How to Manage Your Family Finances like a Business

It’s never been more important to manage your family’s finances. We’re all living longer, spending more, paying more tax and running up higher debt than any generation before us.

And it’s our kids who will bear the greatest brunt of this with:

• a student debt crisis in bound which will dwarf the 2008 housing crisis.
• People living longer – retiring at 60 or 65 won’t cut it any more.
• Crippling mortgage debt from inflated house prices

Unless they’re prepared.

You need to be willing to take charge of our family finances to provide a secure future for you and your loved ones.

But what if you started to look at your household finances as a business? A business is focused on two things:

• Increasing revenue
• Reducing costs

One without the other doesn’t lead to profits.

This is why many businesses fail.

A business increases profits by upping revenue and reducing costs.

Run your family finances in the same way.

— Neil M White 🇬🇧 (@ThisDadDoes) March 30, 2018

The problem is this – every man and his dog is trying to teach you how to increase your income.

It’s easy to sell people a ‘get rich quick’ programme or get them to buy into making ‘SPI – SMART PASSIVE INCOME’ (side note – I’ve listened to dozens of Pat Flynn podcasts and I’m still not sure what ‘SPI’ is).

What’s less sexy is how to reduce your ‘business’ costs – figure out how to do that and you’ll be in the black and making profits. And that’s where you need to be if you’re going to survive into the future.

The other problem is this – read any blog article on this subject and it’s the same crap – “Stop drinking lattes to save £2 every day.” Or ‘packed-lunch’ your way to riches.

But I’m guessing your coffee habit  addiction isn’t one of your major costs/outgoings. And it’s those big ticket costs you need to work at before you switch from flat white to filter.

So I’ve completed a list of the five areas you can attack your outgoings right now – maybe these don’t all apply to your situation, but reduce costs on a few and you’ll already be much more financially solvent. You can then put that excess income into investments. But more on that later.

Here’s my list of major costs to reduce:

• Taxes
• Mortgage repayments
• Student Loans
• Car payments/running
• Utility bills

Start with these big five before you start skipping the Starbucks.

Reduce Your Tax Bill (Legally)

I live in Scotland which is the most heavily taxed part of the UK, one of the most heavily taxed countries in Europe (not including Scandinavia who have apparently traded longboats and being Vikings for ‘loadsataxes’).

So yeah, I have had it pretty much up to ‘here’ with tax. It’s not so much a civic duty as getting robbed a little bit every month in my pay packet.

And every time I buy fuel.

Or anything else.

Or die.

Or get in my car.

Or sell anything.

Taxation might not be theft, but excessive taxation certainly is. Still if that’s the price for living in a civilised country, then so be it.

That doesn’t mean I enjoy it. Or plan on paying a penny more than I need to. And neither should you.

Tax is my single biggest outgoing bar none. So keeping a lid on tax is a big priority. I live in the UK, so some of the specifics of this information might not apply to you.

But the general principles still apply. I’d encourage you to look for ways to live tax efficiently wherever you find yourself.

One way in the UK is to take advantage of tax free investments either through a pension (where contributions aren’t subject to tax) or an ISA Investment where your contributions are subject to tax but any income or capital gain isn’t

This is my preferred option – you can have stocks, shares and ETFs set up to provide you with a tax free income every month or quarter without touching the capital.

Similar arrangements exist in other countries. All you need to do is google ‘How to Pay Less Tax in [Country of Interest]. Honestly, its hard to believe you still need to tell people to do this.

Other ways to reduce your bill is by charitable givings or by setting up your own business. Go mad – just do it legally.

Managing your family finances means reducing costs wherever you can. Start with tax and work from there.

Pay Less on Your Mortgage

After taxes, my mortgages are my next biggest outgoing. But it is pretty easy to reduce your payments on a mortgage once you know how.

Remember – none of this is financial advice and is for entertainment purposes only. I’m not a financial adviser so you can’t sue me when this all goes wrong on you.

There are two main ways to pay less for your mortgage (there are others too. Again, do your research). These are:

• Negotiate a better rate of interest
• Overpay the principal loan amount

Here’s the deal – the bank really wants you as a customer. You pay your mortgage on time every month. And that’s easy money for them. And they’re willing to pay for it through giving you good deals.

If you’ve been with them for a while paying the same high rate of interest, it’s worth going to them for a better deal. The first time I did this, the conversation went a lot like this:

Bank – How can I help?

Me – I’ve had a mortgage with you for a few years now but the rate is quite high. Can you do me a better deal?

Bank – Why, yes we can. How does £1200 less a year sound to you?

Me – (impersonating Patrick Stewart in Star Trek: The Next Generation) Make it so.

The second time I did this, the difference was £2000.

Two thousand pounds. After tax. That’s a a huge decrease in costs. And a massive increase in overall profitability as a family. That extra cash can go to pay off other debts (see below) or invested for the future (see above).

Now do you see where I’m going with this whole ‘treat your finances like a business’ thing? You effectively gave yourself a ten percent pay rise. For three and a half minutes effort.

