As a personal finance blogger who is also an entrepreneur, I’d like to share with you some personal finance goals for entrepreneurs or business owners. Lifestyle blogs are sexy because they conjure up images of working from a bungalow overlooking the beach. That’s great and all, but as I wrote in the post, “Quit Your Job And Die Alone,” entrepreneurship is not easy.
I’m a big believer in goal setting. Without goals, it’s hard to know where you’re going. When it comes to one’s personal finances, having concrete numerical goals is important. You can’t just say, “I want to save more money.” Instead, consider saying, “I want to save 20% of my after-tax income, which equals $12,000 a year in the bank.” Instead of saying, “I want to grow revenue” say, “I will grow revenue by 200% to $300,000.”
Concrete goals are much better than vague goals. We all want to make more money, increase our net worth, and look like Adonis. Assign values to your financial goals and execute them with purpose. Below are my five personal finance goals for entrepreneurs
FIVE PERSONAL FINANCE GOALS FOR ENTREPRENEURS
1) Save money until it hurts. If it doesn’t hurt to save money, you aren’t saving enough. Increase your savings rate by 1% a month every month until it’s unbearable. Take a break without going in reverse, and continue the turn. If you do not have passive income streams then you need to start generating some now. Maybe you know how to teach a language or a sport? Maybe you can do some consulting on the side to bolster up your savings? Keep such income streams separate from your entrepreneurial income streams. Compartmentalize because entrepreneurs more than anybody need a safety fund. The name of the game is survival. If you can survive, you can grow. If you can grow, you might be able to get incredibly wealthy!
What I’m doing: I’m saving 100% of my passive income. While all the craziness surrounding entrepreneurship is happening, I need to make sure I have an automatic savings plan in place. By saving 100% of my passive income from CD interest, dividends, and rental property, I should be able to save at least $50,000 a year after tax. This way, if all goes to hell, I won’t starve.
2) Don’t lose money. This may be a stupidly simple goal, but you’ll be surprised how good people are at losing money in their investments and in their companies! It takes a 100% increase to get back to even if you lose 50% of your money. It’s much better for your health to steadily gain 8% a year vs. losing 20% one year and gaining 35% the next year. As you are building your business, make sure your investments are congruent with your risk tolerance. I recommend turning the risk dial way down by looking at structured notes that provide downside protection, short-term CDs, or even online savings accounts. Run different investment return scenarios to get a realistic picture of what you could gain. The last thing you want to do is have your company go belly up and have your investments disappear as well.
What I’m doing: I’m never going to pretend I’m smarter than the market. All I know is what I know. I can lose money as easily as the best overpaid hedge fund manager. I no longer have the income to buffer any losses to my stock portfolios anymore, which makes not losing money more important. Curiously, I’m increasing stocks as a percentage of my net worth from around 30% to 40%, with the rest of my net worth in property, CDs, and bonds. I’m bullish on the stock markets to the tune of 8-9% returns. Meanwhile, I continue to invest in real estate for the multi-year rebound.
3) Identify a benchmark to measure performance. Growth for growth’s sake is a waste of time. It’s important to identify a target that keeps you focused. The target can either be a competitor or an index such as the NASDAQ or mobile handset growth rates if you have a mobile device company. Make sure you identify sticky revenue streams. In other words, clients that will pay you over and over again for the long run. Focus on the scaleability of your business and not one time profits. Those who focus on one time profit opportunities are going to burn themselves out. By selecting an anchor to base your growth, you will be more focused on your businesses revenue and profitability.
What I’m doing: On a personal finance level, I plan to grow my net worth faster than the S&P 500. It’s one thing to have my stock portfolio beat the S&P 500. It’s another thing to have my entire net worth beat the S&P 500 given my net worth’s diversification. A tailwind will be my property holdings which I think will do tremendously well in 2013, especially due to the leverage affect. A headwind will be my 4% yielding CDs which will underperform the S&P500 by ~6% based on my forecast. It’s all about increasing my “Money Strength” to get money working harder for me. On a business level, I plan to realistically grow traffic online by 100% vs. 300% growth in 2012. With 100% traffic growth should come greater than 100% revenue growth due to leverage.
4) Create a target value for your business. Come up with some type of value target for your business. It can be based off revenue, operating profits, or net profits. Do some research and see what the acquired companies in your space have sold for. Ping buyers on what type of metrics they are using to value a potential purchase. If companies in your space are being valued by revenue, then go after market share. If profits are at a premium, then focus on margins.
What I’m doing: I’ve set a goal to build a company worth at least $1 million dollars. The funny thing about assigning a value to a business is that it all depends on the multiples a business can get. If you can get someone to pay a 100X earnings multiple on a business making $10,000 a year, then there’s your $1 million dollar business! The best is when you can value your business on “eyeballs” or other non-cash producing metrics like many investors did in the 1999-2000 dot com bubble! A more realistic multiple online is somewhere around 5-10X, depending on your growth rate. Remember, saving and making money is the easy part. Making your money work for you after you sell a business for big bucks is the hard part!
