An Entrepreneur’s Guide to Managing Your Money
When it comes to owning a business, there’s one aspect that is at the center of everything you do: money.
And when it comes to money, there are three different types of people:
Those that are driven by financial goals.
Those that get excited when they see sales or their personal finances increase.
Those that are highly stressed by all things related to personal and professional finances.
I, personally, fall into the third category. Anything with numbers, spreadsheets, and financial planning stresses me out. So instead of me talking to you about the best way to manage your finances, why not read tips and tricks from an expert?
We see it all too often, whether you’re an entrepreneur, full-time employee, or stay-at-home mom: when you don’t know how to plan or save, it creates unnecessary stress in your life. And the reality is that this stress is going to prevent you from living the life you imagined.
It doesn’t matter where you are in your journey. If you have goals for your life, if you want financial security, if you want to plan for those big dreams, if you want to ensure your family is taken care of, if you want less stress, but a way to make more money without having to do a lot more work to get there, then this is for you!
Erik Potts is a long-time friend and my financial planner. He has a gift for numbers and simplifying this process so that it’s easy to understand and apply to your business.
So here are his top tips for managing your money like a pro!
You have to create a budget
It doesn’t matter if you’re already making a consistent income, or if you are just starting to generate income, you have to create a budget. In the beginning it can be hard to establish a budget, especially when your income is inconsistent, unpredictable, and you haven’t experienced this before.
For a lot of people, this is the piece that is the most intimidating. When you have a steady paycheck it’s easy to budget for the year because you know exactly what you have coming in. But creating a budget will allow you to plan for those inconsistent weeks and months so that you’re not scrambling or stressing for cash while waiting for new client contracts to come through.
When you start creating your budget, there are a lot of things you have to consider.
To start, you have to remember to accomodate for taxes. When you work for an employer, you receive a paycheck which, in most cases, already has taxes taken out. So your take-home amount is the amount you’re using to create your budget. When you’re an entrepreneur, you don’t have the benefit of someone calculating your taxes for you and automatically removing them from your pay, which means you have to do it instead.
You no longer have health insurance, or health insurance savings. Yet another “perk” of working for an employer: they deduct your health insurance cost from your paycheck as well as any savings you might have for your health insurance. So, if you are the breadwinner in your home and no one else has access to health insurance benefits through their employer in your home, you will have to consider the cost of saving for health insurance.
No one is making contributions to your retirement plan. Which means, you might have to consider contributing more of your own money in order to reach your retirement goals on time.
Gone are the days when you could say, “I’m bringing in X amount of dollars a month so that’s what we have to budget with.” You have to consider all of the extra pieces that, if you worked for an employer, would be taken care of for you.
Pay yourself first
It seems like this would be an easy concept, but so many people struggle to understand what this truly means. The idea that you’re going to pay yourself first really means that you’re going to invest in yourself first; meaning you’re going to set aside money for your health insurance, 401(k), and taxes.
What you budget with is the leftover money - your take home pay.
So many entrepreneurs get excited when they leave their jobs because they are making thousands of dollars and they think, “Wow, I have so much money.” Then tax time rolls around and they are required to pay thousands of dollars. Or they realize that in the past six months their retirement account hasn’t grown because they haven’t been making any contributions to it.
Very few entrepreneurs invest in a tax advisor or financial planner so they don’t understand the reality of how taxes work, or how to invest and understand inflation, interest, etc., and the problem is that if you don’t invest in this early you’ll end up creating bad habits that could set you up for financial failure later in life.
You have to manage your time
They say that it takes twenty-one days to build a habit, and that’s what this is all about - creating solid financial habits.
But in order to create solid financial habits, you have to manage your time. Meaning you need to establish good time management skills as part of your solid financial habits.
It’s easy to say, “I’m so busy,” and almost take pride in that, but being busy doesn’t always mean productive. When you work for an employer, you get paid whether you waste time or not. When you’re an entrepreneur, every second counts. Now, this might not be the case for all entrepreneurs, but for most, it is. You have to be able to manage your time well so that you’re optimizing your productivity and increasing your income. There’s a big difference between being busy and being profitable.
What are your hours worth?
What does it mean to be an entrepreneur? Does it mean that you don’t work for anyone else? Does it mean that you still make a living?
Creating this switch in your mind is what sets successful entrepreneurs apart from the “wanna be’s”. These entrepreneurs see their career longevity and the lifestyle they plan to keep in order to achieve their goals.
Let’s back up though and talk about what it means to be an entrepreneur. The term “entrepreneur” has been used so loosely that it’s lost a lot of meaning. Thanks to social media we see all of these “entrepreneurs” lounging on the beach sipping on a margarita, or sleeping in until 11 a.m. and the reality is that, while that entrepreneur might be choosing to live that way in the time that they’ve earned, a true entrepreneur is someone who is in the trenches, working hard at a future that they’ve defined for themselves. They are working hard at a profitable business that gives them that future, even if it is a future full of beaches and margaritas.
