Personal Finance Money Management Tips for a First-Time Entrepreneur

by Sherry Hao

Everyone struggles to manage their personal finances. Whether it’s setting and sticking to a budget or saving for a big purchase or trip, financial management is tough to master. When you add the pressure of starting and running your own business for the first time, the stakes not only become higher, but personal finance management also becomes even more complicated.

So what’s the best way to manage your personal finances while pursuing your dream of becoming a successful entrepreneur? There are five key things you should do to ensure that your personal finances stay in great shape while you chase your dreams. Read on for more.

Plan and budget for variable income

As an entrepreneur, your income will inevitably change over time. Unlike a regular corporate employee, you might not have a steady paycheck or income, so it pays to plan and budget for that variability.

It’s no secret that starting a business is hard. In fact, more than 20 percent of businesses fail in their first year, according to the Bureau of Labor Statistics, and they fail because of a lack of capital, according to Investopedia. The best way to prevent that from happening to your new business startup is to take a good, hard look at your expenses and put a solid plan in place.

While it seems daunting to do, you can take four simple steps to smooth out those peaks and valleys as they come and go and plan a budget for variable income.

Know your baseline

The first thing you need to do is get an idea of what you absolutely must pay each month to keep your household going. These are the basic things you need to keep a roof over your head, keep the lights on, and feed everyone. This will form the basis for the bare-bones, base amount of money you need to bring in each month.

Things to include in a baseline budget are mortgage or rent, insurance payments, healthcare expenses, power and water bills, Internet connectivity, phone bills, transportation costs, and any childcare or pet care needs. You can also include things like debt repayment and other outstanding items like alimony or loan repayments.

Get an idea of your discretionary spending

Becoming an entrepreneur often means financially bootstrapping yourself into business. That means until things start to run on all cylinders, you’ll likely need to get a handle on any discretionary spending you do.

Items to include in your discretionary budget would be things like gym memberships, trips to coffee shops, clothing purchases, and eating out. Also include things like entertainment memberships (Netflix, Amazon Prime, etc.) and any kind of cultural spending you do (art museums, book clubs, sporting events, etc.).

It pays to take a good, hard look at this portion of your budget and get an idea of what you might be able to trim in order to cut back on expenses. Know that you will likely go through some lean times as a first-time entrepreneur, but by cutting back on unnecessary spending now, you can ensure financial stability in the future.

Create an emergency fund

Having an emergency fund when starting a small business is crucial to successfully managing your personal finances. As they say, life happens, and when it does, you need to be prepared to handle it financially. Most experts recommend storing up at least three to six months’ worth of savings to cover your core expenses should things go totally sideways.

The best way to set up an emergency fund is to sock away a certain amount of your paycheck (if you still have a full-time job) or put aside a certain amount of your earnings each month to cover any unexpected costs that come up.

Should your business go south and you need to rebuild or find a full-time job, having an emergency fund could help ensure that you and your family don’t get into financial trouble.

Pay yourself a “salary”

While this is a marginally controversial idea, especially when starting a business, it makes sense to make sure you pay yourself a “salary” so that you can cover your base costs each month. Essentially, what you are doing is working with what is known as a “zero-sum budget.”

Once you have an idea of your baseline expenses, you should deposit that amount into a separate bank account and use it to pay all your necessary bills for that month. This essentially acts as a “salary” that you can draw on (without going into your savings) to cover all your monthly baseline costs. Anything above and beyond that is gravy, and you can choose to reinvest the surplus in your business or put it into an emergency fund.

Keep your business and personal finances separate

Once you have a budget set up, it’s important that you keep your personal and business finances separate. This is essential for a few reasons.

First, separating your business and personal finances creates a certain legitimacy to your business. It gives your clients a sense that you really are a professional business providing services or goods. When clients have to send a check to a business account or make it out to the business name rather than sending it to a personal account or individual, they feel everything seems more legit.

Second, separating your accounts can protect your personal assets should anything in your business go sideways. Having separate business and personal accounts also makes tax time far easier. You can keep track of what you pay yourself and what expenses you incur out of the business account.

Overall, keeping separate accounts makes keeping track of your cash, liabilities, and expenses easier, too. It can help you know if your expenses are outstripping your income, and you can make appropriate adjustments to ensure that you don’t bankrupt the business or yourself.

Get the right insurance

Insurance is often overlooked by first-time entrepreneurs because they usually don’t believe they need it and because it can be somewhat expensive. The truth is, however, that insurance is absolutely necessary when you are starting a business—both for your new startup and for you personally.

Since a large company’s insurance no longer covers you, you should consider things like business insurance (depending on what services or products your business provides), which should include liability insurance.

You also need to consider getting and maintaining your own health insurance, dental insurance, life insurance, and disability insurance. These are vital to ensuring that you are protecting yourself and your family should something happen to you or the business.

Keep track of your finances

Keeping track of your business (and personal) finances is key to becoming a successful first-time entrepreneur. Just like tracking your weight or exercise can help you stay on top of your fitness, keeping a close eye on your finances in both your business and your home is key to ensuring the long-term health of your financial venture.

Staying on top of your income and outlays offers a way to tell just how successful your business is, and it can give you real-time feedback on where you may be overspending. That way you can adjust as needed to prevent any problems down the road.

While some first-time entrepreneurs choose to keep track of their finances the old-fashioned way—using pen and paper—it may pay to invest in some more robust tools like Quickbooks or other financial management software. The more tools you can employ to make your financial tracking easier, the better.

Hire the right professionals

One of the main reasons that businesses fail is because they don’t have the right people in place to succeed, and that includes hiring outside pros to support you. Perhaps you are terrible at accounting, or maybe you need help with accounts receivable.

Wherever you struggle, it pays to invest a little money to hire the right professionals. After all, most of your time should be taken up by running your business, not trying to figure out the nuances of tax law, right? Paying a little bit more to get the right people to support your venture not only makes good business sense, but it can also help make your business grow at a sustainable rate. The right hires can help save you money, too. For example, small-business tax experts often know where to look (and what you can do to invest) to reduce your taxable burden. Paying someone to save you money in the long term almost always makes good business sense.

The bottom line

It’s no mystery: Starting a business is tough work. It takes capital, time, investment, and patience. The odds are somewhat against first-time business owners, too. More than 20 percent of businesses fail within the first year, and more than 50 percent fail in the first five years.

Yet by following this advice—setting a zero-based budget, keeping your business and personal finances separate, getting and maintaining the right insurance, keeping track of your finances, and hiring the right professionals at the right time—no matter how the business fares, you can ensure your financial health well into the future.