One of the trickiest parts of owning a start-up is learning to manage your finances. You have to control cash flow as you (hopefully) edge towards making a profit, stick to a budget, and build an emergency fund for the lean times. But it’s also important to ensure that your personal finances don’t crumble while you’re making sure your business finances are sound. Here are some tips to help you stay on top of your personal finances while your start-up takes off.
The most important tip is this: make sure that you are very strict about keeping your personal finances separate from your business finances. It’s important that you treat yourself as an employee of the business who earns a set monthly salary, and that you don’t use the business finances for your personal expenses. If you allow your business and personal finance boundaries to blur, and your business goes bust, you could be held personally liable for any debts. Having separate accounts and finances also makes things much easier when it comes to tax or if you were ever to sell your company.
You need to manage your personal finances as you would that of your start-up. You should forecast your finances, document your expenses, have a budget, understand what money is coming in, and how you're spending that which is going out. Look at how you are bringing in money and how you can make the most of that money – just as you should be doing with your professional finances.
It’s a good idea to find ways to pay off your debts. Make sure you have a solid credit history and don’t get yourself into any personal financial trouble. You might need to get a business loan to expand your business in the future. Start by tackling those credit accounts with the highest interest rates, and then move on to any student or car loans. If you have multiple, smaller loans, it’s a good idea to look into debt consolidation (but make sure you understand all the risks and red tape associated with debt consolidation).
Emergencies and unexpected costs creep up more often than we would like to imagine. It’s vital that you have an emergency fund stored away for those times. This fund should have approximately three to six times the amount you live off each month. This is useful for living as well as for your business, should you have months that don’t go according to plan. It will also ensure that salaries are paid and outstanding payments are met. When looking at savings account, look for those that offer higher interest rates and the option to withdraw cash immediately without penalties.
It’s all too easy to get swept up in the excitement (and oftentimes stress) of starting a new business, not to mention the daily highs and lows of life. It’s important, however, that during this time, you don’t neglect your retirement savings.Even if you have an uncertain or fluctuating income, it’s really important that you continue to put money away into a retirement annuity or investment account each month. You cannot afford to miss out on the benefits of compound interest.
We all know the drill: it’s important to diversify your portfolio. Even more so when you have a start-up. The reality is that with every exciting new venture comes the risk of failure. That’s why it’s particularly important to spread your wealth over many different investment options. That way, you have options if you ever want (or need) to expand your business, change direction or even close up shop.
Insurance is that incredibly frustrating thing that most of us don’t want to pay for, but couldn’t do without, should something happen. At the end of the day, it’s an important investment in yourself and in your business. Research which option works best for you, but make sure you take out health insurance (the best you can). You don’t want to be caught in a situation where you look to your business for money in case of a medical emergency. You also want to know that you are completely covered if anything more serious were to happen.
It’s important that you don’t overspend the minute your company starts doing better. In general, you need to make sure that you are not living above your means – both professionally and privately. As you would write up a budget for your business, you need to do the same for your personal finances and keep to that budget, no matter what. The minute you are able to start paying yourself more, your first priority should be to pay off your debts, up the amount you are putting away towards your retirement, and make sure your emergency fund is solid. Be wise with your personal and professional finances and you will set yourself up for success.
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