As an entrepreneur, your business is often inextricably linked with your personal finances. This makes sense since your business is likely your most valuable asset and primary source of income. Yet failing to separate your business from your personal assets can be problematic in the long run. In this article, we’re sharing four reasons why business owners need a personal financial plan.
#1: Your Business Always Comes Before Your Personal Finances
Successful entrepreneurs tend to put everything they have into their business. And this goes beyond just sweat equity. If you’re like most small business owners, you’ve likely invested your personal financial resources into the business as well. In fact, 75% of new businesses are funded with personal savings, according to research from the U.S. Small Business Administration’s Office of Advocacy.
In addition, many small business owners invest their earnings back into the business so that it continues to grow. This can be an effective strategy over time, but there’s a tradeoff.
In many cases, entrepreneurs sacrifice their personal financial future for the future success of the business. As an example, a recent study found that 34% of small business owners don’t have a personal retirement savings plan. And 40% of business owners aren’t confident they’ll be able to retire before age 65.
This is especially true if you have people who rely on you for financial support, when proper insurance coverage and other asset protection strategies are essential. Plus, a financial plan can help you minimize your lifetime tax liability, which can chip away at your financial resources over time.
#2: Concentration Risk May Hurt You
As you invest more money into your business, you may end up with a concentrated position in your own company stock. In addition to potentially being difficult to unwind, concentrating your net worth in one asset puts you at greater risk of permanent capital loss. In investing, this is called concentration risk.
The solution to concentration risk is diversification. Indeed, there are many liquidity and diversification strategies that can minimize your financial risk. This is why having a personal financial plan can be beneficial.
A financial plan can outline a strategy for building a personal cash reserve. In addition, it will likely include an investment plan, so you can invest in assets that behave differently than your business.
And when you invest in the market instead of just your business, you benefit from the power of compounding over time. On average, the stock market earns 10% annually—assuming you stay invested over the long term. Not to mention, your future nest egg won’t be dependent on the financial success of one company.
#3: Your Business May Not Fund Your Retirement
If you invest the bulk of your financial resources into your business, it’s because you expect the future payoff to be lucrative. Yet there’s no guarantee your business will sell for what you think it’s worth—or at all. In fact, the International Business Brokers Association reports that 75-90% of businesses listed by brokers never sell.
The value of your business when you eventually leave it depends on a variety of factors outside of your control. So even if you have an exit plan, you may not get the payout you want. If you’re relying on your business to fund your retirement, you may ultimately fall short of your goals.
Consequently, most business owners end up needing to supplement their retirement resources with personal savings and investments. A personal financial plan helps ensure you’re saving outside of your business, so you can retire on your terms—even if your business falls short.
#4: A Personal Financial Plan Can Take the Pressure Off Your Business
Your business demands plenty from you. But in return, you demand a lot of your business. It may be your sole source of income, your retirement plan, and your legacy. That puts a lot of pressure on one asset. And as hard as you work, you may not be able to control the outcome when you eventually sell your business.
Indeed, the last few years have illuminated the risks of relying only on your business for financial security. Now, many small business owners hit particularly hard by the Covid-19 pandemic are in need of a kick start to get their finances back on track. A personal financial plan can help take some pressure off your business, put you on a path to financial freedom, and protect you against future financial setbacks.
Oak Capital Advisors specializes in the financial planning needs of small business owners. We can help you develop a financial plan that helps you exit your business and retire on your terms. To schedule an introductory meeting, please get started by requesting your complimentary Financial Independence Roadmap™.
