In terms of Personal Finances, the risks associated with establishing a company include the possibility of losing part, if not all, of your savings, income, and perhaps your assets if you are not cautious. Additionally, there is opportunity risk.
According to a study of Census data by the Economic Innovation Group, approximately 5.4 million new company applications were filed in the United States last year, the greatest number ever recorded in a single year. And this happened on the heels of a record-breaking year in 2020. Millions of Americans were laid off or lost their jobs during the epidemic, and many have decided they do not want to work for anybody else.
“In the realm of entrepreneurship, many seek, and few are selected,” said Clark Kendall, President, and CEO of Rockville, Maryland-based investment management business Kendall Capital. “You must enter with a clear understanding of the hazards.”
“You could have worked for someone else and earned a consistent salary rather than taking a chance on launching a new firm with unclear future sales and income.
Having said that, there is a lot of potential upside for successful enterprises. However, regardless of how focused they are on the company, small business entrepreneurs must consider their personal finances as well. If you’re ready to join the rising number of self-employed individuals, take the following precautions to safeguard your financial security and Personal Finances.
1. Keep in mind that your company is not your retirement fund.
Many entrepreneurs have the propensity to see their firm as their principal retirement asset. Often, they want to sell the firm upon retirement or to develop it into a cash cow that will enable them to live well while the business is operated by someone else. While either situation is possible, financial experts encourage entrepreneurs to take additional efforts to save for retirement.
“You never know when anything could happen to your company,” Parks said. “There may be a war, or there could be a pandemic on a worldwide scale. That is why diversification is necessary.”
2. Be prepared to make an initial financial sacrifice.
For the first several months, the majority of firms lose money (or longer). If this is your primary concentration, you are unlikely to earn much money for a long. If feasible, begin increasing your personal savings prior to starting the firm to ensure that you have enough money to meet your expenditures and living costs during that time.
If you’re starting a company with no other source of income, Chad Parks, founder and CEO of Ubiquity Retirement + Savings, suggests setting aside at least six to nine months’ worth of costs if you’re starting a company with no other sources of income. Consider that money is untouchable and to be used only for company purposes.
That is both financially feasible and timely in order to re-ignite the momentum “Nick Foulks, Great Waters Financial’s director of communications strategy and client engagement, said.
Once the firm begins to generate income, you’ll want to start building up cash reserves – up to a year’s worth of business costs in order to decouple your Personal Finances obligations from those of the business.
3. Become an employee
As soon as you begin receiving compensation from the firm, you’ll want to begin contributing to a retirement account. Even if you are unable to make a significant contribution, the sooner you develop the practice of saving for retirement, the better.
“Because we are creatures of habit, you should get used to paying yourself with a paycheck,” said Marcus Blanchard, a certified financial adviser and creator of Focal Point Financial Planning. “Entrepreneurs have a plethora of retirement savings possibilities.”
The savings vehicle you choose depends on your Personal Finances and the nature of your company, but here are three popular accounts to consider:
Individual Retirement Accounts in the conventional sense
If you save $500 or less per month, an IRA may be the best choice since you may only contribute $6,000 per year if you are under the age of 50 or $7,000 if you are older. An IRA may be opened at any brokerage account and comes in two flavors: Traditional IRA contributions are made pre-tax, grow tax-deferred, and are tax-free until withdrawals are made in retirement.
On the other hand, with a Roth IRA, contributions are made after tax, but growth and eligible withdrawals are never taxed. In general, a conventional IRA makes sense for those who expect they will be in a lower tax band upon retirement since withdrawals are taxed at their current income tax rate. Meanwhile, people who believe their tax rate will increase should continue to contribute to a Roth.
In conclusion, starting a business can be an exciting but risky endeavor. It is important to protect your personal finances during this time to ensure that you do not face financial ruin in the event of business failure or unforeseen circumstances. By following the three tips outlined in this article – keeping your personal and business finances separate, establishing an emergency fund, and seeking professional advice – you can mitigate the financial risks associated with starting a business and set yourself up for long-term success. Remember that protecting your personal finances is not only crucial for your own financial well-being, but it can also have a positive impact on the success of your business.