One of the biggest challenges of starting a new business is ensuring its financial viability as you work towards making it profitable. If your personal finances are a mess, your business won’t fare much better. The last thing you want to worry about when trying to focus on building your business is debt or poor choices coming back to haunt you.
Before taking on the challenge of entrepreneurship, here are a few things you can do to get your personal finances into shape.
Make debt reduction a priority
Tackling debt makes sense for a lot of reasons. In addition to the associated stress, you risk damaging your credit rating should you ever find yourself struggling to make payments. This could severely hurt your ability to borrow the money you need to grow your business in the future.
Focus on eliminating debt with the highest interest rates first. This usually means credit card debt, so make this your number one priority. If you have student loans, these should be next on your list. If you have multiple loans, you may want to consider debt consolidation, but there are risks in doing this. The interest on consolidated debt may be lower, but the repayment term is usually longer. That’s how they make money. Do the math first to figure out what makes sense.
Scrutinize your spending habits
Now is not the time to go out and buy a new car or find new ways to accumulate debt. Instead, take a good hard look at how you are spending your money and why, especially if you have debt you are paying down. Were you borrowing for your education or an investment? Or were you borrowing to purchase a luxury item that begins losing value the second you take it home?
If you have any bad habits, you need to get these under control. Poor spending habits are often just a symptom of other problems. Let’s say that, upon consideration, you come to realize that you’re an impulse shopper. Not only does this contribute to debt, it’s not exactly a great trait in an entrepreneur. You won’t last long if you approach corporate purchasing decisions with the same lack of restraint you experience at the shopping mall.
Start building an emergency fund
Nearly a third of Americans don’t have savings for dealing with life’s emergencies. While this isn’t a great way for anybody to live, this is a particularly bad idea for anyone starting a new business.
A good emergency fund will cover 3-6 months of personal living expenses, but will also be there to help your business through lean periods when you might struggle to pay employees or suppliers.
The safest bet is a money market account or FDIC-insured savings account, but if you want to kill two birds with one stone you could make your emergency fund part of your retirement strategy and keep it in a Roth IRA. This way, if you do need to access it, you can take out what you need without paying taxes or penalties.
Start thinking about insurance
Insurance is one of those things we all hate paying for, but when you need it, you really need it. As an entrepreneur, you need to put in some time researching exactly what’s right for your business, but it’s a huge mistake to neglect your personal needs.
Health insurance is a must. Whether you actively purchase health care or not, you are insured under the Affordable Care Act, but you would be wise to take a more proactive approach, especially if you have a family. Purchase the best health insurance you can afford and consider adding disability coverage to your package.
Nobody likes thinking about the worst happening, but think about it you must. Should you meet an untimely demise, you will want to ensure your family isn’t facing poverty on top of their grief. Buy a package that’s sufficient for their needs in the years to come. The younger you are when you buy life insurance, the better. For less than $30 per month, a 25-year-old non-smoker can buy a $250,000 policy with a 20-year term. The older you get, the higher the cost, and if you develop health problems, costs will skyrocket.
Take away
One final caveat: consider these as guidelines rather than hard rules. Many an entrepreneur has built a successful company while still in debt, or without the best insurance money can buy. What’s really important here is that you approach personal finance with the same rigor must apply to the business you are trying to build.
The post Personal Finance Tips for the Budding Entrepreneur appeared first on AllBusiness.com
The post Personal Finance Tips for the Budding Entrepreneur appeared first on AllBusiness.com.
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