It’s a new year, and you have a plan for your business to execute—and probably a few contingency plans because of the last few years. But have you considered your personal finances as part of that plan? Even though women often choose the entrepreneurial path as a means to financial freedom, too often, thinking about their personal finances falls to the wayside as they build their businesses. As we start this New Year, make resolutions that will improve your own financial well-being.
Here are 3 simple ways to get started:
Build Your Personal Cash Flow
As a business owner, you are intimately familiar with managing your business cash flow. So why not leverage the same techniques to build out a cash flow for yourself? Put a true personal cash flow on paper: Map out how much money you need to live on and what you spend. Next, look for expenses you can run through your company as an employee. By taking full advantage of business expenses, you may be able to save a few thousand dollars a year.
If you take those dollars and put them in a tax-deductible and tax-deferred savings vehicle, you now have the start of a retirement plan. You don’t need to think big to start. For example, let’s say you can save $3,000 in a year. Choose any one of several tax-deductible and tax-deferred savings vehicles—such as a Simplified Employee Pension (SEP), a SIMPLE IRA (Savings Incentive Match Plan for Employees), a ROTH IRA, or a solo 401K—and that $3,000 at 6 percent compounded, tax-deferred annual growth will be $126,000 in 20 years. At that same rate of return, a $5,000 contribution would grow to $210,000.
And remember to continue to be consistent with your contributions. Steady savings over the years can help contribute to long-term growth.
Protect Yourself and Your Family
I think we all cringe a little when we hear the word insurance. But as a business owner, and potentially the sole breadwinner of the family, you want to ensure your family is protected if anything should happen to you. One way to have peace of mind is by creating an income replacement strategy using insurance. To figure out how much coverage you need, determine the number of years left before your youngest child graduates from college. Let’s say your little Jenny has 10 years to go. Multiply those years by the amount of money you need to live on, which you just calculated in the section above when you created your personal cash flow. If you need $145,000 per year, you’ll want $1.45 million in insurance coverage to keep your family well supported.
You can also use insurance to fund your retirement if you plan early enough. And no, you don’t have to die to access the money. Permanent life insurance can have a growing cash value. A smart plan is to pay the premium with after-tax dollars and let the cash value build, tax-deferred, over time (usually 10 to 15 years). When you reach retirement, you can withdraw tax-free from the policy up to the basis, or cash value. You can then take policy loans, which are then also tax-free, to use for anything you want—in this case, retirement. This strategy goes beyond just protection: You get a death benefit that can protect your family, and if you live past the building of the cash value, you get retirement income tax-free. This strategy can work very well for business owners under 50 years old since you want to have 10-15 years to build that cash value. It can also be a great addition to your overall wealth plan.
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Document, Document, Document
In both your personal life and your business, you need to document your plan for the future. On the personal side, that should include a will, health care directive, power of attorney, and, potentially, a trust if you have children. For your business, you should have an operating agreement that includes transition goals. If you own the business with a partner, a buy-sell agreement is also critical, and make sure to have a funding mechanism. As your business matures and you may have family members as employees, bring in advisors who can help with both your business succession and estate plans.
With any and all of these plans, review them periodically to ensure they still reflect your current life situation and wishes.
You don’t need to plan and solve all of this today, but prioritizing one of these strategies in 2023 can give you peace of mind for your financial future—not a bad goal for the year ahead!
If you’re looking for help, a good place to start is reaching out to a business banker with experience guiding both businesses and business owners toward their financial goals. Or learn more from Bank of the West’s recent webinar.