The Business of You: Spend Money to Make Money

Dave Ramsey often presents a simple question to folks who call into his radio program. “If I hired you to manage your finances, what would you do?” Almost every time, the solution is made abundantly clear.

Its interesting how differently people run their lives from how they might run a business. Although the same principles apply, emotions creep in. Personal finance becomes just that – personal.

If we ran our lives like businesses, I think we would find ourselves in much different places. Much better places. In this series, we will look at how we can run our lives more like businesses and benefits of doing so.

Only Spend Money On Things That Make Money

I believe this is the area with the biggest divide between businesses and individuals.

Well-run businesses have three types of expenses.

• First, there is ‘mandatory’ expenses. These expenses have to be paid – no matter what – with no foreseeable future benefit. Taxes are a great example.
• Next, you have ‘investment’ expenses. This might include licenses, office rent, payroll, etc. These are not mandatory expenses. They are expenses you pay for a current or future benefit. You pay your employees because they help you perform more work. You don’t have to pay them, but you want to pay them because they enable you to sustain a higher level of output.
• Last, there are ‘want’ expenses. These expenses are not mandatory and they don’t have an additional future benefit above a ‘investment’ expense. You may ‘invest’ in a company car, looking forward to the promise of your salesmen making personal connections with prospective clients and subsequent sales. If this investment can be met with a Chevy Malibu, to purchase any nicer vehicle, the additional cost is a ‘want’. It doesn’t satisfy the investment with any greater promise of future benefit. It is just nicer. It puffs our ego. It makes us feel fancy. But it doesn’t help us achieve the ‘investment’ goal with any greater success. In fact, the additional cost makes the ‘investment’ return harder to realize.

Good businesses focus their expenses on the first two types. They proactively guard against ‘want’ expenses. However, individuals spend a tremendous amount of money on ‘want’ expenses. Many individuals choose ‘wants’ over ‘mandatory’ expenses – which is foolish. Additionally, individuals will often choose ‘wants’ over ‘investments’. They will flounder in their attempts to save for a down-payment for their first home, in the name of new clothes/dining out/entertainment/etc. If you can’t afford your mortgage due to a hefty car payment, you have also fallen victim.

To that end, if we want to run our lives like a good business, we must prioritize our expenses. We must satisfy ‘mandatory’ expenses first. We must look to ‘investments’ before ‘wants’. There is a time and place for ‘wants’, but it must be after ‘wants’ & ‘investments’. This principle is key to building wealth.