Small business owners share many similar characteristics—such as being independent, self-driven, having an entrepreneurial spirit, and prioritizing freedom and autonomy in their careers. The freedom found in being a small business owner can be rewarding, but at times also overwhelming due to the responsibilities of both personal and business successes falling on your shoulders. However, being self-driven enough to have your own business certainly has its payoffs and with careful planning and consideration, you can ensure long-term success in both your personal and business finances.
First, it can be beneficial to consider the common mistakes small business owners make that can make personal financial planning difficult.
- Combining personal and business finances
- Having too little of a cash reserve saved
- Not being adequately insured
- Not planning for retirement
Here are some tips to ensure that you are making conscientious efforts to plan your personal finances which will, in turn, allow you to make better business decisions.
Avoid merging your personal and business accounts
Learning to be intentional about keeping your personal and business accounts completely separate will better you as a business owner. Not only will this help you organize your finances for tax purposes, but it will also help you to track your business spending and identify areas for improvement in your business monthly expenditures (as well as your personal spending as well). Avoid putting costs such as business travel expenses on your personal credit card (even if you get points or rewards for doing so) and vice versa. This will guarantee that you have a more accurate summary of your spending habits. There are many ways to ensure that you are keeping these accounts completely separate to make things easier on yourself in the long run.
Build up a cash reserve
You might be familiar with the recommended financial advice to keep about six months of emergency savings built up. Experts suggest that having this amount of a cash reserve can protect you from unexpected job loss, a major repair that you may need, or a large unforeseen medical bill that you might incur. Having six months of living expenses in a savings account means that you don’t have to put a large unexpected amount of money on a credit card— or even worse, let a bill go into collections.
As a small business owner, it could be beneficial to have even more of a reserve built up because unlike individuals working a salaried job, you are more likely to experience fluctuations. For example, if you were to lose a large client, there might be a long period of time where you need to stay afloat without tapping into additional business funds or using a personal credit card.
Obtain enough insurance
As a small business owner, the independence and autonomy you have over your future is unmatched. When working in a salaried position, you are usually guaranteed a set salary and safeguards provided by the company as additional benefits. The main safeguards that are offered in most traditional workplaces that are also important to secure as a business owner are health insurance, life insurance, and disability insurance. While it can be tempting to forgo some of these coverages, consider accounting for the cost of these insurances when determining a price for your service or product rather than skip out on them altogether.
Even though purchasing health insurance privately can be more costly than obtaining it through an employer, it is still important to look into and factor into your monthly expenses to ensure that you are protected in an unexpected event. While you might not need the most premium and comprehensive coverage, having some kind of health insurance can protect you from a large incurred medical bill. Additionally, when determining the type of coverage to secure, it is important to remember that as a business owner, striving for optimal health is important for the future of your business so try to be diligent about attending preventative appointments.
Many employers usually provide some kind of life insurance coverage for employees as part of their benefits package. As a small business owner, securing a life insurance policy on your own with adequate coverage is extremely important, especially if you have family members that depend on your income to pay bills. Consider a term-life insurance policy that would cover 10-12 times your annual projected income as well as enough to cover your debts to protect your family from financial hardship. A term life insurance policy is usually less expensive per month and will guarantee coverage for a set amount of time. Once the needs of your business change or you have recovered from any debts, look over this policy to make sure that it still works for you.
As a business owner, you are most likely the key person in determining the future success of your business, which is why securing disability insurance policy is a critical step to take to protect both your personal and business financial needs. There are two types of disability insurance– short-term and long-term. Short-term disability insurance subsidizes your income for a short amount of time whereas long-term disability insurance provides a subsidized amount of your income each month for a longer period of time should you become disabled and unable to work.
Plan for retirement
Depending on where you are in your business, you might have plans for retirement or already have saved for retirement from previous employment. Maybe retirement is a long way off, but with the responsibility of saving for retirement on your shoulders, it is important to have a plan to ensure that you have an exit strategy when the time comes. There are different types of retirement savings plans for small business owners depending on your specific needs so consider researching your available options before making contributions to a retirement account.
While it can be easy to put all of your efforts into planning and strategizing for your business, remember to also be diligent about managing your individual finances to ensure financial security both in your personal life as well as your business.