Income is growing, and loans are multiplying. Traveling during vacation takes a significant toll on your pocket. But someone manages to save for a rainy day or a decent retirement. To become one of these lucky ones, you don’t have to have a financial education or read mountains of books. Everything is much simpler.
Those who struggle to live paycheck to paycheck look to those who successfully invest their savings in securities as financial gurus. In fact, anyone can invest their own money wisely. To do this, you just need to take a number of specific steps, and most importantly, learn to behave correctly. After all, most often it is the behavior of people that prevents them from saving money and, by investing it in stocks, receiving a good income. Financial planner, bestselling author of “The Psychology of Investments. How to Stop Doing Stupid Things with Your Money" and "Let's Talk About Your Income and Expenses" Carl Richards explains why people manage their savings illogically and shares simple tips to help improve the situation.
The article will be useful to those who want to learn how to save without making serious sacrifices, get rid of loans, start saving money and increasing their savings.
Remember: You Can't Predict the Future
There is no completely safe investment. Over time, everything changes. And trying to predict where a stock will go next based on evidence that it has been up so far is like guessing which way a coin toss will land, given that the last time it came up was heads. The previous result does not guarantee anything.
But this knowledge should not paralyze you. If you're about to invest your money and want to make a decision based on common sense rather than vague prospects, make a plan. Not a 200-page treatise that you will never have time to even re-read, but a short list of actions that will fit on a small card.
How to plan and enjoy it?
Many people mistakenly associate budget planning with a complete renunciation of life's pleasures, when it is just a matter of setting priorities. With proper financial management, the quality of life, on the contrary, should increase. Having learned how to properly manage your family budget, you will see how much money is left that you can spend on yourself or on general pleasures. In addition, the freed up money can be made to work for yourself, increasing your profits: these are deposits, bills, mutual funds, etc.
Controlling expenses will gradually become a habit and will be taken for granted. Moreover, family budget planning can increase the comfort of life and ensure your financial well-being. Plus, planning a family budget teaches financial discipline, and this, in turn, guarantees that you will never be left without a penny in your pocket. And all that remains is to enjoy the positive results.
Answer the question, what does money mean to you?
For many people, financial planning seems so overwhelming that their first reaction is to throw up their hands and start begging an expert to tell them what to do. No specialist can give universal yet effective advice.
From the book “The Psychology of Investments. How to stop doing stupid things with your money":
“Each person’s financial situation is unique because their goals are unique. Each time we are talking not about abstract dreams... but about everyone’s specific ideas about a prosperous retirement and a good education for children. And if what brings joy to your neighbor cannot make you happy, then someone else’s financial plan will not work in your case.”
So the first (and most important) question you should ask yourself is: “What does money mean to me?” For some they are synonymous with security or opportunity, for others they are the equivalent of freedom. Once you've formulated your unique answer, think about what your realistic goals, time horizons and risk tolerance are, and what you're willing to change.
Having identified your goals, choose the three largest ones. And whenever you think about investing, ask yourself whether it will help you achieve these goals.
Plans
Lack of plans for the month, quarter, year ahead
Uncertainty in the economy is growing, the market situation is constantly changing, but plans are needed. During the planning process, you can think through the work for several periods in advance and predict what the financial result will be.
How to solve a problem:
If the level of risk is high, it is worth considering three possible scenarios for the development of events:
- optimistic;
- realistic;
- pessimistic.
Try to more accurately determine the planned sales volume and changes in prices for basic resources. The amounts received form the basis of the budget according to which each division and the company as a whole will work. Therefore, several departments take part in budget planning: purchasing, sales, finance.
Coordinate the work of sales and purchasing departments . If they interact uncoordinatedly, the buyer does not need the product. In order to sell products, it is necessary to freeze working capital in the product or reduce the price so that it is acceptable to the next buyer.
Lack of plan-factual analysis
It is important for the owner to compare the calculated figures with the actual ones and understand whether it was possible to fulfill the plan or not. If not, why not? This comparison of data is called plan-factual analysis. Without it, making the right management decision is unrealistic, and accounting is meaningless and is needed only by the statistics and tax services.
How to solve a problem:
At the end of each month, compare the fact with the plan, review the reports and carefully analyze them.
