So you have got yourself a new business, learn how to protect your personal finances like a pro and secure the future success of your business venture. In this article, we will talk about the steps to protect your personal finances through personal financial management.
Starting your own business is fun, exciting, and overwhelming.
You might be filled with fear of losing it, wasting the opportunity, or doing something that ruins the business.
Never worry, your fears are normal.
Every new business owner worries about the same things as you do.
But it doesn’t mean, you shouldn’t plan ahead.
However, here are a few things you must do to manage your risks.
One of them is protecting your personal finances.
There are many personal finance courses; you can use to learn personal financial management.
However, knowing how difficult it is to manage funds as a beginner in entrepreneurship, we decided to share five steps with you.
These steps will include insights from these courses and help you separate your individual assets from your business.
Why separate your personal finance from your business?
Your business is a new entity. No matter how lucrative the market or how fascinating your ideas, your business carries a huge risk. Bear in mind that 82% of businesses fail because of insufficient cash flow, usually caused by a lack of organizing personal finances. Another reason for failure is the inability to adjust to expansion.
Besides securing your personal finances, protection can also help you enjoy tax benefits. It can equally help you build business credit as well. Moreover, this separation will also boost your professional image and help you avoid audits from the IRS.
Your finances are crucial to your business success. When you separate your business finance from personal life, you will have a full picture of how successful your business is. You will be able to plan and do all it takes to make sure your business becomes a success.
1. Build an Emergency Fund
As a business owner, you must learn to “pay yourself first.” This money should be drawn from the income you receive every month
Place the money in an emergency fund in preparation for the future. Bear in mind that every business has lean months from time to time.
These emergency funds will maintain your cash flow in those months. That way, you won’t have to draw money from your personal finances to keep your business afloat during leaner months.
2. Your business is a separate entity
You must learn to make sure that you do not mix your business funds with personal funds. These can bring disaster if the business fails tomorrow and there are still creditors to pay.
Open a separate business account but do not stop at that. Make sure you never use funds for your business to buy groceries because it is simply the shortest possible funds at the time.
Anyone who sues your business might also point out this fact as a way of establishing that you and your business are the same.
Respect your business accounts and formality of your business as an entity. Also, be diligent about your business financial records.
3. Build your Savings and Retirement Account
According to Murawski, “time is your biggest asset.” In this case, it also means placing money in retirement and saving for the future.
As an entrepreneur, you must handle these two key investments to build wealth in the future. Your savings is a priority account if you must gain financial freedom in the future.
Adjust your income and budget
Your expenses will change with your new business. You need to create separate budgets for your business and personal issues. Concerning personal expenses, you need to be prepared to cut them down, until you can pay yourself good money.
Create a list of your essential expenses (transportation, housing, food, insurance) and discretionary expenses (clothing, vacation, dinners out, etc.).
Match them to your income from other sources as well as real income within the first months of your business. Make sure you have a complete understanding of your upcoming expenses. You must also understand where and how to make sure you are covered while putting away savings and retirement funds.
Read more: saving for retirement
5. Keep a tight hold on Debt
Use loans with caution. We all know that loans can smooth your way but you should not rely on debt to grow your business.
Look for other ways to improve your cash flow and grow your business. Another rule of thumb while building your new business is to make sure you keep personal debt at a minimum.
With the right planning, you can protect your personal finances effectively.
6. Build diversified Income
Apart from your new business, place your funds in other lines of income. These include having a stable job to support you as you grow your business, stocks, or other investments. Diversification is important in personal financial management as it spreads your risks.
Never put all your eggs in a basket, no matter how profitable or attractive the basket looks.
Alternate investments, provide room so you can expand easily in the future, or restructure your business without bringing in your personal finances into the picture.
7. Add a second person
You can also protect your personal finance from being a subject of discourse during claims by adding a second owner.
Bear in mind that single-member LLCs may not be enough to build a case against disputes. You can add a non-spouse owner to an LLC and build protection over your personal finances.
8. What kind of insurance do you need?
Personal financial management includes managing and hedging against risks. Business comes with its set of risks. You probably already have medical and life insurance.
You may need insurance for your business property, and of course disability insurance. Because you own your business, the success of your business may depend on your health.
You need to be prepared for unforeseen circumstances in the future.
Protect your personal finance and you will be able to build a more successful business while achieving financial security.
It might look challenging at the beginning but in no time, you will see how these important little steps bring remarkable impacts on your net worth.
Take full control of your personal finances by learning personal financial management and you will be increasing the chances of long-term success for your startup.