One of the first principles of entrepreneurship is that the company and personal finances can never be mixed. However, some company owners go so far in the opposite direction, wasting too much time running their business, focusing on their business, and reinvesting money into their business that they ignore their personal finances.
You’ve probably seen founders like this before—they’re smart businesspeople, but they don’t manage their own capital well.
A surprising number of company owners, who are among the toughest workers on the planet, get a little careless in their personal finances: they overspend, don’t save enough for retirement, and make unnecessarily risky investments (or make the mistake of parking their money in the bank and earning 0 percent interest).
It helps to be smart about your personal finances if you’re a company owner. Here are few helpful tips and tactics for making smart financial decisions in your personal life. Indeed, you will discover that improving your personal finances will assist you in becoming more competitive in your company.
- Put money together for an accident.
According to financial advisors, having three to six months’ worth of living costs (after taxes) in an emergency savings fund is a safe rule of thumb. Are you up for it? If you own a corporation, you will want to create an even bigger emergency fund in case your company experiences a slowdown or has seasonal cash flow variations.
What if you lose your most important customer and had to reduce your salary? How long do you think your personal emergency fund will last? Hold the emergency fund in an FDIC-insured cash bank account rather than losing money in the bond exchange or locking it up in long-term CDs. You aren’t looking for a high return on this money; you just need it to be available in an emergency.
Getting an emergency fund would give you more peace of mind, helping you to make more informed business decisions. You’ll be able to focus more on running your business if you feel your family is safe in the event of a financial tragedy (car crash, big house repairs, natural catastrophe, medical bills).
- Take care of your personal credit.
A small business’s lifeblood is credit, so make sure your personal credit is in decent condition as well. And sure you pay your bills on time. And if budget is scarce and you can only afford to make a minimum credit card charge, it’s preferable to skip a payment or pay late.
Often, keep an eye on your credit usage level, which is the amount of the total credit limits that you’re using at any given time during the month. If you can keep this ratio below 30%, you’ll have a higher credit score and have an easier time getting personal loans accepted.
Having better personal credit can also benefit your business, particularly if you’re still creating credit in your company’s name. Keeping track of your mortgage balances and due dates will also help you build a solid financial base.
- Put money together for retirement.
Small business owners also reinvest a large portion of their earnings back into the company, but there are some excellent ways for them to prepare for retirement. Even if you don’t have any workers, consider setting up a SEP IRA or other tax-advantaged retirement savings account for your company.
You can find that as a self-employed citizen, you can save more money for retirement than you will as an employee, based on your salary and other qualified factors.
Saving for retirement will help you diversify your investments into a broader range of investment opportunities, such as stocks, shares, ETFs, and money market mutual funds, rather than pouring all of your earnings back into your company. Your organization is now your most valuable commodity. Your income and insurance are already reliant on your company. You don’t have to put every penny back into your company; you can also invest in a wider variety of opportunities.
- Invest in accordance with your risk profile.
Make sure you’re invested in a diversified portfolio of investments that are suitable for your time span and risk tolerance after you’ve begun preparing for retirement. If you are still relatively young and have many decades until retirement, you should focus your portfolio on stocks.
For example, an old asset allocation rule of thumb was that you should divide your age by 100 to calculate the proportion of your portfolio that should be invested in stocks. So, if you were 40 years old, you would deduct 40 from 100 to get your portfolio, which would result in you spending 60% of your money in stocks and 40% in bonds and currency.
However, based on your financial priorities, you will choose to devote a higher proportion of your portfolio to stocks so that you can benefit from their long-term growth prospects before you retire. Stocks are expensive, but they usually have the highest long-term return opportunities.
- Seek specialist assistance
For more detailed guidance, contact a financial adviser; this column does not constitute legitimate financial advice, but it can help you work about some of your choices so you can make well-informed financial decisions.
You would be more likely to be able to concentrate on running your business with a relaxed and optimistic outlook if you can boost your personal finances—with a solid emergency fund, good personal credit, and a diversified portfolio of investment funds apart from the equity that you own in your business. And for company owners, who are among the busiest individuals on the planet, getting financial peace of mind can be absolutely invaluable.
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