Don’t get me wrong. I just came back from my trip to Maldives, and here I am preaching you guys about budgeting. I do practice what I preach, and budgeting (or none at all) could be a boon to anyone. Sometimes it is not about what you earn, but how you manage it that makes the difference in the long run.
To achieve what we want from life, we must be on top of it, especially with finances. Money is a medium which we strive to have to fulfill our wants, but in order to sustain our tropical lifestyle, we must know how to handle it. Here are some tried and proven tips on how we can do a budget:
Tip # 1 – Have separate bank accounts
Think of a budget as a sustenance, a way to keep you going. And if you want to build an online business or already have one, you need to begin with the end in mind and have a budget for your project.
There are three things that could determine your success: how much you are willing to spend (cost), how much time you are willing to allocate (time), and the level of quality you are trying to achieve. For everything else, money is the scarcest resource, and if you don’t have a “budget” from the start, you’ll never reach the light at the end of the funnel.
Whatever your budget, you need to determine it NOW and put it aside in a different account than you use for your living expenses.
You should NEVER deduct your living and business expenses from the same account. That only brings confusion. You don’t need that. Open a separate account that you’ll use for business transactions only.
Keep your current personal account for your personal expenses like rent, food, transportation and other personal expenses. And of course, have something in case of emergency.
Open up a new account which will be used for business transactions, incoming and outgoing.
Obviously, you want to only use your business debit and credit card for business transactions.
Same is true for your personal account – keep it personal and don’t mess things up.
This is about forming new habits. I know it takes time to build habits, but as soon as you “contain” that spending habit in one place (through separating your expenses) you will be in a much stronger financial position. The change begins in you and the sooner you change things, the sooner you’ll see your business really take off.
Tip # 2: Determine your target ROI
Next thing you need is to dedicate a budget for your business model/project. You need to know how much you need to have to reach x% or x$ ROI. That’s crucial. Let’s say you’re aiming for $5k net profit a month and let’s assume you can get a 100% ROI if you implement well. That means you’d need to spend $5k to make $10k gross, so $5k profit.
In case you want to maintain your $5k net profit, you always need to have $5k ready to invest. So that money should always stay in your business account/Paypal account or whatever you use to make payments for advertising, outsourcing, design, etc.
That’s just an example of what you need if your goal is a 100% return on a $5k investment. There’s a good chance you’ve a different goal so you’d need to adjust the figures.
In general, margins decrease the higher your volume gets. Meaning, if you’re aiming for $100k/month net profit form the same business model, you’d probably reach a thinner ROI, maybe 80% or even less.
Tip # 3: Use a money management software
We all have forgetful minds, and using a tracking tool can help us with “spending amnesia”.
Having set up multiple, separate accounts, you need a money management software. I think it’s mandatory and I don’t see how you can keep a good overview on your spending, both personal and business.
I like to use www.Quicken.com for that purpose. Please note that I’m not recommending this as an affiliate. It’s a tool that I found and used for some time now and I can see it makes a big difference in my business.
Quicken has different packages, but since you’re operating an online business, the only option I recommend is the business version. The cost might be steep for you for a while, but it is worth it because having good records of your spending means less risk of overspending and better overall budgeting!
The software is focused on USD, but I’m using it to manage different bank accounts in multiple currencies. It does the job and you can keep good track of everything. Unfortunately it does not have a multi currency feature.
You can add unlimited bank accounts. If you’re based in the US, you can easily connect quicken with your bank account and it’ll automatically import all of your transactions. Same is true for credit cards. You can set up different accounts for debit cards/credit cards.
If you’re located outside the US, you’d have to manually important everything. It’s not that big of a deal. You dedicate 1 hour every Monday to enter your expenses and incoming from the week before.
You can manage multiple bank accounts and debit or credit cards within the same account.
Quicken allows you to dedicate a budget for each account and you’re going to be able to see how you stay within or exceed the dedicated budget. I think that’s very powerful for both personal and business. You want to see where you’re money is going, how fast it’s going, what’s coming in, so you’re able to optimize. It’s called money optimization.
Another thing that’s super important is to have a cash flow analyses for your business.
Let’s go back to the $5k budget. You need to breakdown how the $5k will be spend, how long it will last, and what is the spending for. You can use excel to create such an analyses. Write down how much you’re planning to spend each week and what kind of expenses you have.
This might all simple tips to you, but having a budgeting mindset from the start will surely set you up for financial success.
What other budgeting tips do you recommend? Let me know in the comments below!