When you are just starting up or if you have a small business, the initial few years are high investment years in terms of both product validation and market uptake as well as steady income. In this phase, it is essential to manage your personal finance well. Because when personal finances are not managed well, your business will also suffer and start a chain of losses.
Here are some tips for your personal finance management:
Don’t quit your job
A start-up usually demands high capital investment in its initial years. You may begin by investing a good sum of money into your business, but you will realise that you will need many such smaller investments during the initial growth years. Some of these may have been accounted for while some may not have been accounted for.
So, it is a good idea to continue at least partially with your steady income and job while working on your start-up idea side by side. This will ensure that you are financially secure for your personal expenses at the very least. At the same time, it will give you freedom for growing the start-up to a point where you can quit your job and investment full time, energy and resources in your venture.
Diversify your income sources
It is great to have focus, ambition and drive in whatever you do. However, from a practical perspective, it is a wise decision to diversify your income sources and hedge your risks. This will ensure that when one income stream is struggling, you have the ability to depend on other sources for at least covering your bills and regular expenses.
Improve your Credit Score
A good credit score is your gateway to acquiring easy credit options like a personal loan or personal line of credit. It proves your creditworthiness and assures lenders of your ability to repay. This means a lot for your personal finance, as you shall be able to negotiate good interest rates, easy repayment options and more. If you have a good credit score, you may also be able to secure a slow interest personal loan or line of credit without collateral. MoneyTap is an app which provides a seamless online loan and personal credit, in a fashion where you pay interest only on the amount of the approved loan that you actually utilize.
Here are some tips to improve your credit score:
- Clear any bills that are due, on time
- Clear your credit card debt as soon as possible
- Apply for a new credit card only if needed, and try to sparse out credit card applications
- Don’t close your unused credit cards, to strengthen your credit history
- Diversify the forms of credit that you use
Separate Business from Personal finance
Most start-up owners find it difficult to delink their personal life from their business. This trait is often instrumental in making their business successful, but the same characteristic can have a negative impact when adopted in managing finances.
Small business owners make mistakes when they muddle up their personal finances and their business finances. Here are a few reasons why you must consciously make an effort to keep your finances separate:
- It will help you save tax-related stress. Mixed finances and inter-usability of incomes without clarity often leads owners into tremendous stress during the tax filing season.
- Separate accounts will lend more credibility to your business.
- If there ever occurs a crisis on the business front, your personal assets will remain safe and you shall not have any personal liabilities.
- It will ensure that you do not put any burden of your venture’s financial position on your personal account.
Diversify your investments
As a start-up owner, you will need all three – savings, investments and liquidity. But make sure that you hedge your risks by diversifying your investments in different fields like mutual funds, stock markets, etc. This will ensure you do not suffer any major losses from a single failed investment, if any.
Develop a Frugal lifestyle
As a start-up, being thrifty is absolutely essential. Minimise your demands so that you can reinvest the maximum amount of your income into your business. In order to develop a frugal lifestyle, you need long term planning, budgeting your expenses, and always being on the lookout for ways to reduce unnecessary expenses.
Make an Emergency fund
A contingency fund is a must-have for all small business owners and entrepreneurs. Maintain this fund at any cost, and ensure that you do not break this fund unless there is an actual emergency. If you really need funds, you could consider opting for other credit options like a personal line of credit or a personal loan which will help you get through your requirements without disturbing your emergency savings.
All in all, while working on your business idea is important, it is equally crucial to managing your finances which is the backbone of your business. And these small tips and practices can go a long way in developing a successful organization and stable personal income.
Lily Tran is a content writer, working for MoneyTap, who writes about all things Finance. Her passion for credit, debt, loan & investment drives her to help readers get an insight into everyday finance.