Successful Transitions Series: Entrepreneurship

The Successful Transition Series looks at three major life transitions: retirement, entrepreneurship and career change. This week, we examine entrepreneurship and some of the financial goals made by entrepreneurs that helped make them successful.

The 21st Century looks to be the century of entrepreneurship. In 2014, Babson University found that between 2000 and 2007, the number of new business start-ups increased by 17% each year. Their survey also noted that 2014 saw the most entrepreneurial activity in 16 years.

Jumping in to the risk of self-employment is a daunting process. Good financial planning has been shown to be one of the effective tools of a successful transition to being your own boss. However, there are still important considerations for your personal financial health. Below are 3 things to remember

Plan Ahead

If you’re thinking of going into business for yourself, arm yourself with the knowledge that it isn’t easy. You may have to sacrifice time and money to make it a success. Know the measures of success and failure. Things will not run smoothly at the beginning, and you’ll need to be flexible to sort things out.

Many entrepreneurs deal with irregular income, especially in the start-up phase. Entrepreneurs in transition know that arranging personal finances to include a crucial nest egg is essential to cover expenses such as housing, insurance and car payments during leaner times. It’s a good idea to have at least a year’s living expenses tucked away before becoming a business owner.

Pay Yourself

Many start-up owners ask themselves, “Should I pay myself?” Ameen Khwaja of Entrepreneur Magazine notes that successful business owners include their self-pay into the business plan right from the start. Whether paying themselves through a percent plan or through small regular payments that grow with the business, they don’t just dip into the business money as needed.  

Protect the Company’s Most Valuable Asset

While being an employee, chances are you had access to some kind of disability insurance. In fact, 40% of Americans have access to disability insurance through their employer. Once the transition begins to entrepreneurship, many may overlook disability insurance.

However, disabilitycanhappen.org found that the average temporary disability lasts about 82 months. The ability to earn income is an entrepreneur’s most valuable asset and needs to be protected. Without disability insurance, retirement and savings may be wiped out by personal expenses while a business owner is recovering.

Plan for The Future

In 2010, a Small Business Administration survey found that over nine million small business owners had not started a dedicated retirement plan. Those transitioning into business ownership, as well as successful entrepreneurs, schedule a regular “money date” to review personal financials and make adjustments to financial plans as necessary. These money dates may also include looking into the best retirement plans for the business owners, such as a SEP IRA for small-business owners with contributions made by the employer that are tax deductible as a business expense, or an individual 401(k) that covers a business owner with no employees or that person and his or her spouse.

Becoming your own boss can be a rewarding experience, and preparing your personal finances is an important step in making entrepreneurship a success. Discussing your ideas and concerns with a trusted financial planner can ease any anxiety and help get everything in line for this next chapter in life.

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

“Finance Made Simple” blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.

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