There are roughly 31 million entrepreneurs in the United States. That is close to 16% of the entire population of the country.
There are many reasons why people choose the path of entrepreneurship. They see better opportunities than their current career. They want more freedom in their day.
There’s another side to entrepreneurship that many don’t discuss. It’s a stressful path that often leads to failure and burnout.
Financial stresses rank among the top reasons why these small businesses close. Many decide to walk down this path without personal finance management.
You can’t afford to make a similar mistake. It will cost you too much time, energy, and resources. It will impact your mental health, too.
Read on to learn how to create a financial management strategy for your personal and business expenses.
1. Separate Business and Personal Finances
The vast majority of entrepreneurs are sole-proprietors. This is a great way to start your business because it’s easy and inexpensive.
It also ensures that your business and personal taxes are handled on one tax return. You might be tempted to start off by self-funding your business. You’ll mix your personal expenses with your business expenses.
That’s a sure way to make your personal finances a mess. Separate your business and personal expenses from the very beginning. It’s much easier to track your business expenses for tax deduction purposes.
2. Have a Rainy Day Fund
No one could have predicted the financial impact of COVID-19 on small businesses. What it did reveal is how so many businesses are just getting by financially.
One survey showed that about half of all small businesses had enough cash on hand to survive 15 days without revenue.
The situation for personal finances isn’t much different as most Americans live paycheck-to-paycheck.
You don’t know when the next pandemic or disaster will strike. That makes financial planning a priority. You should have enough money set aside to cover 3-6 months of personal and businesses expenses.
You don’t need to have all of it set aside right away. Build up your rainy day fund slowly by putting aside a small percentage of your revenue into this fund.
3. Always Pay Yourself First
Personal finance management experts always tell entrepreneurs to pay themselves first. It seems easy on the surface, but it is hard to put into practice.
What you need to do is set up a few different accounts for your business and personal finances. The first thing you do when you get paid is to set aside a certain percentage for taxes. Work with an accountant to determine your percentage.
The funds left over should pay your salary and business operating expenses. You can then take the personal funds to pay your personal expenses and set aside funds for retirement and savings.
4. Use Financial Management Software
Financial management doesn’t have to happen with a shoebox of receipts and a spreadsheet. There are software suites that are inexpensive and easy to use.
Wave Accounting, Zoho, and QuickBooks are a few examples of software to manage your accounts. You can easily categorize your expenses, which makes tax time a lot easier to manage.
5. Focus on Revenue-Generating Expenses
What is the ROI on this expense? This is how you need to measure your business’s expenses early on. Let’s face it, everyone is selling a course or software designed to help you make money.
Entrepreneurs fall into the trap of spending money on things they don’t really need. They are terrified of spending too much money on the things that really matter, and try to do it themselves.
Take marketing as an example. It’s a necessary investment, but entrepreneurs decide to do the marketing themselves. They don’t know anything about marketing strategy or content creation.
They think that a few social media posts will solve all of their problems. They could hire the best marketing agency to do the work, save time, and get leads.
That’s because marketing generates revenue for the business. You need to approach your business expenses that way.
6. Take Advantage of Retirement Plans
There are tax incentives for entrepreneurs that also help you plan for retirement. You can invest in a Simplified Employee Pension (SEP) IRA. This lets you invest up to $58,000 or 25% of your income and deduct your contributions on your tax return.
You can also invest in a 401(k) plan. You can contribute as much as $19,500, or $26,000 if you’re older than 50. You should seek the advice of a financial planner to help you set these funds up.
7. Diversify Investments
Personal financial management isn’t easy for entrepreneurs. You might get to a place where you can make investments and begin to build wealth.
If you do get to that point, you need to have an investment strategy. It’s wise to diversify your investments. For example, if all of your investments are in stocks, and the market crashes, you don’t have other vehicles to lean on.
Diversification protects your wealth in the event of a market crash. You might invest a little in real estate, a little in stocks, and a little in another financial vehicle.
The Best Personal Finance Management Tips
It’s entirely possible that entrepreneurs are overly optimistic. Many feel that their business is just going to work out for the best. They don’t anticipate any financially challenging times.
These personal financial management tips help you get ready for those financial challenges. You won’t stress about money because you are prepared for anything.
Personal finance management happens with careful planning and intention. Make the commitment to improve your personal finances and you’ll have a better business.
Check out the other helpful articles on this site for more entrepreneurial tips today!