Before starting a business, it’s a good idea to get your personal finances in order. Too many ambitious entrepreneurs jump into the business creation game before they have stable financial footing in their own lives, and it ends up limiting their full potential.
Mastering your personal finances is a process that could take months, or even years in extreme cases, but the time you invest upfront could set you up for a much brighter future.
Why Personal Finances Matter.
Why do your personal finances matter when you’re starting a business?
There are several benefits of working on your personal finances first:
First, when your personal finances are in healthier shape, you’ll have a much better chance of getting a loan with favorable terms. You’ll have a selection of loans with lower interest rates, and you’ll be able to qualify for them easier. You don’t always want to take out a personal loan for your business, but it’s nice to have the option.
Mastering your personal finances also increases your personal risk tolerance in other areas. If you have a solid nest egg and a robust emergency fund, you can tolerate running a business whose revenue stream might be volatile.
Stress and dependency.
Don’t underestimate the role that financial stress can play in influencing your success as a business owner. If you’re exclusively dependent on a business as a means of generating income, or if your personal finances are hanging on by a thread, you’ll be too stressed to achieve your best performance.
Also, spending time cleaning up and improving your personal finances will imbue you with experience that you can carry into your business. Better financial planners make better business owners in many cases.
Reduce Your Expenses.
One of the best things you can do is reduce the expenses you face on a regular basis. If you’re spending less money every month, you’ll have tighter control over your personal finance goals, and you’ll be less dependent on any one source of income. There are many areas you can consider here, some of which are more complex than others.
For starters, you can try to reduce your home expenses. Moving to a cheaper area of the city could help you save hundreds, or even thousands of dollars a month. And if you compare home loan rates, you might be able to get a better deal on your mortgage. You can also choose to take public transportation or bike to eliminate your car-related expenses, or sharply reduce your spending on entertainment.
Minimize Your Debts.
You can increase your credit score and reduce your susceptibility to a financial emergency by minimizing your debts. Start by analyzing your current debts and liabilities; how much do you owe on your student loans? Are there unpaid credit card bills that are stacking up? Some debt, including mortgage debt, is considered “good debt” and is therefore not urgent to reduce. But before you start a business, you should at least have a plan in place for reducing debt associated with high-interest accounts, like credit card debt.
Establish an Emergency Fund.
It’s also a good idea to establish a personal emergency fund. This is a designated amount of money that’s set apart from the rest of your finances; you can tap into it whenever you’re short on money or to cover unexpected expenses that fall outside your typical budget. This buffer helps you make sure you’re ready for anything, and protects the rest of your finances from the impact of major unplanned expenses. For most people, a suitable emergency fund is just a few thousand dollars. However, you may want even more padding to reduce your risk further.
Start a Retirement Account.
Before starting a business is a great time to open a retirement account if you haven’t yet. Accounts like Roth IRAs offer impressive tax advantages to consumers who leverage them—and you can get started with just a few hundred dollars. If you’re starting a business, you won’t have an employer paying into a retirement plan for you, so it’s important to make independent plans for your own future.
Create a Backup Stream of Revenue.
More than half of businesses ultimately end in failure after just a few years. No matter how much confidence you have in your business idea or your skills as an entrepreneur, it’s important to have a backup plan in place. How will you make money if your business goes under?
With these financial strategies and habit changes, you can set yourself up to run a business much more effectively. Though it might force you to delay the start of your business by a few months, it will be worth the extra effort in the long run.