Draw conclusions: either you continue to move according to the plan, or you correct mistakes and change goals.
Plans need to be calibrated every month. Over time, the business begins to move exactly in the given direction. Regular plan-factual analysis is the key to a successful company.
Don't be led by emotions
By acting like those around us, we feel safe. That's why we buy stocks that are expensive in hopes that they will continue to rise, and sell stocks when they start to fall out of fear. We may hold our employer's shares because we are loyal, or we may sell securities because it's...fun. This behavior is more like gambling. It's exciting, but it's unlikely that you would advise someone to play in a casino to save money for the future.
Investing is not fun. They should always be consistent with your goals and principles, and not based on feelings about what will happen. Don't play in the stock market.
Risks
Incorrect ratio of fixed and variable expenses
Depreciation of production equipment and remuneration of personnel are constant expenses. Costs for the purchase of raw materials and supplies are variable. The ratio between these expenses should correspond to market dynamics and the stage of business development.
How to solve a problem:
If the market grows, increase fixed costs, and if it falls, then increase variable ones. During a crisis, it is important to get rid of excess capacity or not to increase it initially.
When starting a business, focus on variable expenses . If the startup doesn’t take off, you’ll lose time, but not money. It is wise to invest in fixed expenses only after reaching stable demand.
Then, by reducing costs, you can capture an even larger market share. If a company decides to skip the organic growth stage and immediately invest in a new market, problems are inevitable.
Try to delay major expenses : for the purchase of equipment and expansion of premises for administrative staff. Own resources are necessary, but only when they are fully loaded. For the rest, there is outsourcing, rent, coworking.
Unjustified risks when expanding your business
There are justified risks, and there are stupid ones. The former bring positive results, the latter – negative. When entering new markets, risk is always present. It's important to make sure it's justified.
A competent financier is able to calculate the idea of a new line of business and say whether it is worth investing time and money in it.
How to solve a problem:
A good manager must sort out justified risks, predict pitfalls and insure possible damage.
Before entering a new market, you need to conduct reconnaissance and analyze the information received, and only then plan investments.
The first stage of exploration is internal, the goal is to assess the company’s readiness for a new breakthrough. The second is external: market research, survey of specialists, launch of a pilot project.
Understand how the market works from the inside, find out what products are in demand and at what price. Calculate whether the market capacity is sufficient to achieve expected profits.
Business dependence on one employee, client, supplier
The employee who makes the bulk of sales, controls most of the purchasing or production, eventually begins to dictate his terms to the business owner.
How to solve a problem:
Avoid focusing most of your operations on one employee, customer, or supplier.
Divide areas of responsibility within the enterprise, distribute functions among departments, and maintain normal competition among clients and suppliers.
Transferring tax planning to an accountant
Even the most advanced accountant is not inclined to take on unnecessary risks. Tax optimization is not its function.
How to solve a problem:
Calculate tax optimization options yourself - how to give the minimum amount to the budget within the limits of the law. Most often this concerns the choice of the correct taxation system and employment options.
Tax planning is the responsibility of the business owner, funder or tax consultant.
Use the 72 hour test
Of course, you can think about where to invest your money when you have it. What to do if they are not there? The answer is obvious: you need to start spending less. And there is a killer simple way to do this! Luckily for you, in the modern world with its online stores, where you can buy almost anything “in one click,” they have come up with an excellent tool that allows you to control costs. It's called a "basket".
Let's be honest: Of the things you order from online stores, very few things need to be purchased immediately. Therefore, make it a rule to leave items in your cart for 72 hours. When you check back three days later, ask yourself: What’s more important—the items in your basket or getting closer to achieving your financial goals? And without regret, delete what you can do without. This technique works great because it allows you, on the one hand, not to immediately say “no” to purchases, and on the other hand, not to make purchases under the influence of emotions.
Finance
Using business and personal money
Often, a business owner spends money received from clients on personal needs or pays for his purchases with a business card. As a result, the money is lost and it seems as if it never existed. It turns out that the business works, but brings nothing.
How to solve a problem:
- Separate cash flows: personal money and business money. Assign yourself a salary as a manager and collect it on certain dates. This will reduce the number of transactions, make accounting clear, and cash flow predictable.