The other aspect is repaying your principal loan quicker which can reduce your interest payments. I elected to over pay one of my mortgages by £40 a month which would have saved me an estimated £3000 over the life of the loan – not bad.

However there are a few things to consider with this e.g. you can sometimes pay penalties for overpaying a mortgage.

Also, if you’d make more money from investments than you’d save on the mortgage, it’s not really worth it – unless you’re fixed on being debt free.

If you are really stuck, get some professional financial advice from someone who you trust. They will give you the best steer.

Obliterate Student Debt

One of the advantages of living in one of the most taxed countries in the world is heavily subsidised university education.

Notice I said ‘heavily subsidised’ not debt free. The truth is me and several of my peers left college with thousands and thousands of debt consisting of fee endowments, accommodation loans and the effects of years of  partying and heavy drinking.

If you live in the U.S., things are even worse. Student debt is like a second mortgage to many, only you don’t get the house to live in at the end of it.

The best way to not be in debt is to avoid getting there in the first place. If you’re thinking about college or going back to study for your Masters’, ask yourself if it’s going to be a good ROI (return on investment).

If you are trapped with tens of thousands of loans, work to get the repayments down to manageable levels but remember the point from above – if you’re at a low interest rate (some loans track the base interest rate), it might make more sense to invest your money than use it to overpay low interest loans.

I’m one of the fortunate ones – my student loans were paid off a few years ago, thanks mainly to a dead relative who left a ton of money for my education plus graduating at 20 and going straight into a good job.

Be a Smart Car User

Over the years I’ve lost a good bit of money on cars. And I’ve made some of it back too – I actually sold my Suzuki 4×4 on for a profit due to a favourable exchange rate when I lived in Africa.

One notable mistake in 2005 was selling an old but perfectly good car I owned outright to buy something new and flashy on credit.

So I was tied into a car that was still depreciating two to three years later. When I sold it five years later it was a wreck and I’d lost thousands in depreciation.

Now I own an old car that has no outstanding finance on it. And when it packs in, I’ll by another old car. And so on and so on.

Some financial experts are predicting a 2008 style crash triggered, not by housing, but by bad car loans. With many people going into negative equity (when the loan amount is worth more than the car’s value) and a whopping 88% of new cars bought on finance, the reality is quite shocking.

Often car salesmen will push loan arrangements because they make a commission selling these. Avoiding getting stuck in expensive car finance deals could be one of your keys to keeping your ‘family business’ costs down.

What about leasing? Isn’t that a better way to run a new car? Well let’s park the issue of you needing a new car for a bit.

If you lease a car you take on all the liabilities (depreciation, insurance, damage, excessive charges if you overshoot your mileage) without the obvious benefit (ownership).

If that sounds like a bad deal, it’s because it is.

What’s your need for a new or flash car all about? Do you want to signal to your neighbours or friends that you ‘made it’? Do you like the new car smell? Are you just buying an expensive status symbol.

Buy a cheap car, run it for several years, avoid debt and depreciation and you’ll always be up.

When it comes to maintaining your car, you can make big savings by:

• Using budget/economy tyres instead of premium brands – you don’t get the ROI on top branded tyres.
• Shopping around for insurance (I’ve saved thousands of pounds doing this over the years).
• Using a local or economy garage for repairs.

Studies that featured in the book ‘The Millionaire Next Door‘ showed that savvy car buying and running was linked to high net worth. Those who ran economic, used cars were worth more money than households who had new, flashy motors.

So what’s it going to be? New and financed/leased. Or used and cheap to run.

Manage Your Family Finances: Don’t Settle for Expensive Utility Bills

The final way you can reduce your ‘business’ costs and juice your profitability is through your bills for utilities – most notably gas and electricity.

Research has shown that UK customers overpay for utilities by a massive £18.7 billion every year (Source). That’s around five times Donald Trump’s net worth.

This tendency to overpay is down to one factor: customer inertia. We’ve all been there – it’s an effort to take metre readings, calculate our annual usage and search for a better deal.

But that’s not really an excuse any more.

In the UK, there are numerous switching services which calculate your usage and find out whether you can get a better deal elsewhere. They’ll also switch you to the new supplier with the limited amount of hassle.

I’ve done this every year, resulting in a better deal every time. Sure, you can’t keep doing that indefinitely. But it’s worth checking every couple of years don’t you think?

Check out USwitch (link) – that’s the service I use (not an ad).

Start with ‘One Thing’

Don’t know where to start? Just do one thing. One thing from this list. Even if you don’t have much time – make a start. Choose one thing from the list and work on it till you’re done.

If that means selling your car, getting a better mortgage or not doing that MBA, then that’s what you’re going to have to do.

Doing lots of things at once sucks. But if you do one thing, finish it, then you can do another thing. And on and on until your finances have been properly spring cleaned.

If you resolve to manage your family finances like a business, that change in mindset will lead you to running a leaner home and therefore a more profitable one.

Neil

P.S. If you liked this, you’re going to love my new book. In the meantime, you can check out my current one here (Amazon)