In today’s guest post, Andrew from Money Miser teaches us how to run our lives like a business.
Having a background in business and finance, I often see how the life of a business is very similar to that of a person. Day in, day out, businesses face the same kind of problems we face, yet they tend to approach them far more methodically. Businesses have a structured way of taking out the emotional aspect of decisions, while dealing with issues head on in a logical manner. They’re not emotional or selfish, they don’t splurge on self-fulfilling luxuries and they’re unrelenting in their pursuit of their goals.
Everything a business does is focused on reaching their ultimate vision, aligning with their mission and staying true to their values. Every decision a business makes is ultimately made to reach the end goal. The successful businesses are the ones that manage to do this the most effectively, and failing businesses are the ones that don’t.
I always wonder why people don’t take the same approach to our lives as businesses do to theirs. We deal with the same financial conundrums as they do, yet many of us have no process for managing them. Over at Money-Miser I’m using the foundations that many successful businesses incorporate into their strategic process for developing a structured approach to reaching financial freedom. Here’s a very succinct break-down of the strategic process.
Define Your Vision
On your path to financial freedom, you need to fully understand what your vision is. Without having an ultimate vision, you don’t have any way of creating a strategy for reaching it. How do you know how to act today if you don’t know what you want in 10 years?
Many pursuers of financial freedom do have a vision, which puts them well ahead of the majority of the population. This vision is usually something along the lines of reaching financial freedom by a given age. For us, the vision is to reach financial freedom by the age of 40, which will take over a decade.
Determine Your Values
When a business aims to pursue their vision, they determine a set of values they have to abide by along the way. Usually this is a load of PR crap like behaving with integrity, honesty and social awareness etc., but it sets the tone of how the business plans to operate.
From a financial freedom perspective it’s important to determine your values whilst you are pursuing your vision. What are your non-negotiable beliefs that you don’t want to give up no matter what your vision is? What are you unwilling to compromise on, even if it detracts from reaching your goal? This will be different for everybody, but some examples could be:
- Raising a family
- Having a pet
- Traveling the world
- Living in a specific city
- Owning a home
These are all values you place on yourself that you don’t want to compromise. Financial freedom isn’t about total and absolute frugality. We can all choose where to prioritize our spending as long as we are aware it will detract from reaching our goal along the way. The more non-negotiables you have, the longer it will take to reach your vision.
Scan Your Environment
Once a business has decided on its ultimate vision and the non-negotiable values it abides by along the way, they scan their environment. This involves developing an understanding of the internal and external environment they are operating within that will impact their success in reaching their vision.
Before you begin your journey to financial freedom, and throughout the journey, it’s important to always be aware of the environment you are operating in in order to develop a strategy around it.
Many factors need to be considered but ultimately you need to determine what your strengths, weaknesses, opportunities and threats are. Here is an example of our environmental scan:
Once you have developed an understanding of what you are doing well (strengths), where you can improve (weaknesses), opportunities you can take advantage of and threats you need to be aware of, you start to understand the big picture and you’re able to develop a strategy for reaching your vision.
Determine Your Strategy
Once a business has determined their vision, their values and assessed their environment, they can begin to develop a strategy for reaching their vision. Businesses have several different ways to pursue a strategy, some align with financial freedom and some don’t.
From a financial freedom perspective your strategy could be one of the following:
- Cost Leadership – Reduce costs to the lowest possible level to maximize savings rate
- Income Leadership – Focus is more on increasing income than reducing costs
- Differentiation – Finding unique ways to increase savings, such as moving to cheap countries, living with parents, working 3 jobs.
- Blue Ocean – All of the above at once!
Each of these strategies have their own advantages, and everybody will select a different one when pursuing financial freedom. If you have a high earning potential, an income leadership approach might be best. If you have low income potential, cost cutting might be more achievable.
Implement The Strategy
Surprisingly, this is where most businesses and people will fail in their pursuit of any long-term goal. It’s usually quite easy to think of a vision, values and maybe a strategy, but actually implementing the strategy can be quite challenging, probably even more so for individuals than businesses. The constant temptation to spend money is unrelenting, so you need to understand how the smaller day-to-day decisions affect the overall goal.
This is where a strategy map comes in useful as it takes the ultimate vision and breaks it down into much smaller, much more manageable goals.
Using the strategy map, you can see how the smaller day to day decisions affect the much bigger, life changing goals. Many people don’t think getting rid of cable or spending less on coffee will have much of an effect on reaching their vision, when in reality it quickly adds up and the effect becomes magnified over time by compounding.
Everybody will have different ways of implementing a strategy as they all have unique visions and values. This is why blogs like 1500 Days are great resources because they provide excellent advice to help you determine your own strategy for reaching your vision. Unfortunately, no one journey is the same, so it’s not possible to give everybody equal advice.
Track Your Performance
It blows my mind how few people ever actually track their performance in life. They might set goals and vaguely work towards them without much of a strategy, but they don’t actually monitor their performance to see areas of improvement. Businesses are obsessed with this. They scrutinize their performance in an almost hedonistic manner. Every month they review their performance to see how they’re doing and where they can improve. Most people might be content with simply saving $X and the leftovers can be used however they please. This is a surefire way to be completely average.
As much as you might not like it, tracking your performance is integral for decision making and seeing where you can improve moving forward. Budgets provide you with knowledge, control, focus, short-term goals and many other advantages. Some people are opposed to budgets and tracking their spending, even MMM himself gets by without them. To this I say, be very careful. Most people aren’t MMM and as soon as they loosen their grip, their spending falls apart.
Evaluate And Respond
Businesses are constantly evaluating whether their strategy is working. Without evaluating their strategy on an ongoing basis, they’re blindly hoping that their original strategy is still effective in the current environment.
Your pursuit of financial freedom is no different. As things change in your life you need to constantly be able to respond effectively in a way that will ensure you stay on track to reaching your goal.
Strategic evaluation consists of three steps:
- Has Anything Changed? – The strategy you have chosen is based on underlying assumptions like expected earnings and expenses. These are constantly changing and the whole strategy needs evaluating whenever they do.
- Compare Actual Performance With Targeted – This is where budgeting is very useful as it allows you to see how you’re performing in numerous areas. Comparing actual results against expected allows you to see where you’re doing well and where you can improve.
- Take Corrective Action – If an assumption has changed or you find you are significantly off with your budget, you need to take corrective action. Depending on the change, this could either be a small change or an enormous change.
Obviously, if everything is going well, there is no need to make any changes; just keep doing what you’re doing!
Managing a strategy is a never ending process of monitoring, evaluating and adjusting. Businesses never define their strategy and then ignore it, they’re always changing because something else is changing around them. If a business fails to manage its strategy it will likely get stuck in the past, fall behind and cease to exist.
You need to always stay on top of your strategy for reaching financial freedom, as soon as you rest on your laurels you’re probably falling behind. This was a very quick overview of the general strategic process. I go much more in depth over at Money Miser and will also be covering many other business topics that could help improve your journey to financial freedom, as well as less serious, lighter topics!
I’d just like to take this opportunity to thank Mr. 1500 for allowing me to guest post on his blog! I know a lot of bloggers are wary of accepting guest posts, it’s awesome he is so welcoming, even to relatively new bloggers like myself. Thanks man!
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