If you’re young and your business is blossoming, it may seem like the flow of cash-on-hand will never stop. You can live the life you always dreamed of: buying Italian sports cars, patronizing Michelin-star restaurants, and throwing your financial weight around. But there’s a catch. If you don’t practice restraint, living the so-called “high life” can burn through your funds like wildfire.
That’s why learning to save and budget is the safest way of keeping up a high standard of living well past your prime. More importantly, managing your resources wisely ensures your business is prepared for any bumps down the road.
It’s worth recognizing Herb Kelleher’s “business born on a napkin” and Elon Musk’s meteoric rise to SpaceX fame took more than just lucky timing and elbow grease. It was a lot of smart spending, saving, and self-control that helped them stay on top.
Here are some of the secrets that budding entrepreneurs should know to safeguard their future wealth against calamity— and their own indiscretions:
Self-insure against predictable risks
After taking stock of their risks and liabilities, many entrepreneurs decide to work with an insurance broker to purchase a plan for their business. And as your business grows, you (and your company) become an increasingly larger target for legal liability. For sole proprietorships or small LLCs, insurance isn’t always the best way to handle legal risk. In fact, for many of the hazards small businesses face, paying insurance premiums is the least economical solution.
For example, if you own real estate in an area that experiences earthquakes every year without fail, it may be more affordable to set aside money for the inevitable repairs than to pay a high premium for insurance. In much the same way, you could set aside a fund for legal settlements rather than keeping a legal team on retainer or purchasing legal expense insurance (LEI).
Technological developments designed for risk management software can help you determine which aspects of your business pose the greatest legal, safety, and financial liabilities. Additionally, you can apply the same scrutiny to your personal assets. Wherever you find risk, consider setting funds aside to resolve a specific issue.
Assess your worth (and be realistic)
Successful entrepreneurs take note of everything they have, regardless of how seemingly insignificant it may be. They keep track of their assets, carefully noting the rate of depreciation, and they inventory any debts or liabilities. To calculate their net worth, they subtract all their liabilities from their assets. If this sounds like “personal finance 101,” good – you’re already halfway there.
Taking studious and realistic inventory of your personal worth and the value of your business is about more than estimating liquidity. It’s about understanding the intersection of your long-term financial obligations and future opportunities. It’s the way you need to think if you want to join “the big leagues.”
Ask yourself, what do I owe now? What will I owe in 5 years? Don’t think of debts as discrete or temporary. They should always be part of a cohesive plan for yourself and your business’s future. Your assets, regardless of whether they’re real estate or industrial machines, are investments. Never assume that anything is too small, too cheap, or too unimportant to be documented.
Understand your debts (and pay your bills)
Speaking of debts, effective entrepreneurs understand that accruing interest chisels away at their future wealth. So, if you can’t close a debt in full, pay enough to reduce the principal every time.
The world of credit is not like your parents taught you— not all debt is created equally, not every credit card company is a wolf in sheep’s clothing. In most cases, your ability to create new equity from a loan or line of credit will signal to lenders that you’re a sure bet. The old saying “neither a borrower nor a lender be” does not necessarily apply.
That’s not to say you should string up a series of enormous debts. Your goal in borrowing should always be to secure the most future equity possible. Just as your lenders are looking for repayment, you should be looking to “spin straw into gold.” Never borrow money unless the intended purchase yields a greater ROI than your debt. This can’t be overstated – only borrow after you establish that what you’re buying will boost value long-term.
Create a savings plan (and stick to it)
Be an avid financial planner (or hire one). Smart entrepreneurs understand that the easiest way to control their wealth is setting achievable savings goals and sticking with them. Don’t spend every last cent of your business budget and personal wealth on a new project just because you’re enthusiastic about it. You never know when you might need a parachute cord to pull when things go off the rails.
Think about how much both you and your business save compared to how much you spend. Are you preparing for the future or just trying to keep it at bay? Don’t spend more than a set amount of your budget at once, even if it’s for what seems like a great investment. Often it’s the “sure thing” that falls out from under you fastest. Always try to hold something back as an emergency fund.
Shelter some “rainy day” assets
Fun fact: smart entrepreneurs don’t put all their eggs in one basket. That means diversifying your portfolio both in type and in ownership. If you have trustworthy family members, you can place assets in their names.
Those with children can consider placing money into a trust fund to ensure the child’s future is protected, and, in many cases, you would retain the ability to withdraw the funds up to a certain date. You can even sequester a portion of your equity as property under your spouse’s name. That way, even if something unfortunate happened that required liquidation, you would still have some holdings tucked away.
If you want to take advantage of these sorts of asset control tactics, you need to speak with a financial planner or advisor who can help you map out your options. You should consider entering into a postnuptial or prenuptial property agreement with your spouse if you plan on entering assets under their control. The last thing you want is a legal battle over your emergency funds.
Some parting words
Safeguarding your assets is a vital step towards accumulating long-term wealth. You may be young now, but that seemingly bottomless well of stamina won’t last forever. At some point, you’ll tire of dragging yourself to work every morning. Don’t dread it – plan on it! If you maintain strict control of your budget during your most successful years in business, you can be ready to segue to a comfortable, stress-free future.