- Spend funds for your own needs from a personal bank card.
- Do not withdraw dividends before calculating the financial result. Check whether there is a profit and whether the business has enough money for its current needs before making a payment.
- Collect cash into your checking account regularly. Non-cash payments are easier to control.
Lack of financial planning
Both at the start of a business and at the stage of its growth and development, planning is the main task of a financier. Leaving things to chance is a bad idea.
How to solve a problem:
Plan payments and receipts 3-5 weeks in advance. Create a payment calendar and try to stick to it. The main goal is to predict the cash gap when urgent payments need to be made but there is no money. By knowing about the problem in advance, you can prevent it.
There are four financial sources:
- Business owner;
- bank (loan, overdraft);
- debtor (counterparty who owes you money);
- commodity creditor (supplier who can give a deferment).
If you pay suppliers ahead of schedule, receive payments from clients late and do not keep track of accounts receivable, this leads to chaos in both payments and business.
Lack of airbag and low liquidity
The market situation is volatile and the economy is unstable. If there is no reserve of money at all, then the business may not survive difficult times. Normal liquidity will help to survive 2-3 months in the absence of demand, without losing working capital.
How to solve a problem:
Create an emergency fund to last for several months.
If you have nothing to form a reserve from, you can open an overdraft. Then money can be taken only for the period when it is needed. You need to open an overdraft while the business is doing well.
Sign up for the online course “Financial Director”. We'll tell you how to go beyond the preparation of financial statements and become the initiator of qualitative changes in business.
Automate good behavior
The easiest way to avoid making stupid financial decisions is to not make them at all. Personal accounts on bank websites and mobile applications allow you to automate most daily operations.
From the book “Let's Talk About Your Income and Expenses”:
“Instead of forcing yourself to make the same decisions over and over again, automate them so your good intentions will turn into good behavior. You can automate the payment of contributions to a pension fund or just to a savings account, but not only. It is better if auto payments are also set up to pay off mortgages and car loans. The essence of the procedure is that the necessary debits from the account without your participation will save you from the painful desire to postpone the payment by spending the money on something else.”
As you start spending less and saving painlessly, evaluate how profitable your past investments were.
Tips for every day
Every month a person faces the difficulties of distributing money. To avoid this, it is better to follow the guide for every day:
- 2 days before receiving your salary, we make a list of necessary expenses for the month.
- The day before we receive our salary, we buy food.
- On payday we don’t buy anything except bread and milk.
- We distribute income among envelopes.
- We pay loans, mortgages, rent, etc.
- We study applications with discounts.
- We buy food for the week on special offers.
- We buy household chemicals for a month.
- We purchase food products for the preparation of semi-finished products.
- We prepare semi-finished products for a month.
- Watch a video on financial management.
- We are looking for an additional source of income.
- We buy food for the week.
- Let's go visit because it's profitable.
- We are looking for tips for saving money, implementing life hacks.
- Fasting day. They are good for health and saving money.
- We are looking for food products on sale that have a long shelf life: canned food, cereals, candy.
- We analyze expenses and calculate the remaining funds. If necessary, we redistribute money in accordance with planned subsequent expenses.
- We buy products for preparing semi-finished products.
- We prepare semi-finished products.
- We buy groceries for the week.
- We review personal items from the wardrobe and sell the excess.
- We watch personal growth trainings, read a book on finance.
- We are engaged in the exchange of unnecessary things, equipment and other items.
- We are trying to earn 500-1000 rubles on the Internet.
- We analyze expenses. We put some money into the piggy bank because we will receive our salary soon.
- We carry out an audit in the refrigerator, taking into account the prepared semi-finished products and the products purchased earlier as part of the promotion. We are making a menu for the remaining days.
- Dinner party. You have dumplings and stuffed peppers, the guest has cookies and sweets for tea.
- Fasting day. You can drink tea with your friend's treats.
- Analysis of expenses, remaining amounts in the envelope. Allocating an amount for the remaining 2 days before payday - here it is important to allocate a small amount for the most necessary expenses. Put the saved money into a piggy bank.
By living according to this principle for six months, you can develop a savings strategy. Managing money will be much easier, and the money in your piggy bank will increase.
