Run your personal finances like a business

Businesses need accurate cash flow projections if they are to succeed. They need to know when they can afford to buy new machinery or invest in expanding the business.

Going ahead with big financial decisions without knowing your current position is akin to business suicide. The same is true of your individual finances. Taking a business-like approach to personal finance will ensure financial decisions are not made on emotion, leading to better long-term outcomes.

One of the most important business principles that one can apply to personal finance is to keep an eye on cash flow. The money leaving your accounts should never be more than the money coming in. One of the simplest definitions of wealth creation is to spend less than you earn and invest the difference.

However, few individuals or families can tell you exactly how much they should spend in a month and therefore know how much they should be saving each month. This saving is the 'profit' of the family and is vitally important for future planning, whether you are looking at buying another property, going on holiday or paying for children's education.

A personal financial assessment has a very simple purpose, to determine whether you are on the right path to achieve all your goals, or whether some changes are needed. In modern society, this is a very important question, as our conception of retirement and the amount you need to save towards it is constantly changing.

The retirement industry is just over a century old and when it was introduced, life expectancy was a lot lower, so people would only live a few years after finishing their formal careers, which meant that there usually was no danger of the money running out. Nowadays, however, life expectancy is such that there is the real chance that you may live longer than your investments. Therefore, the new emerging view of retirement is you should be as close as possible to financial independence before you retire. Financial independence simply means that your investment income each month is more than you spend in that month, meaning that your money continues to grow, even after all your living expenses are deducted.

What these investments should be, is up to the individual, preferably backed up by good research or sound financial advice. For instance, you may decide that you want to own four paid-for properties by the time you retire, as this will provide enough rental income to support you for the remainder of your life. You now have a target to aim at, which allows you to assess your position once a year to determine whether you are still on track or whether some changes need to be made. Making lifestyle changes to meet your goals, or finding out that you are not on the right track financially is a daunting exercise for many, which is why so many of us make excuses not to do it.

However, there is no reason to get despondent. Most individuals' earning potential increases over their working careers, so they are able to contribute increasing amounts to their financial plan as they progress. Financial planning therefore also includes thinking about your career path, as your salary will determine which goals you are able to achieve.

No assessment of your personal financial situation is complete without taking a look at unforeseen events. This includes fire, theft, retrenchment and serious illness. Fortunately, all of these events can be covered through insurance, but it is up to the individual to ensure they are not over- or underinsured. The insurance needs to be aligned with the rest of your goals, so that you are able to continue down the financial path that you have mapped out for yourself without too much deviation.

Insurance is a grudge purchase because you are often paying money that you will never see again, but the consequences of not being insured can be dire. Therefore, adequate insurance should be part of any financial plan, even if it means cutting down on some luxuries to make it fit.

As the definition of retirement changes, 70 is becoming the new 60 and many people are seeing the value of continuing to work instead of sitting at home, as the advances in medical science allow them to enjoy their later years in excellent health. If you have a sound financial plan to back you up, you can reach this age with the luxury of deciding whether you want to work, see the world or do a job that pays less, but fulfils your passion.