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How to Become CFO of Your Life

How to Become CFO of Your Life
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In college I got hooked on credit cards, and I graduated with an addiction. My habit grew with my income. By the time I was 30, I had more than $35,000 in consumer debt and a big mortgage, to boot.

Eventually I turned things around, but it didn't happen overnight. It took years for me to master my own money, and it became possible only when I realized that I should treat my personal funds the same way I treat my business finances. I decided, in effect, to become CFO of my own life.

It wasn't easy to bring the rigor of cold cost-benefit analysis to my day-to-day living, but the result is that I no longer work to pay off debt. I now work to live the life I want to live.

Here are five ways you can do the same:

Personal values
To take stock of your financial health, start online. Investopedia offers an overview of personal financial statements, while sites like Mint and Yodlee MoneyCenter make it easy to track your spending by automatically connecting to your bank accounts. They also provide charts and graphs to help you visualize your progress. If you're feeling old-school, visit Consumerism Commentary, where you can download Microsoft Excel templates for creating a personal balance sheet or a traditional income-and-expense report.

Track expenses.
As I began to dig out of debt, expense tracking was the first skill I transferred from my business to my personal life. I wrote down every purchase I made, no matter how small. Now here's the important part: I didn't do this to judge myself.

I simply wrote things down so I could use the numbers to create a snapshot of my actual spending habits.

Build a budget.
Budgets let you take the information you gather from expense tracking and use it to plan for the future. They don't have to be complicated. In a previous column I mentioned author Elizabeth Warren's balanced money formula:

50 percent for needs, 20 percent for savings and 30 percent for wants.
How simple is that? If your spending doesn't fall within these parameters, move to the next step.

Practice conscious spending.
Conscious spending means actively choosing where your money goes--just as you would with your business. Spend extravagantly on the things you love, but cut costs ruthlessly on the things that don't matter. This happens automatically in a business, where every penny is tracked. People are less likely to spend without thinking when they know it'll leave a paper trail.

Turn a profit.
I have a theory: If we were to replace the word savings with profit, the world would have many more motivated and successful savers. Everyone knows that if a company spends more than it makes, it can't turn a profit and soon it will be out of business. The same goes for a household.

Know your worth.
Businesses have a variety of financial statements at their disposal to tell them where they stand. There's no reason you can't use these at home. If you use software to track your spending, it's a simple matter to generate an income statement, a profit-and-loss statement or statement of your net worth.

These practices help entrepreneurs build successful businesses, but they're often neglected in our personal lives. Think about it: We applaud businesses that run "lean and mean," because they're profitable and productive, yet frugal folks who practice the same principles with their personal finances are viewed as penny-pinching misers. I'm not sure why we see things this way, but it's time to change that mindset, starting now.

J.D. Roth is the founder and editor of the personal finance blog getrichslowly.org and the author of Your Money: The Missing Manual.

Like this article? Get this issue right now on iPad, Nook or Kindle Fire.

This article was originally published in the May 2013 print edition of Entrepreneur with the headline: CFO in the House.

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