Worried about how to manage finances before starting a business?
Undoubtedly, many of us want to start a business so that one day, we can achieve financial security. In fact, I think everyone should aim for it, regardless of their financial situation – but I know that not everyone is cut out for it.
Financial security means different things to different people. In general, you’ll find that financial security means no longer having to think about how much things cost at the grocery store or a restaurant. To me, financial security means taking my family on a holiday without worrying about how I’ll pay for it.
For others, it could be less drastic – it could simply mean having enough money left for your peace of mind.
Starting a business takes time, effort, and so much of your energy. You’re most likely already working a full or part-time job, and starting a business will mean less time with your family. Less time sleeping. So how do you balance time – and money and become successful? There are lots to consider.
When I was in my 20s, I was earning a rather decent salary. But I hated my boss. He was the type that would look outside the front window and criticize me for taking more than 15 minutes at lunch. The type that would expect the world from me but offer little in return. It was a draining experience that sucked the life out of me (for a short time). I’m sure you had one of these bosses before.
Eventually, I made a plan. I’d leave this place. I was mad AF – and the only way out, I thought, was by starting something new. As a result, I started my first business – and eventually became financially secure.
Arranging Your Finances Before Starting a Business
If business starts to do well, at some point, you’ll ask yourself: is now the time to quit your day job? The security of a once or twice-a-month paycheck will no longer be. So, you will need to get your finances in order before quitting.
Think of the expenses you have to pay, like rent, bills, and groceries. How will you cover your expenses if you quit your job too soon? While you may be able to save a few bucks here and there, it’s not enough to be secure.
But starting a business isn’t supposed to be an uphill battle. No one should ever have to struggle with their money. Thankfully, you won’t have to.
Here are some of my tried and tested tips for getting your finances in order before saying “I quit” (your day job, of course!)
Go Over Your Current Spending
A journey to financial independence starts with gaining control of your money. You must know how much you earn, reevaluate your spending habits, review your financial obligations, and see if you have any extra money left after expenditures.
Seeing what you spend on paper can help you save hundreds each month. Since we’re in the digital age, you can use one of many mobile apps, like Mint or YNAB, to help you better track where your money is going.
Having a greater insight into your spending can make the budgeting process so much easier and helps pay bills on time. It’s like having a financial planner but in digital form. It’s an immense help if you want to become financially secure.
Avoid Living Beyond Your Means
Living beyond one’s means is surprisingly common but also detrimental. This is when your budget exceeds your monthly income. More evidence as to why making a budget is critical.
While it’s fine splurging here and there, you should never spend more than you can earn. Instead, put the money in a savings account or towards paying off your credit cards. It’s also in your best interest to use the money towards building an emergency.
Get Out of Debt as Fast as You Can
Effective credit management may mean the difference between financial security and financial ruin. Debt is, unfortunately, one of those things where it’s so easy to acquire but challenging to get rid of. Interest rates, another reason for increased expenses, are a lender’s own form of security that ensures the borrower pays their dues.
Dealing with student loans and high-interest credit card debt makes it more difficult to achieve financial stability as time passes, especially thanks to compound interests. Before you can have financial security, you must first figure out how much debt you have and your preferred way of dealing with them.
You can pay off high-interest debts first, depending on how much you want to get rid of them. Or you can pay off the smallest debt and work your way to the last. Remember that it’s just not about paying your debts; it’s being able to pay while still living comfortably.
Set Financial Goals for Yourself
Even if you’re extremely strict with your finances and could say that you’ve become financially stable, saving money can feel pointless without anything to strive for. This is why you need to set a few goals for yourself, whether they’re short-term or long-term. Short-term goals are what you accomplish within a year’s time, while long-term goals take longer.
Goals, however, aren’t always easy to set as there are a whole slew of them to choose from. Furthermore, you can’t just set a goal randomly; you must be sure about it and have a comprehensive plan. There’s no better way to do this than by setting SMART goals.
SMART is short for Specific, Measurable, Achievable, Relevant, and Time-bound. What is your goal, and what do you want from it? Does it mean quitting your job and go full-time with your new business?
How far are you going to take this goal? Is it something that’s in your ability to accomplish? How important is this goal? What’s the timeframe you’re going to set for it? These questions are what help you structure your SMART goals.
Examples of Goals
- Going full-time with your new business,
- Starting a family,
- Have a certain amount within the emergency fund,
- Pay off debt in a certain amount of time,
- Have enough money to afford a down payment, and
- Building up your retirement fund.
These are all examples of both short-term and long-term goals, so take your time considering your options. Always go with a goal that best suits your current needs.
Open a High-Interest, Tax-Deferred Savings Account
Opening a savings account is one of the best ways to help you achieve financial security. But rather than open a traditional account, you should consider opening a tax-deferred savings account.
Tax-deferred accounts have this unique feature where taxes aren’t taken out every time you deposit. Instead, the funds will be taxed when you decide to withdraw (ideally, when you’re in a lower tax bracket later in life).
Create an Emergency Fund
Financial security means having enough money to see you through unexpected expenses or drawbacks — like if you lose your job. Of course, if you’ve already started a new business, losing your job could be a blessing in disguise. But you’ll still likely need some cash to fall back on.
The best way to do so is by creating an emergency fund.
First, you must have enough savings to cover emergencies and up to three to six months of your salary.
If that’s too high, focus on saving for three months’ living expenses, or adjust it depending on how you feel about your financial situation. Over time you could build your emergency fund until you feel secure that it’s enough money to cover most emergencies.
If your new business can cover all your expenses, then it’s probably a sign that you can start thinking about quitting your day job.
Consider Yourself an Investment
Retirement accounts, debt payments, and emergency funds aren’t the only things to consider when starting a business.
When it comes to building up your financial security, you need to consider yourself an investment. You are your business. So invest and reinvest in it. Investing in your own business, whether it’s for your health, education, or preparing for your golden years, is always a great place to start.
It may take some time, effort, and discipline, but starting with these time-tested suggestions will see you on your way to getting your business off the ground and achieving financial security.