Wisdom Wednesday: Treat Your Personal Finances Like a Business

Photo from H&R Block

Since becoming adept in my studies of Business, Accounting, Finance, and Economics, I have made it a point to look at my personal finances with business acumen.  Before looking at numbers, I had to first think about why I am making my personal finances one of my life’s ongoing focuses.  Here’s what I came up with:

“To live a secure life, with the freedom to live in comfort, where I want, and continually experience the joys of time with friends, family,with professional and personal endeavors that feed my passions.”

This might seem kind of corny, but any legitimate business will have a charter indicating its purpose.  If a company does this, why shouldn’t we?  People start businesses to better their personal financial position, which hopefully is geared towards living their eventual dreams.  Dreams don’t usually happen overnight, and that’s why you need a mission statement. 

Next, you need to think about profitability in terms of your personal life.  One way to look at it is to consider your savings your actual earnings & profits (E&P).  E&P is a tax term, but can also be equated to net income and retained earnings.  During your working life, you should aim to have a constantly increasing bucket of retained earnings.  These first take the form of your three to six months of emergency savings, then your retirement accounts, home equity, and other investments made further down the road of life.

Increasing revenues, or income, should also be a big focus for individuals and businesses.  A firm may invest in new product development and the individual might want to invest in higher education or a certification.  Either way, both are looking at the big picture.  If you love your job and the pay increases are holding you back from meeting your personal goals, then look for ways to make yourself more valuable to your employer.  Alternatively, maybe you can start a second job, or “side hustle” to bring in more income.  Either way, you need be looking at ways to increase your income to stay on track and build wealth.  You might also need to consider if you are paid fairly compared to others doing similar work in your market.  Look for resources like Glassdoor for comparative salaries in your geographic area.  Always be on the lookout for opportunities to grow your career and income.

Sometimes you will have “storms” in your life, which will sideline your ability to save.  Other times you will have wants that might have you dip into savings, but this is okay if you are progressing on an annualized basis.  Taking time and money for a wonderful vacation, to start a family with kids, care for parents or loved ones who are ill, or renovating your home to improve your quality of life are all common and valid reasons to temporarily sideline savings.  This concept can be related to a business taking money and having team building days, or company picnics and award parties.  In the grand scheme of both life and business, taking some time and money to do fun things improve the overall quality and give you the motivation to keep going when you get back to work.

Ultimately, you cannot measure the quality of your life by your net worth, but you can definitely make your life less hectic and more predictable, giving you the flexibility to try new things and live out your dreams.  Life is short, but money can be shorter if you don’t plan for the future and monitor your progress.  Live in the present, plan for the future, and be prudent for the sake of making the really important things happen in life.  Stay safe, happy, and focused!

I want to hear why you work, sacrifice, and save!  What motivates you to get up and work each day?  If you are fortunate enough to not need to work anymore, what are you doing with your time? 

The Accountant: Protecting the masses from financial misstatement, and ourselves

Quite frequently, “us accountants” get a bad rap.  My father has referred tome as a “bean counter”, which was kind of offensive, but I got over it. In the large organizations I have been a part of, those outside of the accounting and finance departments like to blame accounting for a lot of things.  For instance, when I don’t approve a purchase requisition, the operational side tends to say we’re being stingy, when in fact I am just trying to follow policy and procedure to ensure correct coding and supporting documentation is attached.  I honestly am not inclined to check anyone’s budget nor tell others they don’t have a valid business purpose for their requisition.  My position is quite the contrary; I would rather all employees have the things they need to serve our customers and make the company perform at the highest level possible.

Image from: straighttalkcpas.com

So, what do accountants really do?  An accountant’s true job is to record business transactions per the guidance found in specific regulations such as U.S. GAAP (Generally Accepted Accounting Principles) or the Internal Revenue Code, A.K.A the tax code.  Our role is to help those who employ our services better understand what is happening on a dollars and cents level.  Everything, even those beans, must be converted into some type of dollar amount.  Measuring the value of items represented on the financial statements is one our key responsibilities. 

What value can accountants provide to me?  First, when you have a situation come up that is so complex, you have no idea on how to handle it to avoid potentially misstating your tax return, a Tax Accountant is likely who you need to see.  Most Tax Accountants are either Certified Public Accountants (CPAs) or Enrolled Agents (EAs). 

EAs must pass a three-part exam developed by the IRS, which focuses on the taxation of business and personal entities.  EAs are typically tax specialists and help individual and business alike.  Many EAs are ex-IRS employees and know the ins and outs of taxation, which can help you make the call on taking potentially risky tax deductions.  Taxation is not a black and white topic.  Complicated matters should be executed by a professional, who is likely to save you a lot of money if you happen to be audited.  They will ensure the proper documentation is in place prior to filing the tax forms, or advise you against taking tax positions that cannot be supported under and audit or in court.  A reputable CPA can also fill this role.

CPAs in the U.S. are vetted by each State Board of Accountancy.  All CPAs must pass the four-part uniform CPA exam, obtain a the equivalent of a bachelor’s in accounting, have at least 150 college credits, and have a certain amount of professional experience, which is slightly different by state.  The exam is developed by the American Institute of Certified Public Accountants (AICPA).  CPAs rarely work synchronously in multiple areas such as tax, financial accounting, and auditing, but those who are seasoned or work for small firms may be well-versed enough to take on multiple specialties.  Some CPAs work as auditors, who protect us from misstatements of financial information that is reported to investors.  CPAs protect everyone who invests in public companies because an independent audit is conducted each year to ensure compliance to the rules.  Those CPA’s that work in “industry” work for public and private firms, acting as managers and senior accounting staff, ensuring those companies correctly report information and have an easier time with the annual audit.

Sometimes you just need to file your return and have a few questions.  This is where going to a tax preparation provider, such as Jackson Hewitt or H&R Block can be of value.  If you operate a small business and are having trouble classifying expenses or creating profit & loss statements, a bookkeeper may be all that you need.  At the end of the year, the bookkeeper can typically refer you to a reputable CPA or EA that can convert your books into a tax return.  The hourly rate can be vastly different between a CPA and bookkeeper, so I recommend checking out both when you are shopping for tax and financial services.

Being an accountant is interesting when you see the world through numbers and financial statements.  For me, personally, I have always seen things through dollar and cents, but know there are many out there who prefer to live life on the other side of the numbers and just do things.  To be successful with your own finances, you don’t have to be a CPA or financial advisor, but you do need to know the basics.  Employing a team of professionals to advise you as your net worth grows is essential to protecting what you have worked so hard to build.  When you get up toward a million dollars or more, you probably want to also find an estate attorney who can help you make sure you are protected with a trust and that when you do leave this world, your estate easily passes to your heirs. 

I view accountants as protectors of the economy.  Accountants should not influence the decisions of the users of the financial statements, but should instead fairly present the data that comprises the financial results of a company or individual.  As an accountant, I do not set out to make a company look good or bad, but instead vow to use my best professional judgement to ensure users of those financials get the most accurate results possible.  This may sound hokey, but it’s what a good accountant does.

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