A lot of people are great at business. They have fantastic ideas, and they know how to execute them. Many of us entrepreneurs have a firm grasp of modern marketing, how to create a thriving brand, and how to stay ahead of the competition.
However, some entrepreneurs have serious issues when it comes to personal finances. For these business owners, personal finance takes a back seat to business, and this has the potential for money woes sooner rather than later.
Natalie Cooper, an editor at Banking Sense, said “Entrepreneurs understand the importance of managing their businesses effectively for the greatest success. Unfortunately, some of them do not apply the same tactics to their personal finances, which can create problems that might eventually spill over into the business. It’s crucial for business owners to keep their personal finances in good shape, just as they do for their business.”
Not putting as much thought or attention into our personal finances will cause problems. Here’s how to make things easier…
Avoid Mixing Personal Debt and Business Expenses
According to the Wall Street Journal, close to 60% of small businesses with employees took out loans using personal guarantees to secure business debt during the pandemic. When we have to take on personal debt to help keep the businesses going, it’s easy to understand the panic when things don’t seem to be working out.
Co-founder of Mile High Run Club in NYC, William Heath, said, “It weighs on me a lot” when referring to the $1.5 million personal guarantees he and the other co-founders have on three boutique gyms. While it may have seemed necessary during the pandemic, the reality is now coming back to potentially bite them. Heath and business owners in similar predicaments agree that it doesn’t seem fair, but they now have to deal with the fallout.
Plenty of other business owners like us have done the same thing, even before there was a pandemic. However, mixing business and personal finances tends to be a bad idea. Too much could go wrong.
A Personal Emergency Fund
Setting up an emergency fund is one of the first things most financial experts recommend whether you are a business owner or not. It’s recommended that you have between three and six months of living expenses, after taxes, in emergency savings at any one time.
The more the better, particularly if you own a business. If your business suffers a downturn, for example, you could always take a temporary pay cut or opt to forego taking money from the business. Use the emergency fund instead.
It’s a good rule of thumb to put as much as possible into the emergency fund each month. The amount varies, of course, from one person to the next. The larger the fund the easier you can rest at night even if your business hits a few slow months.
Manage Personal Credit and Debt
Keeping personal credit in good shape is essential. Missing payments and making late payments will put your credit score in jeopardy. Even when you are short on cash, it is a good idea to make at least the minimum payment on your credit cards. This is better than making late payments or not paying at all.
Try to keep your credit utilization ratio below 30%. This can help to improve your personal credit score and make it easier for you to get approved for personal and business loans.
Proper handling of credit and debt allow entrepreneurs to have a stronger, stable base for both their personal and business finances.
Create a Monthly Budget
Setting up a budget can help you to become better disciplined with your finances. You don’t want to go without the things you need – or the things you deserve for all of your hard work. But… you also want to learn how to create and use a budget in both your business and your personal life.
Developing a budget helps you stay on track with your expenses each month. You can see where money is going out, where it is being wasted, and areas where you might be able to save.
Plan for Retirement
Just as it is a good idea to put money into an emergency fund, it’s also smart to start planning for retirement. Consider setting up a SEP IRA (Simplified Employee Pension) or another retirement savings plan that can work for your business and make sure your personal finances are cared for down the line.
The SEP IRA is a good option for sole proprietors, and the account tends to be easy to open. It offers low fees and contributions to it are tax deductible. The cap for this varies by the year, but in 2022 it’s $61,000.
The Savings Incentive Match Plan for Employees (SIMPLE) IRA is another option. This works well if you are running your own business, but you would like to expand. You can continue investing even after hiring employees, but you will need to match your employee contributions up to 3% of their pay. The contribution limit for 2022 is $14,000 per year, but those who are 50 and older can contribute an added $3,000 per year.
If you are going to make investments, it’s a good idea to choose a diversified portfolio that will work well for your risk tolerance and time horizon. Find investment solutions that are right for business owners like you.
Talk to a Financial Advisor
Of course, if you have trouble with things like creating a budget, setting up a retirement plan, or finding the right investments, talk with the professionals. Financial advisors can help with all of your personal finance needs.
These are some of the best and simplest tips to keep in mind when you are operating your business. Don’t neglect your personal finances and always be careful when putting personal money into your business. It’s often difficult to get it back.
Who’s Your Peer Advisory Group?
Who do you bounce ideas off with, get expert insights from, and share resources with?
Are you ready to connect with like minded Business Owners, Founders, and Entrepreneurs who’ve “been there, done that” ?
Important Disclaimer: We here at the Bay Area Mastermind aren’t attorneys or financial advisors or tax professionals. You should discuss any financial decisions with your advisors and experts.