October 5, 2019
While I was navel-gazing this week, I had a thought. A number of business principles can be transferred across to our personal finances.
Not just obvious things like ‘make more money’, but also some less obvious concepts, like our philosophy and mindset.
So let’s run through them, and consider how you can use these principles to boost your odds of financial success.
In essence, this means spending your precious time on what matters most. And doing what will give you the most benefit for your efforts.
Good businesses and successful people don’t try to please everyone. Instead, they prioritise through the power of focus. Often, they’re ruthless at cutting things which don’t add value to their business or their lives.
What does this mean for us personally?
Our health, our home life and our ability to earn income is arguably where most of our focus should be on our Financial Independence journey. Everything else can take a back seat for now. You can dedicate more time to other things later, once you’ve got your freedom back.
In the meantime, we need to focus on the key areas that will drive our results and make our lives more enjoyable. This is the 80/20 rule in action.
As you devote more time to less things, your results in those areas will be better. And that’s likely to result in less time and money wasted on things you don’t care as much about.
Examine how your life and finances are currently running.
Can you do things better? Is your investment plan running smoothly? What about your free time – are you trying to cram too many things into a limited window of time?
Maybe you could benefit by simplifying your investment strategy. You could commit to investing monthly, no matter what, rather than agonising over which fund to invest in or trying to time the market.
In your personal life, maybe simplifying your schedule could make you happier. Instead of trying to plan another epic holiday, what if you used some annual leave to have some extra free time instead?
Use this time to relax, read a book, get outdoors for a while, or catch up with a friend. I actually did this towards the end of our FI journey. I used my annual leave for more days off, rather than holidays, to get a taste of early retirement. And it was incredible!
It’s something I highly recommend. You get to keep your juicy income, while cutting back your hours. And you feel less need for holidays because you’re more relaxed and less burnt out, so it can actually save you money. Also, travel can sometimes be exhausting, leaving you more in need of a break than before you left!
Sometimes in our busy world, we commit to too many things. And in the end, we don’t end up enjoying it because we’re rushing off to the next activity!
Small efficiencies can make a big difference to a business and to your wealth over time. This point is routinely dismissed by many as ‘small-minded thinking’. But I’d say dismissing it is blind ignorance to how wealth works.
Here’s a little story about oil tycoon John D. Rockefeller, who by the way, was obsessed with efficiency and not coincidentally built probably the most successful company of all time…
“Rockefeller was relentless in ferreting out ways to cut costs. During an inspection tour of a Standard Oil plant in New York, he observed a machine that soldered the lids on cans of kerosene destined for export. Upon learning that each lid was sealed with 40 drops of solder, he asked, “Have you ever tried 38?” It turned out that when 38 drops were applied, a small percentage of the cans leaked. None leaked with 39, though. “That one drop of solder, said Rockefeller…”saved $2,500 the first year; but the export business kept on increasing after that and doubled, quadrupled–became immensely greater than it was then; and the saving has gone steadily along, one drop on each can, and has amounted since to many hundreds of thousands of dollars.”
And keep in mind this is the early 1900s, equal to millions of dollars in today’s terms.
Small amounts build up over time to become large sums. Put another way, a large sum of money is simply lots of small amounts of money bundled together. Simple as that.
Yes, I hammer this point regularly. That’s because incremental savings across the board can make a big difference. So watch out for small, regular expenses.
The goal of a business is to increase its profit over time. But doing so at the expense of workers is unlikely to prove sustainable.
A successful company will aim to keep workers happy, leading to better output and customer service, hopefully creating satisfied, loyal customers. In turn, this helps the business flourish and shareholders are rewarded, with increasing earnings and dividends.
It’s similar with our personal finances. If we try to boost our household profit – our savings rate – so much that it hurts our morale, we won’t enjoy the process and may fall off the wagon.
The goal is to have a high savings rate while still having a good life. That’s definitely possible, but it can be a balancing act at times.
Businesses look for areas of waste and aim to minimise those or find other solutions. They look for places where money or resources aren’t being used effectively. And so can we, while keeping an eye on the quality of our lives.
For example, we may decide to move to a smaller house with less bedrooms. We may get rid of our second (or only) car. Here, our quality of life and happiness will remain largely unchanged. We’re simply using our resources better and minimising excess.
As a result, we’ll achieve a boost in savings without a dent in happiness.
Many successful companies in the modern era are capital-light businesses. This means they aim to avoid having lots of cash tied up in owning various assets and infrastructure.
The idea is that each dollar of capital can be used more productively invested in the right areas of their business, rather than owning offices, factories, plant and equipment. This also gives the business more flexibility to adapt to changes they may experience.
What does this mean for us?
Well, for one, tying up a substantial sum of money in the form of home ownership may not always be the best idea. In fact, renting and investing can often (not always) result in faster progress towards Financial Independence and a more flexible set of finances.
We can take this capital-light approach to many areas of our life: car ownership, exercise equipment, furniture, technology and more.
The point isn’t to own nothing. It’s to question whether the amount of savings we have tied up in these things is effective and in line with our goals. Sometimes it is, but sometimes not.
You might find that it’s more effective (or even more enjoyable) to own very little and instead invest all your surplus cash into productive income-producing assets like shares. This way, each dollar of capital is working as hard as possible for you.
Most business owners are relentlessly focused on finding ways to grow their future earnings. They’re not constantly obsessing over the ‘market value’ of the business, or what each asset they own is currently worth.
As individuals, we should do the same. Move away from values, and focus on cashflows. Rather than getting caught up in the value of our house and investments, we should focus on what those things are producing for us.
There’s little use in being asset rich, cashflow poor. Far better to have a stream of income you can tap into when you need it.
There are many ways we can build future cashflow for ourselves. By learning new skills and becoming more valuable in the workplace. Through side-gigs or part-time work that interests us. From investments like shares, real estate and other things like peer-to-peer lending. We could even start our own small business or rent out rooms in our house.
Another important area is research and development. This helps businesses come up with new ideas or products, find ways to do things better and help the company keep moving in the direction it desires.
For us, this can mean finding new savings ideas or lifestyle tips. It could be learning more about investing or simply mapping out a list of things you want to do once you retire early.
Also, it’s about staying on course and making sure you’re still following the path that’s right for you.
Just like companies go through change, so do our Financial Independence plans. Your life circumstances will change. Your investment strategy might change. This is all perfectly normal. So don’t be afraid to adjust your plans as you go. In fact, it’s the only sensible thing to do!
If I had stubbornly stuck with investing in property, I would still be working today, rather than sitting here writing to you (which I much prefer by the way!). Luckily, I decided to keep researching and realised dividend-focused investing was much more suited to us and our goals.
As humans, we like to believe we’re pretty smart. But nobody has it all figured out. We’re all just making our way through the darkness as best we can, learning and adjusting as we go.
To sum up…
Focus on a few key areas of your life. See if there’s a better or simpler way to do what you’re currently doing.
Always respect the power of small savings. Aim for high savings and quality of life. Consider owning less to invest more. Build your future earnings streams. And finally, keep learning and make adjustments as you go.
As the CEO of your own life, I hope these principles help you make better decisions on your journey to financial freedom!
What ideas would you add to this list? Let me know in the comments…