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Sound Financial Group - Bothell, Washington


What Entrepreneurs Get Wrong About Personal Finance

| May 01, 2017
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Every entrepreneur might think they’re masters of their domain, but too often, the nuts-and-bolts of finance trip them up along the way.

While you might be an expert in your product or scaling your business to new heights, do you really know your true net worth? Do you have a long-term strategy in place? What if you get an offer to sell the company this year?

I’ve worked with entrepreneurs in all stages of life. One constant? Many don’t have a clear personal financial strategy in place.

If you’re hyper-focused on building your business, you need to read this. Here are six ways I’ve seen entrepreneurs fail by not giving proper attention to their personal finances.

You can’t calculate true net worth

I’ll be blunt here: your business net worth is not your personal net worth.

If you’ve built a business from the ground up, your blood, sweat, tears (and money) are all over it. You know that your business is worth $2 million, so your personal net worth checks in around $2 million, as well, right? Wrong.

This issue usually comes up when entrepreneurs get an offer to sell their business. They’ll set the asking price on what it’ll take for them to walk away, not what the business is truly worth.

To truly grow as an entrepreneur, you need to firmly establish two values: the worth of your business, as well as your net worth.

When you don’t know your true worth, you can’t really figure out what you’ll need for a successful future. Most business owners and entrepreneurs I meet don’t have a clue how much to save. If you’re making $400,000 per year now as a founder and CEO, do you know what it’ll take to generate that much when you’re no longer the business owner? It’s like trusting a talented pilot on your next flight — but having no clue where he’s flying you.

You don’t have a personal financial strategy

I’m not talking about your business, of which you likely have planned for years to come.

I’m talking about building the life you want, planning for it and taking the necessary measures to make it happen.

The way most people think about personal finance is backwards. Say you’re looking at buying a new car. Today, you can probably afford a modest, reliable sedan. Maybe even one with a nifty feature or two. Your bank account balance fuels your lifestyle, when it should be the other way around.

That Maserati you have in your wildest dreams? It stays there if you keep acting like this.

Instead of a New Year’s Resolution, take the turn of the calendar to set some financial goals. If you truly want that Maserati (or maybe just more time to spend at home with your kids), start thinking about what you need to do to make it happen. Do you need to ship 40 percent more units in the next 6 months? Sign 10 new clients? Find that figure — and work your ass off for it. You’ll be a lot happier in the long run.

Here’s what I recommend to my clients: take 20 percent of everything your business generates and put it into some asset other than your business.

Letting your personal bank account balance guide your life is like running on a never-ending treadmill.

You build a castle before you build a moat

You now know what it’ll take for you to get that new car or house, but do you have these assets protected?

Just as medieval kings wouldn’t build a castle before they carve out a moat and build a wall, ensuring your personal assets are safe and protected is key. We love the exciting prospect of building our life, but too often, we neglect the value of insurance.

So many entrepreneurs I come into contact with don’t have a personal umbrella policy or even decent life insurance. As you’ve probably figured by now, I place the utmost priority on building that vital foundation before I celebrate my success.

You might get advertised to by an investment firm, or have an insurance company sell you a policy, but do they have your best long-term interests at heart? Since they’re just trying to get you to sign on the dotted line, probably not.

This isn’t sexy. This isn’t exciting. You won’t hear about it in a TED Talk. But things like insurance need to be squared away before you start building your empire. It adds the economic value of certainty to your plans.

You believe you know everything

Most entrepreneurs have been successful in the face of doubters telling them it can’t be done. That mindset can help you build the rocket ship early on, but it can be poisonous once you’re past the startup stage.

You might know everything about your industry, but you might fall short in the areas of personal finance. It’s OK to seek outside help or do some research when it comes to your wealth.

Too many entrepreneurs fall into one of two damaging mindsets:

  • They simply believe they’re going to sell their business someday and retire off the riches.
  • They knew what they were doing when they were building their business, so why should they trust someone else when it comes to personal finances?

Instead of blocking out everyone else simply because that has worked well before, don’t risk your fortune. Speak with a financial advisor in order to keep your personal finances on track.

You have no idea how to spend money

You’ve become so used to spending money to grow your business that you’ve lost a frame of reference when it comes to your personal choices.

First-class flights and the newest technology for your office are easy checks to sign when you can tell how they’ll boost your company’s bottom line. But if you’re high rolling on your own dime, you need to play by another set of rules.

Things you purchase for yourself — such as high-priced vacations and the newest luxury cars — don’t pay for themselves in time like your business expenditures do. We can get blinded when we spend on ourselves because we’re so used to investing in the best for our company.  It can throw off your consumption calibration.

I recommend that entrepreneurs develop a philosophy around personal spending. For instance, take 20 percent of your gross income into something other than the business. Put that money into assets that will return on their investment.

You don’t know what happens when you sell — or reach retirement age

Inevitably, one of two things will happen: you will sell your business or you will reach retirement age. The ride you’re on now will end at some point.

Even if you’re in your 30s now, do you know how to handle these situations? Don’t be blindsided when it happens.

Financially (and mentally), you need to be prepared for the day where you aren’t the head of your business. The three numbers I live by, when it comes to that: 65, 95 and 4.

  • 65: The common retirement age
  • 95: It's over 50% that if you are healthy at age 65, either you or your spouse will live to see 95
  • 4: If you take out more than 4 percent per year from your retirement account, chances are you will run out of money before you reach 95

It is never too early to plan ahead, both for when you sell your business and when you reach retirement age. As I’ve stated before, too many entrepreneurs don’t take into account long-term finances when they sell their company. They’re too focused on the here and now and immediate cash out.

Even just the topic of retirement is a sore one for many entrepreneurs. I prefer the term “Entire-ment.”

If this business is something you want to do for the rest of your life (and if you’re reading this, I can assume this is true), the last thing you want is to be put to pasture when you’ve got so much expertise. We think that retirement means they want us to abdicate control of our money.

But instead, here’s how you should be thinking about that phase: you’re past the point where you’re doing this for money. You’ve spent your working life building that safety net. Once you have enough to live comfortably, you can keep building out your business purely for enjoyment, knowing that your financial needs will be met.

You can now guide your company using the wealth of knowledge accumulated through decades of experience — without the fear of bankruptcy or needing to work to life.

However, if you still choose to ignore this advice, you’ll go the way of most so-called entrepreneurs: working to merely get by in life because they didn’t have a sound financial plan in place.

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