Problem #1: You View Your Account Balance as a Spending Goal
Here is the video version of this for those who prefer to watch rather than read:
You know you have this problem when you're making money but you still have no money. To be honest, this is not a contractor-specific problem, but it is so prevalent, that I thought it needed to be addressed here. I’ve seen this so many times, especially when business and personal funds are commingled. Commingling is a huge problem in itself, but that’s not what I am going to address here, other than to say that if you are commingling, STOP as soon as possible! Even when there is no commingling, your habits with your personal funds tend to spill over to your business funds.
Not having control over your spending causes some obvious problems: 1) You will always be playing catch up, and 2) Your business cannot grow without capital. So, what can you do? Well, let’s start at the root of the problem. Often, the over-spending is a result of not knowing what you actually need your money to do. There are a couple of ways to go about improving this situation.
The easiest method would be to follow a system like Profit First, where you split your income into various bank accounts to cover different types of expenses. Each time you get paid, you split a percentage of your funds into buckets, such as taxes, operating money, profit, etc, so you don't see your entire bank balance as operating money. While it’s a great concept, the reality is that when income is inconsistent (as it often is in construction), I often see people start shuffling money between accounts because they run out in one bucket, so they fill it from another, therefore defeating the purpose. So, I tend to recommend this more for clients who have a bigger cushion of funds, steady income, or an extremely high volume of transactions. Otherwise, especially if you use accounts that require a minimum balance, then you start getting hit with non-sufficient funds fees. You can, of course, avoid this by using a bank that doesn’t require a minimum balance. (Relay is a great option). That being said, I find the next option better suited for those with a lower volume of funds and/or transactions.
If you want to have laser focus on your finances, I cannot recommend YNAB enough. You can use it for both personal and business budgeting, all without having to pay for separate accounts. For those of you who have not heard of YNAB, it stands for You Need A Budget. It is not your typical budgeting system. It is especially useful for those whose income is inconsistent because it focuses on actuals, not on what you hope to make. You prioritize your expenses and savings goals, and give every dollar a job accordingly. Once you get going, it’s easy to use, but if you are just getting started, it might seem like more work than you want to do. Let me just say this: learning to budget might be hard, but so is being broke. Which do you prefer? I suggest giving it a try for 6-8 weeks and see if it doesn't make a difference in the way you think about money and gives you satisfaction knowing that you are in control. If you go to youneedabudget.com, you will find a lot of free resources to help you get started with personal budgeting. YNAB itself is VERY reasonably priced and worth every penny. In the near future, I will be posting a tutorial on how to use YNAB for your construction company. It may be a little unconventional to use YNAB that way, but it is very effective for achieving financial clarity.
Regardless of the method you choose, the issue of over-spending will require a change in mindset and it will require work. You need to see beyond the things you want today, to what you want your life and business to look like 1, 2, 5, 10, or more years from now. It is worth the effort you put in when you feel the satisfaction of knowing you are finally in control of your spending rather than it being in control of you. It is worth the effort when you have total clarity on what each dollar you own needs to do and you can finally see the path toward achieving your goals.
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