This book has covered a lot of information and materials so it might be easy to skip through, skip ahead, and skim through a lot of the information, links, and other materials we have covered. Like any book, whether it be a text book, a practitioner-oriented book like this one, or a shorter one that you are reading for fun, it is important to keep in mind what the key takeaways should be after you are done reading. Reading is an essential skill that has to constantly be developed, tweaked, and improved, but it would not be realistic to expect you to remember all of the wide ranging amounts of information that we have covered and discussed within this text.
Personal Finance Takeaways
Since this book was divided into two separate components, the first of which focused on personal finance and financial literacy, I thought it best to start identifying the takeaways items for this first section of the book. It is also important to remember that although the information contained in the first part of this book is labeled as important for personal finance, it is linked to the topics and information we later discussed for business, entrepreneurs, and how to bootstrap your startup. With that in mind, let’s review some of the core topics and concepts that, I believe, are some of the most important take-away items for you to remember and keep in mind as you put this book down.
Why Financial Literacy Matters
Financial literacy, financial wellness, and other related topics might seem like abstract ideas and concepts that are not truly important for the day-to-day management and analysis of your life. This mindset cannot be further from the truth, and will leave you with a financial mindset and situation that is not ideal, or even one that is anything close to what you would like. An important way to obtain the information and knowledge that you need in order to improve your financial life is to have a firm understanding of what the basics of personal finance and financial literacy actually are. We are not going to rehash and reexamine the entirety of what was discussed in the first part of the book, but what we can do is highlight some of the most important aspects of what was covered in this section.
1. Know the basics—having a firm understanding of the basics, as they relate to your personal finances and financial literacy, is critically important to getting your personal finances into the shape that you want. Now it is important to remember that while very individual is different, there are some basic concepts and terminology that form the basis for better decision making. Akin to building a house or any kind of building, building a strong foundation is the first, and arguably the most important, step in getting this financial ball rolling. Some of the important fundamentals and concepts to keep in mind include the following.
a. Your personal balance sheet, including what your assets and liabilities, and how to classify what these items actually means for your personal finances.
b. Basic financial terms and concepts that include, but are not limited to, items and terms like 401k, dividends, Roth IRAs, and what all of these different topics and ideas mean for you.
c. Credit cards, debt, and how these sometimes opaque issues can influence your financial decision making.
2. The different phases of your financial life—just like we all change and evolve as we move through different phases of our life, our finances and financial outlook must also evolve as we move through different phases of our life. The different junctures of your financial life require different financial planning and budgeting, and will be different for every person. That said, there are several key items and junctures that almost everyone should plan for as they put a financial roadmap together:
a. Higher education, especially how to budget, save, and afford whatever options are correct for you.
b. Managing the transition between jobs, focusing in on making sure you are not leaving 401k dollars on the table as you move from job to job.
c. The old out argument between renting and buying, and this conversation can take place for both autos and housing, both of which are tremendously important for you and your financial life.
d. Being knowledgeable of the tools and various resources out there to help you better manage your finances, financial planning, and how your plan might change as events change.
3. What the stock market actually means—the stock market, especially with the constant coverage and analysis it receives from the likes of Bloomberg, CNBC, Fox Business, and other various networks, might seem to have an outsize importance in how your personal finances are influenced by broader economic trends.
a. One thing to always keep in mind, as you try to synthesize the market headlines you see on a daily basis, is that you are invested in the stock market whether you are actively investing in individual stocks or not.
i. If you are retirement plan of any kind, you are invested in the stock market!
4. How to get started—it can be intimidating to try to jump-start of overhaul your personal finances, but it is important to get started as soon as reasonably possible. My recommendations to help you jump-start your personal finances include, but are not limited to, the following:
a. Use technology to help jump-start your savings and investment plans—it is important to remember that just because it is technology does not mean it is social media. Social media is the tip of the iceberg; the true value of technology to personal finance is the ability it gives you to automate some of your savings or investments.
b. Make a plan for your shorter-term and longer-term financial goals, and then write those goals down. Numerous studies, and our collective experience I am sure, tell us that once a goal is written down we are more likely to commit to it, and actually see it through to completion.
c. Get a budget buddy to help you outline your plan, decide how to specifically execute on that plan, and stick to your plan when the going gets tough. Every journey, be it finance or exercise related, will inevitably have some ups and downs during the process. Having that budget buddy will only help you remain committed and motivated to see your goals through to the end.
d. Celebrate the little wins and victories, short-term milestones, and when you are hitting the ball out of the park. The entire point of improving your personal finances, don’t forget, is to help you live more of the life you would like to live anyway, so do not lose track of that along the way.
Finance for Business and Entrepreneurs
Without a solid foundation and understanding of what personal finance means for you and your financial goals it can be very difficult to lay the foundation to start or to grow a business. This connection and linkage between personal finance and financial literacy, and the ability of you to actually launch and successfully sustain a business idea is something that hopefully was strongly emphasized throughout this book. That said, there are differences between the concepts and terminology that you should understand for business finance that are slightly different from the ideas and concepts important for personal finance. My checklist of items that every entrepreneur should know includes, but is not limited to, the following:
1. Understand the financials—This is something I cannot stress enough, and that is how critically important it is for every small business owners or entrepreneur to understand how exactly their business looks in financial terms. Understanding that accounting and finance terminology and information might not be the interesting topics, or topics that most people are truly that interested in using on a day-to-day basis, I still must emphasize the importance of understanding the ins and outs of business finance. The most logical place to begin this analysis is with the four financial statements.
a. The balance sheet—where the action for the month or year ended eventually ends up being reported, and where the assets, liabilities, and owners’ equity of the firm are listed out. Remember that assets represent future economic benefits to the corporation, liabilities represent future economic detriments to the business, and equity is comprised of (1) earnings that have been retained, and (2) funds that have been invested into the business.
b. The income statement tracks and communicates how much the business actually earned during the period. This is where all of the usual favorites, including items such as revenues and profits, will appear and are analyzed by internal and external users. For most business owners, this is the statement that receives the most attention, as it communicates just how well the company is performing in terms of profitability.
c. Statement of the retained earnings—this is the bridge between the income statement and the balance sheet, and basically allows you the business owner to see how much in the way of profits you have been able to retain over time. While this is a relatively simple and straightforward financial statement, be sure to keep an eye on it—this also lets you see how much you are able to reinvest into the business over a period of several years.
d. Cash flow statement—this is the statement that I believe many business owners and entrepreneurs overlook in a quest to obtain profitability. Constructed in a similar manner to the income statement, but focusing only on the cash inflows and outflows related to the business, this statement truly identifies and illustrates just how much cash your business is actually generating. One important fact to remember is that while income looks good, and is good, in order to actually pay bills and purchase raw materials, cash flow is king.
2. Technology for business—With all of the technology focused information out there, I know that it can be a bit overwhelming to actually select on type of technology to use in your business, and doubly difficult if you are trying to stay within a shoestring budget. That said, just because it may be difficult does not mean it is impossible, or even anywhere close to it. When factoring in what types of technology tools you might use for your business there are a variety of factors to consider and take into account:
a. Is it compatible with your existing technology tools and platforms? Buying the most sophisticated customer relationship manager program will not do your business any good if it cannot speak to your shipping records. Additionally, it might be worth purchasing an entire suite upfront rather than assembling a technology piecemeal over the years.
b. Are you social—yes, the infamous social media finally makes an appearance in the context of finance for business! As much as it may irritate you, or strike you as a colossal waste of time in most situations, social media is a powerful tool that can (and should) be used to develop and expand your business. The best part of all is that, for the vast majority of social media tools, it is completely free! Nothing really ever beats free marketing, so definitely look into having some sort of social media presence.
3. Debt for business—The concept of debt, otherwise known as credit, is something that every entrepreneur has to know how to use, understand, and make good use of in order to help grow and expand their business. Debt is a topic and conversation point that is covered extensively for issues related to personal finance and financial literacy, but is often overlooked when it comes to business literacy and entrepreneurship. This, however, only gives you the entrepreneur, an incomplete picture of the full effect that debt can have on you and your business. Let’s take a look at a few of the ways in which debt (credit) can have an impact on how you run your business.
a. Interest—this word might have a negative connotation, but the idea and concept of interest is something fundamental to how the commercial credit and debt cycles operate throughout the economy. Interest represents dollars that you have to pay back to the lender or creditor who has extended your business financing in return for the utilization of that money for a certain period of time. It is important to remember, however, that every dollar paid in interest does nothing to reduce the overall amount you will have to eventually pay back.
i. Introductory or special rates are nice while they last, but do not get lured into a false sense of security by these lower rates and run up higher than optimal balances on your credit cards. You will have to pay these amounts back, and it will most likely be at a higher interest rate than you acquired them at.
b. Credit utilization—if you have ever wondered why a firm might set up extra credit cards, or borrow slightly more than it needs at the time for current operations, it may be that they are trying to improve their credit utilization. Put simply, the credit utilization ratio demonstrates to the market place how much available you have in total versus how much you have actually upon. The higher this utilization gets the higher risk you will be for new potential lenders—higher risk means higher interest for you.
c. Good debt versus bad debt—do not let debt become a 4-letter word that keeps you from expanding or growing your business due to some irrational fear of taking on more debt. Virtually every successful firm has had to, at a certain point, take on business debt to expand and grow business operations. Using debt to grow your business, develop new products or services, and make your business run better all represent good times to take on debt.