Use an overnight test
By following the plan, you will put your current expenses in order. But past investments may have been made without considering your financial goals, driven by emotions, or influenced by people you know. Therefore, sooner or later you will have to deal with previous investments.
To do this, imagine that overnight all your investments were returned to you in cash. And ask yourself what investments you would make again under the same conditions and without losses. All deposits that fail this test should be redirected.
How do we pay
There are plenty of options here. The classic scheme is when the manager of your investment portfolio charges 1% per year of its value. Then various games begin. So, if the amount is very large, the fee may be lower. For example, at UBS Wealth Management, the maximum annual cost of the portfolio advisory program is 0.75% of assets under management. At the same time, the total costs for capital management can reach 2.5%. There are companies that charge a 1% management fee for the first $5 million, and then much less, 0.25%. In general, there is only one limitation - the demand for your services and the prices of competitors.
Material on the topic
You can proceed not from a percentage of the cost of managed capital, but, as it were, to pay for labor - for the number of hours that, in the opinion of the management of a particular company, are spent on managing your portfolio. This could result in a flat fee of, say, $3,000 or $10,000 per year.
Finally, the most fashionable method is special robotic systems (robo advisers), which manage your money according to a given algorithm. Thus, American robots Betterment and Wealthfront take only 0.25% of the cost of capital. This is probably the future, which is gradually coming to the Russian market, although in a simpler and more expensive version.
Follow the basic rules of investing
- 1. Pay your loans on time.
- 2. Try to pay off loans faster. Once the debt is gone, you won't have to pay interest on it.
- 3. Spread out your investments. The point of diversification is to combine investments, each of which carries its own risks. Such combinations are often less risky than their components and bring higher returns.
From the book “Let's Talk About Your Income and Expenses”:
“When you bet on 'systemic risk', it means you're investing in the concept of capitalism as a whole. It is based on the idea that, despite the ups and downs of the market... it still continues to grow. Therefore, you should invest in shares of different companies. Of course, some of them will close, but this will not affect you much, since others will develop and their shares will rise.”
Mutual funds, which involve the distribution of investments among various companies, are much more profitable than individual stocks. When choosing mutual funds, remember to consult your summary financial plan.
Accounting and reporting
Gap in financial reporting
There are three main reports. If one of them is missing, it is very difficult to find an accounting error.
How to solve a problem:
The enterprise must generate three reports on an ongoing basis:
- cash flow statement (Cash-flow);
- profit and loss (P&L) statement;
- balance.
These reports must be compiled once a quarter, but it is better to do this every month. Together they form a single system that is easy to compare and understand how accurate the financial statements are.
To make things easier, install a financial accounting program.
Generating reports late
If reports are completed late, the information becomes outdated and the value of the information decreases. In addition, this indicates a poorly built accounting system at the enterprise.
How to solve a problem:
Reporting should be generated:
- for a month - on the 5th–7th day of the month following the reporting month;
- for a quarter - on the 10th–15th day of the month following the reporting quarter;
- for the year – on the 20–25th day after the end of the year.
Finance is not difficult. There are basics you need to know. There is accounting that needs to be done. There is a budget that needs to be drawn up. Do you want to master this science? Take the video course “Financial Management”.
Be ignorant and lazy
A huge mistake is made by those who read too much financial news that encourages buying, selling or other similar gambling actions. Remember: you cannot predict the future.
Experts can’t either, but they make predictions because that’s their job. So ignore financial news. Pay attention only to what can affect the achievement of your goals and what you can control.
Someone will say: “What about “black swans”? If people paid attention to details in time, they could avoid serious crises!” Economists from Oxford and New York universities responded to similar objections. In a 2010 study, they concluded that experts who correctly predict the most unexpected events are hardly listened to.
Staff
Unskilled employees
In the field of financial planning, one real pro can replace three or four mediocre specialists. Finding such an employee is difficult, but the efforts made will be worth it.
How to solve a problem:
Using special programs and macros, you can automate routine work and the process of generating reports. Quality and technology are critical.
Good financiers must think quickly and accurately, have practical skills, and be able to work at high speed with a minimum number of technical errors.
Well-structured processes and accounting automation will help increase productivity. And real experts in their field will take this productivity to a new level.
