Webinar Recording: J.D. Roth on Becoming Your Own CFO

By Leo Babauta

The Awesome Finances webinar was held by my friend J.D. Roth, one of my favorite all-time personal finance writers.

J.D. gave an amazing presentation … see the notes below, and the recording below that.

Be Your Own CFO presentation for Zen Habits

BACKGROUND/SOCIAL PROOF
* I wrote Your Money: The Missing Manual. Wrote the “Your Money” column for Entrepreneur magazine. Wrote an ebook about how to “Be Your Own CFO”.
* Best known for founding GetRichSlowly.org in 2006 to help myself get out of debt and to share what I learned with others.
* Over the past decade, I’ve paid off my debt, built savings, and sold my business.
* Bad beginnings: Parents poor with money but good with business. Me too. Why? We treated personal money different than business money. I decided to manage my personal finances as if I were a CFO. It worked.

CORE IDEA
YOU are the boss of you. YOU are in charge of your life and your money and your happiness. If you want things to change, YOU have to do the work and make the changes. Nobody cares more about your money than you do. Your attitude must be, “The buck stops here.” You must be your own CFO.

What do I mean? CEO is public face of business, but CFO manages things behind the scene — especially money. I have a lot to say on this subject but not much time today. (See moneytoolbox.com for more info.) Let’s focus on three key parts of my philosophy:

  1. Craft a mission statement.
  2. Arrange your life to reflect this mission.
  3. Boost your profit/savings to achieve your goals more quickly.

CRAFT MISSION STATEMENT
As I grow older, I’m less concerned with setting lots of goals. That said, I do think it’s important to be clear on what your personal mission is.

Companies have mission statements to define their purpose. Many folks think profit is the purpose of business. It isn’t. Profit is secondary. Profit is like food and water. You need food and water to survive, but food and water aren’t your purpose. Similarly, businesses need profit to survive, but profit isn’t the purpose of a successful business.

Examples of actual business mission statements:

I think people should have mission statements too so that they can make better decisions with time and money.

My mission statement: Be the best person I can be, both physically and mentally. Sample all the world has to offer. Use my skills and experience to share what I learn with others.

Note there’s nothing about having a fancy car in my mission statement, so I don’t drive a fancy car. Nothing about owning a big home, so I don’t own a big home. Instead, I’ve tried to make my life match my mission. I travel. I take classes. I spend money on personal trainer. I devote my time to reading and writing.

How do you find YOUR purpose? Big question, lots of answers. All sorts of exercises to help you do this. Here’s one. Make time to answer these three questions. Be serious and sincere.

  1. Imagine you’re financially secure. You don’t have to worry about money anymore. What would you do with your life and time if money were no object?
  2. Now imagine you have your current life and money. Your doctor tells you that you have only 5-10 years left to live. You won’t suffer, but you’ll die suddenly in a few years. What would you do with the time remaining?
  3. Finally, imagine doctor shocks you with news you’ll die tomorrow. In 24 hours, you’ll be dead. What did you miss in life? What did you not get to be or do?

Use this exercise — or others like it — to help craft a personal mission statement. Then use this mission statement to develop a plan of action and to organize your life and finances.

ME: Based on my mission plan, I do Crossfit. I’m doing a year-long RV trip. I do presentations like this. I plan to produce a series of ebooks giving money advice. Etc.

ARRANGE YOUR LIFE TO REFLECT YOUR MISSION STATEMENT
After you have a mission, re-arrange your life to pursue that mission. This will be different for different people.

Because everyone is different, tough to give general advice. That said, there are some common steps.

  1. Organize your time. Make time for your money and your mission. You must make time for what’s important. If you don’t, nothing will change.
  2. Organize your space. Make space for money management. Dedicate a desk or drawer to finances.
  3. Optimize and automate. Get rid of unused or extra accounts. Find better accounts. Don’t just stick with what you have. (Tell story of keeping $5/month bank account because it came with “free” Frisbee.) KEY POINT: Automate good behaviors, create barriers to bad. Make it easy to do the right thing.

Final step: Budget. Everyone hates budgets, even me. But successful CFOs have budgets for their businesses, and millionaires have them for their home. Key? Don’t micromanage. Use a Big Picture budget instead of a detailed one.

Balanced Money Formula from “All Your Worth”:

This is your initial target. You’ll probably be out of balance at first, but rearrange life to meet this Balanced Money Formula. Your goal is to get as much into savings as possible. Why?

Key to entire “Be Your Own CFO” philosophy: Savings and profit are the same thing. In business, we call it profit. In personal finance, we call it savings. It’s all just what’s left over of income after expenses. Just as a company works to boost profit, you should work to boost savings.

How much savings?

Most advise 10%. Balanced Money Formula says 20%. These are fine, but you’ll achieve goals faster if you increase profit even more. I meet many people who save 30% or 50% or even more.

Quick example:

The more you save, the more time you can take off. In other words, the sooner you can retire or achieve your other goals. The bigger your profit, the better able you are to pursue your mission statement.

75% saving impossible? NO! I meet people all the time who do this. They’re quiet though because if they talk about it, people complain. So, how to boost profit?

BOOST PROFIT WITH BIG WINS
The key to achieving high personal profit is to focus on Big Wins. Not every path to profit is equal. Some are more or less difficult. Some have greater or lesser impact. Most financial advice centers on easy stuff with small payoff: clipping coupons, using library, etc. All good, but you’ll make slow progress.

Instead, put effort into high reward stuff. Because there are so few Big Wins, it’s important to nail them. If you get the big stuff right, you don’t have to worry about the small stuff. Three biggest: Home, car, job.

  1. Pay less for housing. Biggest expense. Most Americans spend 1/3 budget on housing. No amount of coupon clipping can match cutting housing costs. In 1970s, DTI limit was 25%. In 1990s, 36%. In 2000s, 41%. Old ways best. Aim for 20-25% budget on housing. Okay to rent. Choose areas with low cost of living. Don’t “buy as much home as you can afford” — but minimal comfortable. NOTHING ELSE CAN BOOST PROFIT SO MUCH!

  2. Trim transportation. Second biggest expense. Most Americans spend 17% of budget on transportation. AAA says 60 cents per mile or $9000/year average. You could cut that to zero today by selling vehicles. Probably unrealistic, but most can drive much less. Cut driving in half, average American earns extra $400 per month. How? Gas efficient vehicles. Buy used instead of new. Live near work. Walk, bike, take bus. Benefits to health too.

  3. Income. Can only cut costs so far, but income is theoretically unlimited. Negotiate salary. Work overtime. Take second job. Better, go back to school. Start a side business. Sell stuff you don’t use.

These three things are BY FAR best way to boost profit: house, car, job.

CONCLUSION
A few other great ways to boost income:

All of this is really about psychology. Smart money management is more about mindset than about math. Math is easy. Mastering impulses and emotions is hard. Important to develop internal locus of control.

Watch the video below or download the mp4 video file to watch on your device/computer: