Successful entrepreneurs want to pour everything they have into their businesses, including time, attention, energy, and money. 100% commitment increases the odds of success in an area with high risk of failure. However, 100% commitment doesn’t necessarily mean giving everything you have. Giving too much in one area may prevent you from giving enough in more important areas. This principle applies to various aspects of life, but I will address the financial.
It’s obvious that your business performance impacts your personal financial situation. But it’s not as obvious that your personal financial situation also impacts the success of your business.
Sometimes pouring all of your money into a venture prevents you from giving something more valuable: your undivided attention. Personal financial struggles create stress, which distracts your attention from your business.
Here are four ways to avoid distracting personal financial struggles. Although I’m addressing entrepreneurs specifically, these principles apply to anyone.
1. Keep your overhead low
Keeping overhead low is a business principle that also applies to personal finance. Overhead is a company's fixed, ongoing expenses, which could include rent, utilities, travel, and debt payments.
Successful businesses keep their overhead as low as possible. The lower the overhead, the faster a startup can get to the critical breakeven milestone. The lower the overhead, the more prepared a profitable business can respond to fluctuations in revenue or investment opportunities.
Similarly, low personal overhead means you don’t need to generate much personal income to cover your basic expenses. You know you can quickly adapt to changing circumstances, such business cash flow struggles. The resulting peace of mind allows you to focus on your business.
One way to keep overhead low is to avoid debt, especially when used to purchase depreciating assets. Getting a loan to buy a vehicle, RV, or furniture set commits you to paying for it over time, no matter what happens to your finances. These types of purchases usually drop in value faster than the loan is paid down, which means you can’t simply sell the asset to pay off the loan if you don’t want the payments anymore.
Besides, debt payments get in the way of savings money for emergencies and investing, which are covered in the next two points.
2. Set aside at least six months of expenses (and don’t touch it even in an emergency)
Having at least six months of expenses in savings, while also having low personal overhead, provides even greater peace of mind. You will make better decisions for your business knowing that you don’t have to consistently take money out of the business to live on.
Consider this stash sacred. I’m being facetious when I say not to touch it even in an emergency, but something close to that should be your mindset. It’s not vacation or nicer car or home renovation money. It’s there to help you weather the ups and downs of your business.
Most startups hit rough patches, and being able to go a few months without taking money out might make the difference between success and failure. You will also be less dependent on outside capital. Taking on debt increases your business risk, and the payments add to overhead (see point 1). Giving up equity dilutes your ownership and control.
3. Develop an investment strategy separate from your business
Entrepreneurs, by nature and necessity, are eternal optimists about their business. You know you will succeed and want to pour everything you have into it. You wonder why you should invest anywhere else when you can invest in your own business.
But what if your business doesn’t succeed? What are you left with?
No matter how confident you are in your business, you must diversify. We all know we shouldn't have all of our eggs in one basket. No matter how attractive that basket looks right now, unforeseen circumstances can quickly crush all of the eggs.
I suggest consistently investing 10-20% of your personal income somewhere other than your business. If you take just enough out of your business to live on, take out 10-20% more to invest.
You’re likely spending every waking hour building your business, so you’re not going to have much time to research other investment opportunities. The good news is you don’t need to. For most people, investing in low-cost index funds is the way to go.
If you can break away from your business to read, I recommend Tony Robbins new book, MONEY Master the Game: 7 Simple Steps to Financial Freedom. I just finished reading it, and it provides unbiased advice for minimizing fees and risk while maximizing returns, all while spending very little time.
4. Take money off the table when given the chance
At some point you may have the opportunity to sell all or part of your business. What to do in this situation is an intensely personal decision with numerous factors.
I can’t suggest what to do in every situation, but it’s often a good idea to take money off the table when given the chance. This is especially true if you’re not well diversified in other investments.
Taking money off the table doesn’t necessarily mean giving up your business. You could sell shares to a trusted partner or spin off part of your business.
In another post I wrote about creating value vs capturing value. Entrepreneurs like to create value, but there comes a time when that value should be captured.
Hold back for success
You will be most successful by putting almost everything you have into your business. By carefully choosing what to hold back, you increase the likelihood of achieving your goals.
Making smart personal financial decisions will give you peace of mind, which will allow you to give undivided attention to your business.
Question: What personal financial strategies have allowed you to focus on your business?