In last week’s blog post, we discussed the importance of preparing yourself financially for business ownership. This week we’re sharing some tips on how to prepare your personal finances for starting a business.
Create a Personal Budget
To prepare yourself for the future, you need to know your current financial picture. Start by downloading your monthly bank and credit card statements for the last year, as well as your last tax return. Then, categorize and track the money you are receiving and spending each month in a spreadsheet or other financial software, such as Mint or Quicken. Use that historical data to create a personal budget that details where your money will come from and where it will go.
Reduce Your Debt
These days, many of us have some form of debt, whether its student loans, car loans, credit card payments, or a home mortgage. Look at each loan and credit card account and identify how much is outstanding, when it is due, the annual interest rate, and the minimum payment amount. From that information, look at how you can reduce your debt by establishing a monthly payment plan for yourself, paying off the highest interest rate debt first and potentially consolidating the debt to reduce your debt payments.
Minimize Your Expenses
Notice where you are spending your money now. Ask yourself if there are any areas where you might be able to lower your expenses in the future. Also, look for any spending habits that are potentially unhealthy, such as impulse buying. Reflect on how you might be able to curb those unhealthy habits by shifting how you spend your money and time.
Establish an Emergency Fund
Develop a realistic savings plan, putting away a little bit of money each month into an emergency fund to provide a cushion for income volatility in your new business. A good rule of thumb that I learned from my father is to save up at least six months of living expenses in the emergency fund. That amount of cushion also provides enough runway to find another job in the event the business doesn’t work out.
Build Your Credit
You may need to seek additional funds to get your business off the ground. Your personal financial situation might have an impact on your funding options. So, it’s important for you to get current on all your outstanding debts and build your credit score. This will make it easier for you to get certain types of funding, such as loans, and receive better terms on that financing.
Have a Transition Plan
Resist the temptation to quit your day job and go all-in on your business right away. Instead, consider starting your business on the side. Test your idea to make sure it’s feasible and there is demand for it. Then, create a plan for how you can grow the business and what it will take for the business to provide you with sufficient income to make that transition from your job to working on the business full-time.