early, would that help you be a more proactive member of your community by volunteering your time to help those around you? Would you be able to give generously to causes that you support, such as your local church, favorite charity, or simply help out someone in need? This is my family's goal, and what I try to encourage my clients to pursue.
To get to this point, I use a formula that most people would recognize if they took an economic class in high school or college. The formula is for economic profit for a business by taking their fixed costs for producing a product or service, adding their variable costs, and subtracting it from the revenue of the product or service. Before I lose you, I'll write out the formula, and I promise that I'll explain why it matters.
Profit"P" = Revenue"R" - (Fixed Costs "FC" + Variable Costs "VC")
In business, if your company isn't profitable or generating enough cash to meet meet it's costs, then your business will most likely fail. Of course every failure could be seen as a learning opportunity. Now, let's apply it to personal finance and coaching. If you look at yourself as a business, you really have no choice but to make sure you can cover your expenses. If your expenses exceed your "revenue" then you'll most likely have to borrow funds, which increases your debt and fixed expenses, and only makes it harder to steward your finances. If a C.E.O. of a business can't manage its costs, then the C.E.O. get's fired. You must think of yourself as the C.E.O. of [Enter Your Name Here], Inc. You MUST manage your expenses, because life is more unforgiving than business.
First, your revenue is your net income, or take home pay. This amount must last to the next month. When it comes to your fixed expenses, I like to approach this part in a different way than most people. I categorize fixed expenses that need to be paid in order to survive to the next month. This includes expenses like rent or mortgage payments, and debt payments, insurance, phone bill, charitable donations, savings, and even expenses like utilities and food that may vary. Fixed expenses are expenses that need to be paid this month. For variable expenses, I also do something a little different by categorizing these expenses as wants such as eating out, that shiny new thing, and whatever else the heart desires. Whatever is left over is profit, and can be used to splurge a little, reinvest, or save for next months expenses.
I include charitable donations and savings for fixed expenses for a couple of reasons. First, the point of stewardship is knowing that this money isn't ours, we just manage it. Giving to the local church, or any other organization dedicated to improving the community, demonstrates that we aren't defined by our possessions, but rather by the identity given to us in Christ. Next, in order to build assets and wealth for the purpose of being a better steward, you have to save. If other things need to be cut for these two categories, then expenses need to be cut since these are the foundation for better stewardship.
We can increase our profit in two ways, increasing our revenue, and by cutting expenses. Expenses, even fixed ones, can always be cut. Debt payments can be eliminated by savings and paying off debt quicker. We can always shop around for discounts to save money on our bills, and we can always decide that it is better to wait a couple of months before we splurge on the shiny new toy. Increasing our net income isn't always so easy, although there are plenty of ways to do side hustles and businesses to increase your income. I think its best to focus on cutting expenses, since there is always something that can be reduced, and then focus on increasing income in order to generate a larger profit.