5 Tips to Get Your Personal Finances in Order Before Starting a Business
Thinking about starting a business? Then resolve to get your personal finances in order — the first step to launching a financially healthy business.
Despite a struggling economy and low consumer spending, more people are becoming small-business owners. But being an entrepreneur has never been easy. In fact, more than half of all new businesses fail within the first year. While there is little to guarantee that your business will succeed, you can take steps to improve your chances. In addition to writing a business plan and securing funding, preparing your personal finances will make it more likely that your endeavor is a success.
1. Create a budget
If you haven't already, create a personal budget and start managing your personal finances like you would your business finances. Track your expenses and income, make sure you know where all your money is going, and see where you can cut back. If possible, scale back or eliminate service plans and subscriptions, and categorize all spending choices as either "wants" or "needs." Once you do this, find ways to reduce what you pay for needs, and eliminate as many wants as possible. This helps you free up money for more pressing matters, such as paying down debt and creating an emergency fund. If you've been lackadaisical about personal finance in the past, the time to change is now.
2. Create an emergency fund
You know that starting a business often requires long hours with little pay, so you need to have a cushion in place to afford everyday living expenses and avoid racking up high-interest debt. At minimum, set aside six months' worth of household expenses in an emergency fund before you launch your venture. If you need to delay quitting your day job, or take on part-time work, do it. Being a business owner is a labor of love, so start saving money before you launch to help weather the inevitable storms.
3. Eliminate high-interest debt
There's a balance to be reached between saving for an emergency fund and paying down credit card debt. It doesn't seem to make sense to pay interest on debt when you have the funds to pay it off, but if an emergency strikes, cash on hand will help you avoid incurring additional debt.
How you proceed depends on your personal situation regarding debt and savings. While paying off high-interest accounts with cash is ideal, transferring those balances to accounts with a lower APR may be necessary. Also, keep in mind that as your income fluctuates, the higher your monthly debt payments, the harder it will be for you to qualify for loans.
4. Save for retirement
It may seem counterintuitive to lock money away for retirement when your fledgling business needs all the help it can get — so don't. Instead, open and invest in a Roth IRA. Since you contribute after-tax funds to this retirement account, you can withdraw your contributions at any time without being penalized. This is unlike a traditional IRA or 401(k), in which you are taxed and penalized an extra 10 percent on any early withdrawals.
Saving for retirement is often overlooked by business owners. Start off on the right foot by not making this crucial mistake.
5. Start small
All these tips look great on paper, but if your debt is extremely high and your disposable income low, then you simply may not be able to build an adequate emergency fund or pay down much debt. In this case, you can move forward with your business, but you need to start small.
Look at your ideal venture and consider how to downsize it. For example, if you want to open a full-service restaurant, consider a food cart instead. Or if you want to sell handmade crafts, sell them on consignment instead of purchasing them outright. Better yet, begin blogging about your business before you get it off the ground — by sharing your passion and expertise with others, you could build a clientele for your products or services before you even launch.
Once your personal finances are in order, investigate ways to fund your venture. You may be considering small-business or peer-to-peer loans, or even trying to locate investors. But have you considered crowdfunding? Through websites such as Kickstarter and Rock the Post, you can find funding to start your creative endeavor. In fact, crowdfunding is likely to become very prevalent in 2013, as businesses will be able to solicit anyone for investment in exchange for equity shares.
What ways can you think of to adjust your personal finances before starting a business?
Holly Mangan is the managing editor of Money Crashers Personal Finance, a site that focuses on topics related to money, business, investing, careers and more.