When I started my own media company in 2009 I was less fearful of taking control of my career destiny than I was of my finances. I was confident I’d chosen the right, fulfilling path, but, wow, how would I manage to pay my bills on time every month without a steady paycheck? How would I secure health insurance? What if I developed carpel tunnel and could no longer type? What about retirement?
As entrepreneurs, we tend not to be so frightened by risk. To the contrary, many of us gravitate towards the unknown. But when it comes to protecting and growing wealth as business owners, valiant risk-taking isn’t necessarily the solution. Instead, it’s imperative that we arrange all our financial ducks in a row and build a strong and confident relationship with our money. As I confessed to my financial planner at our very first meeting, “I just don’t want to have to really think about money and take it off the table.” In other words, I told her, I wanted to reach a place where my money worked for me – instead of the other way around. And preferably on autopilot. She nodded and smiled. As a business owner herself, she understood me exactly.
I reckon you may be going through similar financial insecurities. It’s only natural. The good news is you can achieve financial freedom and build wealth just by developing simple systems and practices and committing to them. Trust me, starting a business is way more challenging than getting your finances in order. We just don’t necessarily feel that way sometimes because we tend to lack the same passion and drive in starting our ventures than in balancing our budgets. Can you blame us?
But it can be done.
And it should be a priority. At the end of the day, a properly managed financial life serves as the backbone to your business and livelihood. And as women, in particular, there are specific money rules we ought to live by to ensure we get ahead – and stay there.
Here’s my advice:
Build a Better Cushion.We need a bigger savings cushion than men, plain and simple. We have higher expenses, live longer and in many cases are financially independent without the ability to rely on someone else. But a survey by Financial Finesse, a financial education firm, shows that women are much less likely than men to maintain a rainy-day savings account. Only 43 percent of women overall reported having an emergency fund, compared with 63 percent of men. The gap was even wider between women and men age 55 to 64. Just 58 percent of women in that age group have an emergency fund, while 82 percent of men do.
A large emergency fund totaling up to a year’s worth of your expenses is ideal when you’re running your own business. But for starters, try to at least shore up six to nine months in a liquid savings account. Put half in your business savings and the other half in personal savings. Don’t worry about the mealy interest it will earn. This account is meant to be there for things that may come up in the near term, not retirement.
Establish Separate Accounts. As mentioned earlier, it’s best to distinguish your savings for business and for personal needs. Divide and conquer your checking and credit card accounts, as well. One mistake I often encounter (and I’ve been guilty of this) is putting all your earnings in one big pot and spending freely on personal and business expenses without any sense of division. But your personal and business lives deserve more financial awareness and dedication. How else will you know if you can really afford something for yourself or your business? The separation offers more clarity.
Secure Your Own Benefits. Health insurance is not exactly the most exhilarating piece of the financial puzzle – but it’s so vital because if anything should happen to you and you don’t have the means to support your medical costs, it could cripple your business. Medical debt is actually a top cause for bankruptcy in this country. Address this need right away in the most efficient way possible. For some that may mean piggybacking on a partner or spouse’s employer health benefits or paying for your own insurance through the health insurance marketplace or through a private plan on sites like ehealthinsurance.com. It may not be inexpensive, but consider it a non-negotiable. Pay for it, get it off the table and sleep better at night knowing you are covered.
The same goes for retirement savings. I know you can’t ever imagine quitting your passion at any point. We all plan to pursue our businesses until our dying breath. But realistically, you will want to slow down and not have to worry about earning as much later on in life. To support that, you will need a sufficient retirement account.
Options as entrepreneurs include the Solo 401(k), SEP-IRA and traditional and Roth IRAs. I personally like the Solo 401(k) and SEP-IRA because they have very high annual contribution limits, allowing you to be more aggressive and play catch-up. You can open up any of these sort of accounts through a brokerage. I work with a financial planner to manage these accounts. Automatically contribute at least 15% of your earnings each year to retirement. As women, our longer life expectancies require us to save more aggressively than men.
Invest in Disability Insurance. As an entrepreneur and possibly the breadwinner in your marriage, you’ll want to secure a sizeable disability insurance policy in case you can no longer work for a stretch of time. Admittedly, this may be a challenge to secure for some of you, depending on the nature of your business. Since so much of my work relies on my ability to write, I barely got approved. Of the six or seven insurance companies that considered my case, only one offered to insure me. Like many freelance journalists and writers, I’m considered a “high risk” client not only because I travel occasionally for work, but because of the sheer nature of my job, which is that I write. Apparently insurance companies fear that a writer could cry writer’s block in a frivolous claim. The lesson for all: Cast a wide net when shopping for policies, since every insurance agency has different underwriting rules. Use a broker who’s well versed in these policies and various insurance companies. Don’t give up!
Pay Yourself More. As female business owners, we sell ourselves short. A new study developed by Babson College in partnership with Goldman Sachs discovered that female business owners paid themselves smaller salaries than men. My advice here involves two steps: 1) Demand more for your products and services, if you sense the market will support it. 2) Allocate more from your business earnings to your personal savings account discussed earlier. When determining what “salary” to give yourself, be more generous.
Err on Side of Caution with Taxes. We can’t talk about money without acknowledging Uncle Sam and the portion we must pay him. Even as a financial coach, I do not enjoy thinking, talking or dealing with taxes – ever. What’s helped me is working with a trusted certified public accountant who has me set up to pay my taxes quarterly based on my anticipated income for the year. For this, I err on the side of caution and set aside up to 40% of each paycheck into a separate account labeled “TAXES.” It’s a very conservative approach, knowing I’ll pay less than 40% after all my deductions. But that’s okay with me. At least this way I can look forward to a nice return each year.
You Top Dollar Checklist:
1. Establish separate accounts.
2. Secure health insurance.
3. Look into retirement savings options.
4. Give yourself a raise.
5. Be initially generous with Uncle Sam.