Personal Finance Lessons for Entrepreneurs
Thomas Edison summed up the entrepreneurial spirit when he said, “I have not failed. I’ve just found 10,000 ways that won’t work.” It’s this “refuse to lose” attitude that makes entrepreneurs the backbone of America’s – and Washington’s – economy. However, finding 10,000 ways that won’t work is probably not the best approach for business owners as they plan their financial future.
Hard work, knowledge, and a willingness to take risks are traits shared by entrepreneurs. Unlike individuals on a company payroll, however, entrepreneurs can’t count on a steady paycheck, or contributions to an employer’s retirement savings account to help them ride out life’s economic highs and lows.
That’s why, regardless of age or accomplishments, entrepreneurs should take time today to create an investment plan for the future – or risk undercutting the rewards of their labor.
Diversification for the future
Entrepreneurs are accustomed to taking calculated business risks. However, when it comes to investing hard-earned personal wealth, it’s important to understand that investment risks are different.
Many business owners work hard to establish themselves within their industry. Yet, it is this comfort and familiarity that leads some business owners to concentrate their investments in their own industry.
For example, aerospace is a huge driver of the Washington state economy. Local entrepreneurs who provide products or services to Boeing may be tempted to concentrate their investments in the aerospace industry. After all, they know all the players. However, this kind of approach could lead to increased vulnerability – particularly in the event of a downturn within the aerospace industry.
Some business owners lose sight of the fact that they already have a portfolio position in their own industries – their business. Diversification across several industries is a more savvy investment approach.
Develop a plan to leave
Many Americans retire or change careers by simply packing a few boxes. Business owners, on the other hand, have two things to think about when making a life change: 1) An exit plan for themselves and their business; and 2) a financial plan for retirement.
Instead of waiting for an exit, business owners should build a long-term investment portfolio designed to address their future income needs. Ideally, they will have a retirement plan in place five to 10 years before the target retirement date.
Critical questions must address where the business owner’s income will come from once they’ve walked out the door, and how assets will be passed along to heirs.
Selling is one way to extract assets from a business, unless it has no residual value. Those who will get a payout on their business should have a well-devised plan for investing the proceeds.
Delegate where needed
Lastly, hiring the right people and delegating essential business functions often drive an entrepreneur’s success. This enables the business owner to address the big picture for growth and trajectory of the business.
An entrepreneur not otherwise trained as investment professionals is advised to consider a similar strategy when planning their financial future. Identifying the right investment professional can help chart a successful financial course for life after the business.
As reported in November in Seattle Business, more and more Washington State residents are starting companies as soon as they graduate, even fresh out of high school. No matter how old you are, if you’re a business owner, now is a good time to plan for the future.
Erin Eddins is a Chartered Financial Consultant®, a member of the Financial Planning Association (FPA) and is a CERTIFIED FINANCIAL PLANNER® professional. She has more than 20 years of experience working with individuals and families to develop financial plans and implement investment portfolios to help clients secure their financial futures. She can be reached at erin.eddins@standard.com or 425.212.5986.
