Achieve finance freedom using management tools

Our first mistake

When it comes to finance, every person in the planet works like as a company or an institution. So there is no difference when we talk about results.

Imagine a situation where every year or every month a company reports results whose the amount spent is equal the income’s amount leading to a operational result equals to Zero. What can you say about this company’s performance? Is it prosperus? Can it survive? For how long?

I’m betting that you said that this company ins’t going to be here in a near future. Right? RIGHT?

Well, me too.

So when we talk about family surviving, financially speaking, we can’t seek to be in the break even point. We must be seeking more than that.

Strategic Planning and our second mistake

When you talk about saving money, usually you start thinking how much do you want to save per month or year and here is the moment that we got it wrong.

Money is a resource not a life goal. Is a necessary way to reach a purpose, even a simple one. You have to have money to: survive and do the things you want to do.

Yeah, sounds like a cliché, but I think different. It’s a lesson, a rule. Remember, like any other institution ok?

So, the first thing you have to do is discover: What do you want? Today or in a few years from now?

Setting your Life Goals

I’ve read many articles here on medium about setting life goals. I don’t know if I can link they here, it’s my first article on medium and I don’t know the rules.

I do can speak for a company. They usually think their strategy 5 years ahead for some reasons:

  1. Is easier to break in small goals and to check if the steps and decisions made is leading toward those goals.
  2. A company is like a big family, so thinking not long ahead is easier to get everyone on board.

Deciding what to do tomorrow is difficult. Imagine 5 or 10 years ahead?

But believe me, this step is the key to success.

The ZBB Basics

Have you heard about the zero base-budgeting? Well it is a technique created by Peter Pyhrr where every item budgeted has to be aproved and justified, like what are the benefits in having this particular item and how this item helps you reach your goals and strategy achievement?

The logic is pretty simple and I’m bet you’ve already used it. Imagine a scenario where you are shopping your groceries and you have a maximum amount to spent, U$500. You’re checking out your items and realized that the total amount surpassed the U$600. What do you do? Pay the extra U$100? Or choose some itens to leave behind? How do you choose?

Practicing ZBB

ZBB is a powerful technique, but I can’t say it is effortless. In fact, it’s very hard to implement, but I assure you will save some time planning in the future.

Starting listing everything that you need in order to survive and what you must have to have a decent life and the things that is nice to have.

Defining Priorities

It’s good to have nice things and some luxuries but when it comes to reach your objectives you may want to separate the benefit from everything that you have or carry with you.

Think about it, if you’re on a plane flying with low fuel and had to decide what to throw it out in order to complete the flight, wouldn’t be better to have this decision planned so you don’t regret those decisions in the future?

So grab and notebook and a pen or open a excel spreadsheet and listing everything that you use your money today.

After you done, start think the benefit of each item that you list. Some items you’ll see that it’s impossible to live without, such as minimal food requirements, taxes, commutes and so on. Some items will be easy to identify the benefit and value, some items don’t. Put those apart.

How many and How much

After setting your priorities up. It is time to plan how much of those items do you need or desire to have in your life.

The ideal goal here is to have a defined quantity of every item you buy for living in food, tools, TV and internet access, commuting and etc.

It is important to set for each item a necessities level, for example, nowadays we need internet access, but for normal activities you don’t need a very quick connection. So the basic plan to access is your minimal and every step above for that access plan you can set a decision package (we’ll go on that later), you can group those decision packages in categories like, Must have, Good to have and Nice to have. You can change the names if you want, but it is important to separate the essentials and upgrades.

After defining the quantities, it is time to put the price and budgeting every decision package that you grouped in categories. See, there’s a very different aproach to normal budgeting where you usually would start setting how much you have to spend and starting filling a bucket without separating into different categories. That’s a key change in your normal budgeting exercise. That’s the power of using the ZBB technique.

Now, go back to your spreadsheet and start doing this exercise so you can forward to the next step.

Your budget from A to Z

You should now have each decision package budgeted and categorized. This step is for build a tower that represents your anual budget. In the tower’s base, the essentials packages more important to your life should be allocated and going to the top should be the nice to have but more dispensable package. Did you get the idea?

For each category you should do the following activity.

For the Must have: This is your essentials, assuming that if you cut a decision package in this category you won’t live your life proporly and with healthy and security risks. So for this category, just pile up and put on the base of the tower

For the Good to have: This package should be those who represents the upgrade level for the essentials packages. They have to be placed in order from those upgrades who would help you achieve faster your strategy goals to those whom improve your life.

For the Nice to have: This should be the less important ones but need to be placed in order of importance for you and your family. Find those packages that have a good cost benefit and satisfied you in a way that help you relax and recreation to face those sour moments we all face in life.

For those Not categorized: This one is a bonus and should be ease. Think about it. If you didn’t find placed for those package it’s because it’s not important to you and your family at all. Cut it, and will help save and reach your strategy faster.

Present your work

At the end, it is important to share the planning with your stakeholders, meaning your family because they will probably help organize the final tower.

This part is easy to do but hard to execute and it critic to the ZBB sucess. Let’s recap:

  • You already defined the anual amount that will need to save to reach your strategy;
  • You have a packages pilled up in order of importance.

What to do next?

Well, I said it’s easy because this step is logic, if your budget tower size ins’t compatible with your incomes and the amount that you need to save you should just go to the top and eliminate those things that is less important, right?

Yeah, this is a very hard thing to do. It’s hard to let go things because you’ll always think that item would be need if… something remotely possible happen. But let me tell you one thing, analyze those possibles events and decide how possible they really are and what are the risks if you chose not to be prepared to when it happens, if it happens. Let’s move on.

Adjusting the journey

It is you who decides how prepared you should be for unwanted events and the ZBB technique help you focus and minimizes the impact of those predictions.

First, if you are a person who prefers to be always prepared, chances are the event provision package are not placed in the Top Budget tower. Otherwise you weren’t honest with yourself, so the decision of Be or don’t be prepared are already made.

But, let’s pick the scenario where you didn’t budget the provisions for a remotely event and unfortunately it happened. What do you do? Well, ZBB got you covered too, go to the tower eliminated the top packages until you need to cover the damages.

I like to think the ZBB tower work like a lung tank and help you deal with your incomes and garantee the results at the end. Note that the same apply when you have a change of direction with your incomes, if it more than you planned, ZBB help you decide what you can put back on top and enjoy more nice things.

Reaching your Goals

If I didn’t bore you with all lessons above, chances are that you’re now more prepared to face adverse situations, prioritize what is more important to you and help correct deviations focusing in your strategy

Things are more logical with ZBB and should be. This is finances and not economys.

Let me know if want more tips. I’ll gladly help!