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Maintaining Your Personal Finance While Starting A Business

A note from InvestEd:

InvestEd is a startup, financial advising firm based in downtown Baltimore. We’re on a mission to bring smart money to everyone, and have removed the complexity around saving and investing money. InvestEd has no minimums or hidden fees, and we’re not tied to big banks. We believe in technology, and taking the long-view on investments. We really want to help ALL people achieve financial independence. 

-Genti Cici

One night earlier this year, I sat down with a friend of mine, who was starting his own business. He’d done his homework on the business’ financials, and he’d done a pretty good job estimating cashflow vs. revenue vs. profit. But as we talked further, there was an element of starting a business that I could see he hadn’t thought much about: how it would affect his own personal financial situation. We talked a lot about this.

For the Startup Soiree community, I thought parts of this discussion would be really helpful, so here they are in a nutshell.

The Safety Net

In general, I tell the typical InvestEd client to carry a cushion/safety net of 3-6 months of expenses, for any unforeseen circumstances. But for new entrepreneurs starting their own business, it’s good practice to have at least 1 to 2 years of your expenses in savings before you make the leap. Even if you think your business will make money right away, starting a company comes with all kinds of surprises: unplanned renovation costs, delays in product launches, additional legal fees. You’ll want the financial flexibility to handle these up’s and down’s, and keep your current lifestyle as close to normal as possible. Believe me, you’ll be under enough stress as it is.

Shrink Your Expenses

Getting your expenses down to a minimum is key to making your safety net last longer. The rule of thumb is no more than 28% of your gross pay should go towards a home payment, and no more than 36% to home + recurring payments. Of course, if you don’t have any income because your business is just starting, all of your expenses must come out of savings or revenue from your new business.

So, plan accordingly. I won’t ever tell someone to change their lifestyle when starting a business, but what I will say is that all entrepreneurs need to be realistic and strategic–can you really handle all of your expenses while you get your business off the ground? Make sure your answer is a firm ‘yes’ when you get started.

Protect Yourself

Even if you’re going to be an army of one when you start out, always form either an LLC or corporation to ensure you keep your personal assets protected. The idea is to keep your personal money and holdings away from your business. One easy but essential step is to use business-only credit cards and bank accounts. In addition, spending on your business may be tax deductible, so separate your business expenses and keep good records for tax time and beyond.

Life Changes

Many founders that I talk to, don’t consider the effect that major life changes will have on their business. Getting married, having children, taking care of other loved ones–all of these things can affect an entrepreneur’s mind, as well as his/her financials.

Make sure you understand the ramifications of these big life events, and as much as you can, plan for them in advance. If you’re in a relationship, you should talk about the financials of your venture and what impact it will have on the two of you. Believe me, there is nothing worse than having to decide between the wedding of your dreams and keeping the lights on at your new office. This is why the savings guidelines I mentioned earlier are so important.

For Those About To Rock

Building a business is an amazing journey. It can reward you in ways that you never dreamed. Most people these days think of startups as high-flying tech companies with billion dollar valuations. Some of those are out there, for sure–but I think it’s good to remember that most of the businesses around us that we use every day, started as someone’s idea or dream. Their owners saw a need, hatched an idea, pulled together resources, toughed it out, and made something real and valuable. I salute everyone who is inspired, gutsy, and resourceful enough to go strike out on their own. It’s a trip almost always worth taking. I wish you the best on it.