Tuesday 21 August 2012

Importance of Personal Finance Education to Entrepreneurs: Not ...

There are blogs on personal finance, then there are blogs on various forms of entrepreneurship, but very rarely do you find blogs that discuss both topics.

I can understand the desire to laser focus in on one?s target reader, but because I don?t see much of a blend of the two topics in the blogosphere, I (hopefully wrongly) assume there aren?t very many who feel these topics are not mutually exclusive.

From my perspective, I see these as two topics that go hand-in-hand mainly because money is at the core of each of these. Entrepreneurs may become successful financially without a solid understanding of the personal finance basics, but if they want to increase their chances of doing so and more importantly remain successful over time, personal finance education becomes critical.

Knowledge of Personal Finance Ensures Your Financial Safety ? Even If You Fail as an Entrepreneur

Although I consider myself a successful entrepreneur, both online and offline, I am a student of personal finance first before I am an entrepreneur. I was applying personal finance fundamentals in my own life way before I embarked on anything entrepreneurial.

For example, I was spending less than I was earning, I was saving for the short term, I was investing for the long term in vehicles like 401k plans and Roth IRAs. I was cognizant of the debt I undertook and attempted to eliminate all of it.

I leveraged arbitrage by borrowing money cheap and then investing it for a higher rate of return. One can argue arbitrage is a form of entrepreneurship and I agree, hence another reason why these two topics are not mutually exclusive.

The advantage of practicing fundamental personal finance in my life is that I slept at ease every night knowing that even if my entrepreneurial activities were to fail, I would be fine in the long run from a financial perspective, and I don?t mean fine as just making ends meet.

I don?t think it is prudent to leave your job and become a full time entrepreneur right away. There are a lot of wonderful things that can be said about a solid career in the corporate world as well. This attitude and approach helped me psychologically as well as I built my businesses over time, whether investing in real estate, buying a physical business or starting multiple websites online.

Personal Finance Fundamentals For Entrepreneurs

Consistently practicing personal finance also prepared me for the next level, which is entrepreneurship and the application of personal finance principles to business.

Here are some very specific areas of personal finance that I feel are important for an entrepreneur to grasp:

Budgets and Forecasts ? Budgeting and forecasting are at the forefront of fundamental personal finance. After one gets good at managing the personal balance sheet and income statement, doing so for an entrepreneurial endeavor becomes much less daunting. When you are starting a business, resources are thin, and even the most basic blocking and tackling aspects of it need to be executed adequately if you want to succeed.

1. Incorporation ? Do you establish an LLC or an S corporation? It continues to unpleasantly surprise me how many online entrepreneurs will set up an LLC because of either herd mentality or the ease of execution. Little do they know the amount of money they are excessively paying in income taxes. With an S corporation, an entrepreneur can draw a salary from their business, which is not subject to self employment tax.

2. Debt ? Is all debt bad? Can debt be used to propel your success? Not all debt is bad, and if you can recognize good debt from bad debt and more importantly how to leverage it in your personal finances, you can do the same for your business. This is where the importance of understanding arbitrage comes into play as well.

3. Income Taxes ? Do you have a basic grasp of how income taxes work? Most Americans (maybe people in general) don?t realize how much they are truly paying in income taxes. Whether as an individual or as a business, the nature of income (active vs. passive) can impact your income tax situation significantly. Do you understand all the tax deductions you are entitled to? How much should you draw in salary vs. dividends or distributions from your company? Understanding the difference between each and more importantly each one?s tax treatment can help you tremendously.

4. Asset Protection, Management and Growth ? What happens to all the profits from your business? They flow to you as the owner individual. How do you protect your wealth? How do you actively or passively manage it so that it grows or at the very least preserves its worth? Are you familiar with the different alternatives? Should you diversify? Knowledge of personal finance, even as basic as locking in your capital in layered certificates of fixed deposit can go a long way in this example.

There are several other topics as well. For example, education planning if you plan on having children, or estate planning when you start to consider what to do with all that wealth you will have accumulate closer to the time of your death. Do you want to leave a legacy? What?s the most tax efficient way to do so while accomplishing all your objectives?

Because of the space we are in and the nature of blog topics that are written about in this space, very rarely do I witness discussions of this nature, which touch on the personal finance side of the equation. I suppose that?s what personal finance blogs are for. But why not have access to a blend of the two?

We often hear about online entrepreneurs generating a significant amount of income online, but what are they doing with that income? I sure hope many have spent some of that money on their education, or hiring a professional that can help them with the personal finance side of the business. But what about those who don?t? I guess we will never know.

What Should You Do With The Wealth Accumulated Through Online Business?

Everyone has different views and beliefs about money, and while I cannot tell you what to do with it, I can share with you what I do with funds accumulated through online business.

If you are a full time entrepreneur (online or offline), your first priority is obviously to fund your living. Bills have to be paid and you need to raise yourself and your family. Anything excess of that is where personal finances starts to come into play.

I allocate a good part of my excess to savings and retirement funding. I also allocate to tax efficient vehicles that allow me to save for healthcare expenses and children?s education. I also keep a rainy day fund locked up in fixed deposits. This fund grows overtime as my family?s needs grow.

I am also a big advocate of diversification, so I also allocate to other avenues such as real estate, small scale private equity investments (there is always someone with a brilliant idea looking for capital) and physical brick and mortar businesses.

For me, diversification and the pursuit for more passive income streams is the key. With appropriate financial knowledge and management skills, a financially successful entrepreneur can reach a point where their income and investments generate enough funds for them to live on.

I have been studying personal finance for well over a decade. From everything I have experienced in life and have written in this article, it is apparent to me that entrepreneurship and personal finance are very much intertwined. I truly feel they are not mutually exclusive at all, but I?d love to hear your thoughts in the comments section below?

I am definitely not advocating training yourself to be a professor of personal finance. Rather, embrace the topic and educate yourself. Knowledge of fundamental personal finance principles in my opinion is just as important as knowledge of the entrepreneurship endeavor you are involved with or are interested in.

So whether you are already successfully profiting from your online business(es) or not, invest some time in your personal finance development. This knowledge will help you tremendously whether or not you succeed in entrepreneurship.

What About You?

Do you feel personal finance and entrepreneurship are mutually exclusive topics? Why or why not? Hypothetically assuming that you are not familiar with either, if you were given only one option between the two, which one would you rather have exposure to? Why?

Sunil

Photo courtesy of Alan Cleaver

Source: http://www.entrepreneurs-journey.com/11084/what-should-successful-entrepreneurs-do-with-their-money/

melissa gilbert dancing with the stars dandelion wine cough matt groening brandon phillips summerfest summerfest

No comments:

Post a Comment