Today I want to visit a subject that is just as important as the ability to make money online, perhaps more important in my opinion: controlling costs.

First, a really important concept…

COSTS exist before INCOME

Everybody starts life with basic costs (food, housing and clothing). The fundamental reason why you earn money is to cover these costs. They will not simply disappear if you stop earning money.

Of course, once you cover these costs, you’re free to create yet more costs in your life such as a car, a social life, better food etc. as Maslow’s trusted Hierarchy of Needs dictates.

The same is of course true for small businesses: Revenue does not start from day one, but costs often do.

So it makes a lot of sense to learn to control your costs, both personally and in business.

Why Focus on Controlling Costs

It’s much easier and faster to reduce your outgoings today, rather than increase your income.

For a small business, it’s just as important to improve your profit margins by sourcing cheaper packaging, postage, insurance, outsourcing, phone bills etc. then it is to increase your product sell price.

Here’s some examples that immediately come to mind as a I write this post:

Individuals:

• Quit your £30/month gym membership
• Switch to a bank with 0% overdraft
• Downgrade your phone plan
• Buy bulk food (rice, bottled water, meat to freeze)
• Avoid buying lunches in the city

Small Businesses:

• Print on both sides
• Use Skype instead of the landline where possible
• Chase invoices earlier

I could write hundreds of small tips to cut costs, but that’s for another article I think. It’s more important for you at this stage to understand that reducing costs is essentially the same as immediately earning more money.

Stop Haemorrhaging Money

I own an iphone – a wonderful work of art and engineering that never ceases to frustrate me – However, I am legally obliged to pay £30 a month as a priority before I buy food or pay my rent.

How wack is that?!… I am legally bound by contract to pay for a mobile phone BEFORE I feed my family.

Add to this car insurance, music, TV, landline etc. and very quickly it becomes apparent I have hundreds of pounds of costs before I have even bought my food or paid my rent!

Everyone – indivuals, families and businesses – needs to be very careful before they commit to regular payments, especially when unable to cancel at short notice.

When Your Costs Control You

This post was inspired by a movie I just watched, The Joneses, in which a man, Larry, kills himself because his monthly credit repayments are too much, leaving him unable to pay his mortgage or support his wife – oh yeah, spoiler alert!

Larry had a serious problem that he alone was responsible for – he allowed his outgoings to exceed his income.

He was undisciplined and shortsighted – just like most of us.

In 1850 Charles Dickens also gave us a lesson in how this way of life ultimately results in misery. He introduced us to a character called Wilkins Micawber, whose famous quote is enshrined in economics and popular culture as Micawber’s Law:

Annual income twenty pounds,
annual expenditure nineteen pounds nineteen and six,
result happiness.

Annual income twenty pounds,
annual expenditure twenty pounds ought and six,
result misery.

Of course in less eloquent language, this means those who spend more than they earn are on course for disaster – you can literally plot their descent into misery on a graph!

For those international visitors who are not familar with old British currency, you can think of it as:

$10.01 income
$10.00 expense
= happiness

$10.00 income
$10.01 expense
= misery

Micawber’s law will ALWAYS be relevant to both individuals and businesses. I know it’s super basic and a little patronising, but so many people fail to apply it to their lives or businesses.

Thanks for the Lesson, Dad…

You’re welcome. And tell your mother I said hi.

Joking aside, this may be the single most important post you’ll ever ready if you honestly apply this concept to the way you view finance.

Making more money doesn’t get simpler than spending less.