Owning and operating your own small business is an accounting feat in and of itself. Balancing the books, juggling payments and payroll, and making ends meet can be difficult for even the most financially savvy owner. With the fiscal demands of a startup or small business in the forefront, entrepreneurs may be at risk of failing to build their own personal safety net. Saving and managing your finances will benefit you both in the short and the long term.
Keeping personal finances personal
Startups are marked by unexpected expenses, especially in their early stages. Many entrepreneurs use their own money as the initial capital and treat it as an investment. They may also find themselves dipping into their personal accounts when a pressing bill comes up or profits come up short, setting a dangerous precedent as they intertwine their personal finances with startup capital. Keeping your personal finances personal is difficult, especially when your startup is a one-man show or you are struggling to secure outside funding.
In an ideal world, the only time your personal and your business finances would meet would be when you were depositing your paycheck into your personal account. But, unfortunately, this is not always the case, especially with owner-operators.
Having your personal finances in order is essential for everyone, whether you’re an entrepreneur or not. Keeping your personal finances separate from your business funds lends legitimacy and credibility to your business, and makes things much easier during tax season.
Take stock of your current fiscal state
Are you running up your credit card? Have you neglected your student loan payments or are you debating whether to refinance your home? Knowing exactly how much is going in and out of your accounts is essential knowledge if you’re looking to save and build your assets. While you may be familiar with budgeting for your business, you may be neglecting your budgeting at home. Entrepreneurs at startups often have erratic payment schedules, and may be unaware of how much money they’ll bring in one month to the next. This makes planning and budgeting difficult, but not impossible.
A financial professional, such as an accountant or a financial planner, can help you take a look at your current fiscal affairs, and help you to build a plan to reach your financial goals. The funds leaving your account should always be lower than the amount you’re taking in each month. When your income is variable, it’s best to keep your spending on the low side. You don’t need to live like a monk, but you need to budget, taking into account lean months as well as profitable ones.
Pay down existing debt
Personal debt is a staggering problem in America. We have been hearing about the coming Great Wealth Transfer for decades, and have yet to see it come to fruition. Inheritance and accumulated wealth will flow from the older generations to the younger, and can help alleviate some of the crushing debt many of us take on due to student loans or other obligations.
But it hasn’t happened yet. For the first time in decades, wealth has actually reversed in its directional net flow. A recent report from The Economist found that younger generations around the world, namely Millennials, are taking on the fiscal responsibility of caring for multiple generations as the global population ages. In conjunction with trillions of dollars of student loan debt, Millennials are markedly conservative with their money. A report by UBS found their saving, spending, and investing habits to be more akin to the WWII generation that came of age during the Great Depression than their parents or other generations in respect to risk tolerance.
Take a cue from younger generations, who are also more likely to have an emergency fund in savings and more diversified assets, and tackle any existing debt. There are two popular methods to pay down debt: snowball and avalanche. Whether you tackle your smallest balances first (snowball) or those with the highest interest rates (avalanche), paying down your debts will allow you to save more.
Establish an emergency fund
According to a recent study from Bankrate, 60% of Americans do not have enough in savings to cover a $500 or $1,000 unplanned expense. Liquid cash in a rainy day fund needs to be on your priority list. Having your assets diversified in different forms is always a good idea, but maintaining a rainy day fund of cash that you can easily access can save you a lot of headaches. Treat this account as an emergency fund that can cover unexpected expenses, such as a car breaking down, and do not dip into it unless absolutely necessary. Rather than putting unanticipated emergency expenses on a credit card, which can have long term implications if you fail to pay it off immediately, this fund can help to keep unexpected situations from derailing your savings.
Don’t forget about retirement
Saving for retirement is a challenge for many people. It’s difficult to plan for your needs when you’re 30 or 40 years away from needing it. Many entrepreneurs are without the 401k options that those in larger workplaces have the benefit of partaking in, but this is no excuse to neglect saving for retirement. Philip Taylor, the founder of FinCon, suggests, “A good starting point would be to open up a Roth IRA and contribute the max each year. If you want to do more, consider a SEP IRA or Solo 401K account, which will help you shelter a lot of your business income from taxes.” Saving a portion of your paycheck each month, even if it’s a small amount to begin with, is often many people’s first place to start. Here, a financial planner can also help you to make a plan for your future.
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