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Approaching Your Personal Finances Like an Analyst

Matt Spillar

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Today’s post is a guest post from Howie Bick, the founder of The Analyst Handbook. The Analyst Handbook is a collection of 16 guides created to help current and aspiring Analysts advance their careers. Prior to founding The Analyst Handbook, he was a financial analyst.

Managing your finances can sometimes be a daily struggle. Whether it’s trying to find the right balance to save, deciding between going out to eat or eating at home, or trying to decide what to invest in, managing your personal finances is a multi-faceted task that’s affected by a variety of variables.

Companies large and small, hire financial analysts to try and find ways to make their companies more profitable, more efficient, and more effective. By analyzing and understanding what drives the numbers behind expenses, income, and free cash flow, they’re able to decide how to make the best decisions.

If you’ve ever wondered how to become a financial analyst, we’re going to touch on some of the ways they approach finances, and the tasks they find themselves doing. Maybe you’ll turn yourself into a self-made financial analyst…

Revenue Minus Expenses

The formula behind all cash flow calculations is revenue minus expenses equals profit or free cash flow. This equation categorizes and simplifies the various transactions that comprise of your income and expenses. All of your decisions and transactions will fall into one of these two categories, and will have the adverse effect on your bottom line.

Any money that is produced, generated, or received, will primarily fall into the income category. This includes your salary, any bonuses, any investments, and anything that brings in extra dollars.

The expense category is for anything that deducts money from the income you’ve earned. Whether it’s paying rent, shopping at the mall, eating at a restaurant, or spending discretionary money, expenses deduct from the income you’ve earned or generated.

By looking at your income and expenses like an analyst, you’ll start to evaluate and analyze all the transactions you made. You’ll start to see which are essential and have to be paid for every month, and which aren’t essential and can be eliminated. If you’re trying to maximize the amount of free cash flow or money in your pocket, like an analyst, you have to drill down on every transaction. This way, you’re fully aware of where your money is going. You can evaluate whether it’s something to cut back on, or if it is truly essential.

All analysts try to find ways to increase a company’s profitability, whether that’s figuring out ways to generate more income, or to reduce expenses. This can be thought of as “growing the gap.” Somewhere in that equation there are areas or transactions that you can eliminate or enhance in order to give you more money to save, pay off debt, and invest.

Allocating Resources to the Important Activities

Many people tend to spend time and money on areas that don’t produce much value, and especially much revenue. Of course, everyone has to live, and there are essentials like food, water, and shelter that no one can live without. But we often spend money on areas that bring temporary joy, or impulse buy products that we don’t need.

Analysts often try to find ways to allocate resources they or the company possess in an efficient and effective way. This means investing the resources they have, in order to make more of them in the future. This way, you’re able to be better off in the future, then you are today. By focusing your time, energy, or resources on revenue producing assets, you’re giving yourself more potential to earn additional income and utilize your time wisely.

Putting in extra time or money to learn a new business, investing capital into something that will produce a return or yield, or trying to build something that will produce income for you in the future, are all examples of what analysts do for companies on a daily basis. Given, it’s on a much larger scale, with much larger numbers, you can do the same by looking at your expenses and exploring new opportunities available to you.

Taking a Look into The Future

A lot of what analysts do is to project various assumptions, and take a glimpse into the future. They usually try to project how a certain situation, decision, or transaction is going to look down the road. Estimating various metrics and calculations allows them to have a glimpse into what might happen.

Whether that means evaluating a market, seeing what their earnings potential is looking like, or building in any safety’s or precautionary measures to prepare for whatever may come their way. Companies and analysts try to prepare for the future, by assessing what they might need, evaluating the amount of resources they have, and trying to prepare beforehand.

A lot of this is applicable to personal finances as well. Think about anything that might be upcoming. For example, an upcoming move to a new apartment, a change in commute for a new office, or a purchase you’ve been saving up for. A lot of these life events can be mitigated, and less of a stressor if you prepare in advance for them.

It’s much easier to prepare for something before it happens, rather than having to react quickly as it is happening. This is why building an emergency fund should be your first financial goal. It’s tough to know what’s going to happen in the future, but you can try to prepare for whatever may come your way.

Final Thoughts

If you’re struggling with your finances, and you’re trying to find better ways to handle them, it’s an interesting idea to try and treat them like a financial analyst. Thinking like an analyst can be incredibly effective. It allows you to take a subjective view and think about all the decisions you’ve made.

Remembering the essential equation behind all of business, revenue minus expenses, is one of the most important fundamentals behind all of financial calculations. Allocating resources to the most important areas is an effective way to reduce spending. Being prepared for what might be ahead is very helpful when it comes to your personal finances.

One thing I would like to make clear, having done this myself, is that you are still human. It’s all about finding the right balance between cutting back on the areas that aren’t bringing you value, while still living life to the fullest. Finding out what you truly enjoy and splurging on it after you’ve saved for a while is a rewarding experience. Regardless if you’re an analyst or trying to approach your finances like one, you need to remember that mistakes will still happen from time to time. The key is to not get discouraged and get right back on track.

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