I recently listened to a fascinating podcast with Kelsa Dickey, the owner of Financial Coach Academy, where she shared a striking story. She spoke of a highly successful surgeon, earning over a million dollars a year, who was astonishingly living paycheck to paycheck with terrible credit.
He was brilliant in the operating room, incredibly well-compensated for his expertise. Yet, on the home front, he had no idea how to manage his money. Every dollar he earned, he spent. He was frequently late paying bills, which crippled his credit score, and he consistently borrowed more than he could afford. Despite his impressive income, he found himself in a significant financial pickle.
I wish this were an anomaly, but the reality is, this scenario plays out far more often than you might think.
In my work with numerous small business owners, I see a common, critical mistake: a laser focus on the business’s finances without adequately addressing their personal financial health.
It’s easy to believe that if the business is thriving, your personal finances will naturally fall into place.
However, a person’s personal financial situation has a profound influence on their business, and vice versa.
It’s challenging to operate a well-run, strategic business when you’re facing a desperate financial situation at home. When personal finances are strained, it can lead to reactive, short-sighted business decisions.
The truth is, it doesn’t matter how much money you make if you don’t know how to handle it.
This is precisely why I recommend starting with your personal finances – your foundational financial health.
The first step is to understand your baseline: how much do you truly need to earn every month to cover your current lifestyle?
I take this a step further with my clients, helping them calculate what they need to make to cover three different lifestyles: basic, better, and best.
Basic:
- Covering basic expenses
- Able to pay your bills on time
- May not be able to pay your bills in full every time
- Relying on credit cards to make ends meet
- Often worried about money
- Unsure where your next paycheck is coming from
Better:
- Investing some money
- Some discretionary spending $
- Some savings set aside
- Occasionally stressed
- Feeling that you should be doing better financially
- Sometimes worry about the timing of your paycheck
Best:
- Fully funded emergency fund
- Income to cover expenses
- Investing for your future
- Savings for future expenses
- Spend $ guilt-free
- Able to focus on future growth
This clarity provides a roadmap for both personal and business financial goals.
From there, we utilize the 50/30/20 rule as a flexible yet robust framework for your personal finances. This budgeting guideline suggests allocating:
- 50% of your after-tax income to Needs: Essential expenses like housing, groceries, utilities, and transportation.
- 30% to Wants: Discretionary spending like dining out, entertainment, hobbies, and vacations.
- 20% to Savings and Investing: Building your emergency fund, retirement accounts, and other long-term wealth goals.
I’m a big fan of operating both business and personal finances based on percentages. Whether you have a $5,000 monthly income or a $50,000 monthly income, the percentages provide a consistent, scalable framework for decision-making.
If your business is currently only able to provide you with a “basic” lifestyle, that’s perfectly okay! The most important thing is to know your baseline. Once you understand where you are, you can strategically build from there, setting clear targets for growth in both your personal and business financial life.
Ultimately, the story of the high-earning surgeon serves as a potent reminder: income alone doesn’t guarantee financial well-being. Whether you’re a seasoned business owner or just starting out, the health of your personal finances forms the foundation of your entire financial ecosystem.
By understanding your baseline lifestyle needs (basic, better, best) and implementing a clear framework, such as the 50/30/20 rule, you gain the clarity and control necessary to make informed decisions, both at home and in your business.
Embracing this holistic approach allows you to move beyond reactive financial management. It empowers you to build a resilient foundation, ensuring that your entrepreneurial dreams are not just ambitious but truly sustainable.
Remember, knowing where you stand is the first step to creating the financial future you truly desire.