5) Minimize taxes paid. It takes effort to minimize your tax bill, just like it takes effort to save and make more money. The government is counting on you to roll over and die. If you are paying more in taxes than you are saving a year, the government is screwing you. Max out your 401K and IRA or start a self-employed 401K and shovel as much money in there as possible. Take advantage of the mortgage interest shield. Relocate to tax friendlier states. Maximize your business expenses by studying what is generally expensable. There is a difference between net profit and cash flow. Learn how to optimize your business to reduce your tax liability.
What I’m doing: Paying less taxes in 2013 is easy because my reported income will drop now that I’m a bootstrapping entrepreneur with no job income. Start-up costs are always higher as a percentage of revenue in the beginning. How else am I going to write about the happiest people on earth without spending a couple weeks in Scandinavia? I’m looking to further minimize my tax liability by perhaps setting up residency in one of the seven no income tax states such as Washington, Nevada, or Florida. Paying 8-10% here in California is egregious due to years of budget mismanagement. Eventually, other states and perhaps the Federal government will have to bail California out. I want to be patriotic and not contribute to bailouts.
SIMPLIFY YOUR PERSONAL FINANCES TO FOCUS ON YOUR BUSINESS
It’s important to take a proactive approach to your finances while you’re busy building your business. I keep track of my finances with Personal Capital, a free online wealth management software tool. Personal Capital monitors my spending, charts my net worth progress, highlights where I’m spending too much in 401K fees, and provides an overall snapshot of my entire financial well-being. As a result, I don’t have to manually track my finances anymore, or worry whether I’m overspending.
My number one goal as an entrepreneur is to build something that matters and grow the business to the point of expanding profitability. Unfortunately, most entrepreneurs fail or give up due to various reasons. As a result, we need to separate our finances so that in case of failure, we still have enough of our finances intact to continue the battle. Manage your wealth!
Entrepreneurs and small business owners, what are some goals you have? How do you make sure you protect your personal finances while building a business?
Updated for 2015. Let the bull market continue!
Carlita Morandi says
Your article is really inspiring. I will consider all the informaiton above for my future activities and will recommend it to my friends for sure!
Absolutely, don’t lose money. There is a bit of a misguided notion out there that it’s okay to fail, even when it comes to money. Now, failure can be a GREAT way to learn, but the basic math behind losing money means it’s tougher to get it back. Start at $100 and lose 20%, and you’re at $80. To get back to $100, you have to gain 25%.
Financial Samurai says
Indeed. After 2009’s crash, I have become deathly allergic to losing money. Way too painful and demoralizing. It’s why I think through so many scenarios now before doing anything.
I like the “save money until it hurts”, it is so important when life is unpredictable to have a good cushion. I have had a few bumps on the road and barely felt them thanks to that goal.
Financial Samurai says
Yep, for sure. It’s a must for anybody who wants to take some risk!
Brick By Brick Investing | Marvin says
I really like 1 & 2 but love #5. If you can avoid the tax mafia that will grow your wealth much faster! It always stings around this time of year when I have to file my taxes and see uncle sam collecting his “piece” for offering up absolutely no capital or advice to my investment decisions….
Yes sir. #5 is important given how wasteful our government is! Took 18 months for my city to fix a pothole/manhole yet I paid over $75,000 in state taxes during this time period. Outrageous!
One of the joys of small business is almost everything you do is tax deductible! If you are willing to take on risks, you can limit the amount of tax you pay. Are you planning on moving or just establishing residency in another state?
Financial Samurai says
Indeed, that is one of the joys. But paying the franchise board tax and all this other government fees is a waste. I’m looking to buy rental property in Nevada and eventually set up a homebase there for half the year to save 10% on CA state taxes. Could be good!
Edward Antrobus says
Great point with #2.When I tell people that my IRA is 90% fixed-income mutual funds, they give me a look like I’m crazy being so conservative with my asset allocation while I’m as young as I am. But I just can’t stomach loosing money.
Granted, you can probably save money on taxes by moving just about anywhere in the world compared to California, but I’d recommend looking at total taxes before moving. States revenues have to come from somewhere. Delaware is famous for not having sales taxes, but instead, their property tax rate is crazy high.
Financial Samurai says
You are right. Crazy property taxes in New Jersey and elsewhere too. But, Washington, Nevada, Wyoming and Oregon all look promising, and much much cheaper than San Francisco, CA.
Good idea to make bucks in expensive areas then retire in cheaper areas.
Watching expenses and not wasting or losing money is so important. And I couldn’t agree more about your #5 on taxes. Small businesses, sole proprietors, and bigger companies pay so much in taxes. And California is cruel, oh so cruel. States like Texas are attracting a lot of entrepreneurs and businesses for this very reason. CA wins any day in terms of lifestyle though. 😉
Financial Samurai says
I can’t ever live in Texas. Too hot, not enough diversity. But, no state taxes rocks! I also love the ocean and being close to Hawaii, although you can go to South America and C America from Texas quite easily!
I’m planning my escape. Give me 3 years 🙂