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Personal finances are not that much different then finances in a business.
What many people don’t realize is that they need to manage their money similarly to the way in which a business manages finances. When you take an active role in managing your money it allows you to understand which expenses are unnecessary and which investments are. It allows you to see which expenses are actually critical to your current well-being add future plans. In order to take an active role you need to understand the financially ins and outs to both daily activities as well the long-term strategies and investing.
So let’s talk about the three different mindsets and roles you need to play when managing your personal finances.
#1 – Chief Executive Officer: CEO
Yes, the boss of all bosses.
In personal finance as well as in business the main role of the CEO is to provide the overall strategy and direction for resource allocation (both of money and time). As the CEO you need to sharpen your strategic thinking skills and in many cases it might be helpful to start with the end in mind.
So what is your goal.
A lot of people will simply say “I want to be rich.” But that thinking has kept many people in the poor house for years. The first part of building a successful business or creating wealth is becoming financially stable. In rebuttal a lot of people start spouting out “no risk and no reward.” But when talking strategically everything involves risk, as there’s even risk in doing nothing.
The reason for seeking a basic level of financial security is that having a stable access to capital (money) allows a skilled CEO to take the appropriate risks when a favorable risk-to-reward opportunity is found.
So it your Job as CEO to determine how you are going to make money.
Are you going to go to college to increase your earning power? do you have the skill and resources to start your own business? Don’t overlook alternative career routes either, such as apprenticeships or trade schools. Many such routes can lead to well-paying jobs. You need to choose something you can become an expert on. Most likely it will still feel like work, but hopefully work you enjoy. When it comes to succeeding in business or advancing your career and enjoying your work remember, “in thoroughness lays satisfaction.”
Once as the CEO you have elected a career to pursue and have money coming in the door you need to decide how to allocate it. You will want to use some of the funds to maintain a certain level investor satisfaction, typically dividends. In personal finances this correlates to your current standard-of-living. A good CEO will try to invest a large chunk of incoming money to spur future growth. In personal finances, as the CEO of your own money, this is saving for a house, having a rainy day fund, and very importantly investing your money to take advantage of the compound growth factor that smart resource management brings over time.
#2 – Chief Financial Officer: CFO
In business the Chief Financial Officer is the person responsible for measuring and tracking the financial results. They also benchmark results to see how the business stacks up to its peers. The CFO deals with specifics in fine-tuning the allocation of resources. This particularly involving investments, but sometimes they have to figure out how to limit risk if the company takes on debt to finance growth.
The CFO is charged with bringing reality to the CEO’s vision.
They aren’t there to discourage but to inform. This gives the CEO a firm grasp on what is the risk-to-reward ratio of a strategic decision. In personal finance the CFO fine-tunes investments. This ensures that investments are well allocated and provides a proper risk-reward ratio, taking into account the timeframe in which these funds will need to be available for use.
Also, with our CFO mindset encourages us only to take on debt when the economics of such debt our in our favor. For example, a home is typically a smart investment and many individuals need to borrow money to make the purchase of a home, particularly their first home. The CFO is the one who tells us what is required in order to overcome the cost of obtaining the mortgage and the cost of possibly selling the home in the future. This requirement is to stay in that home for probably 3 to 5 years and in some cases more in order to break even.
The CFO is the one who reviews the actual costs and investing allocations to what was budgeted. It is him that keeps an eye on preserving financial stability. Then he calls for action if the stability of your personal finances are deteriorating from either a change in income or an increase in expense.
The CFO is constantly planning for your future money needs. Planning for that new home, new car, college for the kids, vacations, and eventual retirement. The CFO is the one keeping our money working for us and helping us stay the course. Keeping a long term perspective on navigating the natural and unavoidable cyclical nature of investments.
#3 – Chief Operating Officer: COO
Next is the Chief Operating Officer. While this title is not as well-known it is where the rubber meets the road for most businesses. The COO is all about executing the plans and budgets from both the CEO and CFO. She focuses specifically on the day to day operations of the business. She implants policies and procedures to make the most of expenditures and maximize the bottom line.
In personal finance being COO is where most people spend their time. Unfortunately for some they spend all of their time here.
Both in personal finance and in business the risk of a COO mindset reigning supreme and becoming myopic or nearsighted needs to be taken seriously. Blockbuster Video is a good example of this. It fell victim of not wanting to maximize current margin and did not invest enough in evolving and changing to meet future needs.
In personal finance many people fail to plan ahead for emergencies. But they also often fail to plan for certainties such as retirement. This failure to plan and stick to that plan is planning to fail. So, while the COO is the most important role in how the majority of our money is spent, she can’t be the dominate voice. Yes, she needs to maximize the effectiveness of our current spending. But she must also be 100% committed to the CEO’s Vision and the CFO’s budgets for achieving that vision.
These three roles are critical when it comes to managing money.
They are critical roles in any company, and it is critical that all of them have a seat at the table. The same goes for managing your personal finances. When decisions come your way, put on the hat of each of these roles and ask “what does the CEO, CFO, COO think?” Work over the questions until the answer is satisfactory to each executive.
These three roles also thrive on data. And the ability of each role to be an effective leader and decision maker depends on accurate and informative data. So in further articles we will discuss the importance of three financial statements. Theses are known as the income statement, balance sheet, and cash flow statement. We will also discuss how each of these apply to personal finance.
