Millennials have redefined the meaning of work as we break away from the corporate trends of generations past. In fact, a 2015 Deloitte report found that 54% of Millennials had started or had planned to start their own businesses by year-end. Countless personal finance articles offer retirement planning advice for our generation, but the guidance doesn’t always apply to the more than half of us that will seek self-employment rather than a traditional career track. A recent Motley Fool article explored how young people manage their finances for the future and found that we are “at a real risk of outliving retirement savings.” While this is true for our generation across the board, young entrepreneurs require more tailored financial advice to build personal wealth and reach financial security.
In my experience working in a family-owned business and advising Millennials, I’ve seen first-hand the challenges young entrepreneurs face in trying to balance their personal life and wealth while reaching goals independent from the companies they run. To help our growing group of fellow entrepreneurs, I’ve compiled my top 5 personal finance rules for Millennial moguls looking to avoid the Motley Fool prediction.
Hire Professional Advisors
As a financial advisor, I know Millennials procrastinate when it comes to hiring financial professionals. While the American Psychological Association ranks finances as the top stressor among Americans, we tend to avoid the things that most affect our wellbeing. Just like avoiding the doctor when you have a nagging cough, seemingly benign financial problems left untreated can cause heartache down the line. On top of basic planning needs like creating a personal budget and savings schedule, entrepreneurs must contend with the more complex financial needs of their businesses. Accountants, lawyers and financial advisors can help you define your needs and goals while creating a plan for you and your company.
Rather than hiring a human, some Millennials have started to use new do-it-yourself investing and planning apps that disrupt traditional planning. While these tools offer a streamlined and intuitive experience for the masses, they lack the most critical component of advice: personal accountability. Using a faceless app, you won’t feel as guilty about going against the long-term plan. You won’t worry as much about overspending, forgetting to sign your will, or disregarding life insurance. The best advisors harness new technologies while still providing personal, individualized advice.
Inherently fixated on building successful companies, some entrepreneurs forget to take care of themselves. Unfortunately, failing to ensure your own financial security can lead to broader problems for your business. As the business generates revenue, think about paying yourself a portion of proceeds. Of course, you shouldn’t take capital out of the company before paying employees, paying the bills and putting a plan in place to pay down debt. As soon as you can account for these costs, a fixed-dollar salary will allow you to create a more systemized personal budget and long-term savings plan. Just like corporate employees should methodically save in retirement plans like 401ks, the self-employed can use the tax benefits of 401k alternatives like solo 401ks, simplified employee pension plans and savings incentive match plans.
Paying yourself will also give you a clearer picture of your company’s profitability. Without considering all of your expenses, you’ll never know when you need to make important changes to the cost structure to ensure the company succeeds. Beyond the math, the emotional toll of a personal financial burden will hinder any entrepreneur from effectively running a business.
Separate Personal From Business
There’s a big difference between investing in your business and how you should invest personal assets. Too often, young entrepreneurs attach their future livelihood to the success of the companies they run. While entrepreneurs should, of course, use their money to finance their day-to-day passions, a lack of diversification creates unintended risks to long-term financial security. Beyond a budgeting and savings plan, self-employed Millennials should build diversified, long-term investment portfolios that will grow separate from a business. With any luck, you will have created both a successful company and a steady source of income to use if and when you choose to retire.
Most important, taking money off the table and letting it grow in unrelated investments will allow you to spend more time on the things you love. At its core, financial planning should not be just about the math, but about ensuring you can align your ideal life and your wealth.
Maintain Your Books
Nothing hurts worse than failing in business because of growth. As you build your company, hire more people and handle more projects, you’ll inevitably need to manage more moving parts. Unfortunately, entrepreneurs often focus on big picture expansion and forget to address the details. Come tax season, they’re left scrambling to piece together something that may or not pass IRS scrutiny. From the start, your deliberate surveillance of company money should reflect how you’ve created a structured budget for yourself.
Just like the best financial advisors, top accountants use modern technology to provide simpler, less stressful ways to keep track of assets while providing personalized advice. In working with a professional and sitting down to review the flow of money through your business, you’ll begin to notice trends that can guide your next move, like cutting costs in areas or deploying more capital in others.