When you’re a business owner, it’s easy to feel like your business is your financial life. You’re so wrapped up in the financial success of your work that it’s easy to blur the lines between your business and personal finances. For some, this might mean dipping into your business account to cover groceries, for others it might mean using your personal savings to make a large business purchase - like a laptop, or a new software to help streamline your processes.
Investing time and money in your business is somewhat of a given, but it’s incredibly important that you work toward separating your personal financial life from your professional accounting. It’s not easy to do, but the financial protection you’ll end up giving yourself is well worth the effort. So, how can you insulate yourself from letting your business bleed into your personal financial plan?
Ramp Up Your Savings
The first and best way to protect yourself against an unexpected business expense is to ramp up your savings - both for your business, and for your personal life. It’s a good idea to have at least a few month’s worth of expenses socked away as an entrepreneur. Take a look at your accounting - what do you spend money on each month? Do you have product you’d need to buy to keep the business going even if sales were down? Do you have team members you need to pay even if you lose a client? Jot down all of the expenses that are absolutely necessary to keep your business running for 3-6 months if you lost all of your revenue, and make it a goal to save that amount in an account that’s earmarked for business-related emergencies.
Then, you’ll need to do the same for your personal finances. List out all of your living expenses for one month. This might include:
- Rent or a mortgage payment
- Cost of travel if you’re living a nomadic lifestyle
- Utilities (if applicable)
- Transportation costs
- Ongoing medical expenses
Your goal should be to have a minimum of one month’s worth of expenses in a separate personal savings account in case you suddenly lose your income through your business, or you run into an extra-big, unexpected expense that your normal income can’t cover. Once you have one month saved, work to build up three months worth of expenses, then six, then twelve. As a business owner, you need more protection than the average bear, because your income is a little bit more volatile. Continue to make savings a priority even after you feel you may have “enough” set aside.
Minimize Your Debt
Being in debt is a huge drain on your energy and your finances. Whether your debt is personal, like student loans or credit card debt, or professional, like a business loan that you took out to launch your latest venture, you should make it a goal to get rid of it. The less liabilities you have, the more likely you’ll be able to protect yourself in the event of an emergency. The last thing you want is to lose your income source, but still owe money on debt that you can no longer repay.
You can tackle debt repayment in a few different ways. First, you can use the “snowball” method to repay your debt: You focus on paying off small debts first, and roll those monthly payments toward your bigger debts as you continue to pay things off. Second, you can create an interest-based debt repayment plan where you list all of your debts in order from highest interest to lowest interest, and pay them off in order.
Think Carefully Before You Spend
As a business owner, it’s wise to keep your overhead low - both personally and professionally. Before you take on a new expense either in life or in work, you need to think carefully. Although your revenue may seem consistent right now, you never know when the tides might change. Most every business owner has experienced a period of financial hardship, and you don’t want yourself to feel overwhelmed and underwater as a result. Before you choose to take on a business expense, or agree to a large personal expense, think it through. Will you be able to afford this even if your income or revenue disappears overnight? Will this expense dramatically improve the quality of your life, or your ability to run your business? Knowing what you own and why you own it is key for everyone, but it’s especially important for a business owner.
Finally, using a separate bank account specifically for business spending will help keep the money "physically" separated from your personal money. This keeps your accounting easier, and cleaner, which should save you (and your accountant!) time, headache, and money come tax time. Keeping funds separate also helps protect you if an auditor wanted to take a closer look at your business finances.
Seek Help From Someone Who Gets It
At New Heights Financial Planning, we’re business owners. We also live a nomadic, travel-focused lifestyle. We understand the financial frustrations you’re going through, and we want to help you develop a unique strategy to achieve your personal and professional financial goals. Talking to someone who understands exactly what you’re going through can help you to keep your business and personal finances distinctly separate from one another, which will put you on the path to financial success. Want to get started creating your plan? Contact us today to learn more.