Because the reality is that the person you see drinking margaritas on the beach might actually be drowning financially, or back at their hotel room working tirelessly and the picture they posted was from the day before.
So take a step back and ask yourself:
What does being an entrepreneur mean to me?
Why do I want to do this?
What does success look like for me and my family?
Success for you might look different than it does for me -- create your own definition and work towards that. Then you have to remember to stay in your lane; don’t compare yourself to the entrepreneurs you see on social media. This is your story, your journey towards success. No one can do this, but you.
Stop trying to keep up with the Joneses'
Just because your neighbor drives luxury cars, has a big house, and sends his or her kids to private school, doesn’t mean they are set-up for financial success. In fact, most of the time it’s the average Joe that drives the modest vehicle and lives in a modest home that has a higher net worth and has set himself up for success in the long run by contributing to his retirement and saving his money wherever possible.
Don’t try to keep up with the people across the street. Most likely you’ll find yourself stressed out, in debt, and unhappy.
Go back to your definition of success and use that to drive you forward.
Create a blueprint for your life
This is the fun part, so take your time and really brainstorm. Think about your dreams and your passions. Ask yourself, “What are some things I can do to earn money and make a living to build the lifestyle that I envision for us?”
Now, write it down. Write down your vision, your goals.
But don’t stop there. Once you write down your goals, you need to track them. You need to put them in a place where you are continually looking at them, reminding yourself why you’re doing what you’re doing.
Next, you have to reverse engineer your goal. This might be a great time to find a mentor, or someone that can help you talk through your goals and figure out how to get there. A mentor doesn’t necessarily have to be another entrepreneur, or someone who makes a lot of money, just someone that is successful (in the way you define success), that could help you find a way to reach your own goals.
You need someone that knows you and your habits, as well as your goals. But the trick is to find someone that’s unbiased and independent because it’s not just about managing your money, it’s about helping you design your financial blueprint and make sure you are set-up for financial success in the long run.
So what can you do, today, to get started?
First, you need to understand the cost of your lifestyle, and I’m not just saying how much you spend on takeout. You need to analyze what your mortgage costs, how much you spend on insurance, groceries, car payments, clothes, etc. Once you have a clear understanding of what you spend your money on, and why you spend it there, you need to categories those items into buckets. When you create your buckets you will have the opportunity to create buckets for your savings goals, such as your kid’s college, a new car, retirement, as well as other fun things like new clothes or furniture.
Once you’ve created those buckets, you can determine how much of your “leftover” income is going to go into those buckets. Your leftover income is anything you have after you’ve paid your essential bills (like your mortgage, insurance, groceries, etc.).
And don’t forget to create a bucket for taxes!
Even if you overestimate how much you need for taxes, you should have the money set-aside. Worst case scenario is you don’t need the money for taxes and can roll it over for the next year, or move it to a different savings bucket.
When you get into the habit of allocating your income into these buckets, you’ll start to forget that you even do it and you’ll really focus on living off of what you have.
The important thing to remember is that you don’t have to be great with numbers to be successful at financial planning and savings. All you have to do is pay attention to your income and your spending. Understand where your money is going and why. Take charge of your finances!
Live beneath your means
Now, this doesn’t mean that you can’t go out with friends, or get a cup of coffee on occasion. What it means is that you analyze what you spend money on and recognize that if you’re a little more conservative with your spending now, you will have the money to spend later. Instead of getting coffee every morning, try making it at home. Try reducing your meals out to once a week instead of twice. These little changes can add up quickly and create a financial ripple.
You have to look at the bigger picture. Are you really making a sacrifice if you make coffee instead of getting it at Starbucks? Not really. You’re still getting a caffeine fix - just from a different source. You’re looking at your long term goals and realizing that while $5 a day doesn’t seem like much now, in six months that is $840.
Think of all of the amazing things you could do with $840!
That is what it means to live beneath your means. Do you have the $840 to spend? Sure! Do you need to spend it? Nope. Because you have financial goals and you are going to reach them.
It’s not about the money
It may sound cliche, but those who chase money, never find happiness. It doesn’t matter how much you make if you’re spending all of your time and energy making that money and you never get the chance to enjoy your life. So many people get caught up in the idea that they have to make more money to buy more things and be happy, when the reality is that it’s the ones who save money, live below their means, and wait that are the happiest.
Time is a thief, so don’t spend your life working for tomorrow; tomorrow might never come. Find that balance in your life so that you’re able to make money and still live your dream life, while continuously setting yourself up for success in your future.
So sit back, close your eyes and imagine your future. What does it look like?
Now ask yourself if you have the tools to get you there. If not, do you know who you can reach out to for help?
Step out of your comfort zone
Becoming a business owner is scary. Dealing with finances is scary. But sometimes we have to step outside of our comfort zone to get to where you want to be. You don’t have to be perfect, you just have to actively work to be a better version of yourself.
We all had to start somewhere. The fact that you’re reading this is a step in the right direction and with a little hard work, you’re going to set yourself, and your family up for great financial success.