You’re laser-focused on your business’ financial success. But what about your personal finances? When it comes to financial planning, entrepreneurs face special challenges that average employees—with company-provided health insurance and 401(k) employer-matching plans—don’t have to worry about.
“If their businesses are growing and need capital, small-business owners often put all available liquidity into the business, leaving them unable to save or invest for other financial planning goals,” says Eleanor Blayney, certified financial planner (CFP) and volunteer with the CFP Board Center for Financial Planning.
Entrepreneurs also are likely to start saving for their financial goals later than the average person, says Sara Stanich, CFP and founder of Cultivating Wealth. “They may have been putting all their extra cash into the business, especially in the early years, leaving little or no cash available to set aside for the future,” she continues.
Ironically, putting your business first can doom its future, according to Blayney. “Failing to do the financial planning for [yourself and your family] puts the business itself at risk,” she says. “The personal planning is every bit as important as the business planning, and in many ways the two are integrally related.”
The good news is it’s never too late for entrepreneurs to start planning personal financial goals. “Just as you have a business plan to run your business, don’t neglect having your own personal financial plan. Think of it as a road map,” says Stephen L. Williams, CFP. “Some assumptions may not be accurate, but when you have a plan in place, you can make adjustments and changes on an annual basis.”
To start developing your personal financial road map, Stanich says to “think about where you want to be in five, 10 or 20 years. What will it take to get there?”
Financial planning for entrepreneurs
Here’s an overview of some important stops along your financial planning route:
Consider your living arrangements
If you haven’t already purchased your own humble abode, you may think the dream of homeownership is beyond your reach. But buying a home gives you a valuable asset that can potentially be used as a tool for financing your business. Purchasing one may not be as hard as you think.
One mistake business owners make—mingling their business and personal finances—can be a stumbling block to homeownership, however. “Small-business owners especially tend to do this in the early years of the business, and it really confuses the financial picture,” Stanich says. Separating business and personal bank accounts is essential to building both your business and personal credit rating and income records.
Another error to avoid: over-minimizing your income. Stanich explains that many entrepreneurs make every expense a business expense so they can show no or little income on tax returns. That can come back to bite you when you can’t qualify for a mortgage because of a low income history, she warns.
It’s also important to maintain a stable income if possible, even if your business’ sales fluctuate. “Lenders want to see a stable income on your tax returns over several years,” Stanich says. “That can be a challenge for business owners.” Once your business is profitable, figure out how much income you need to support a comfortable lifestyle and stick to it.
Plan for how you’ll pay for college
You don’t have to be a small-business owner to cringe at the cost of a college education. According to U.S. News & World Report, the average cost of an in-state public college for the 2022-2023 school year was $10,423, and the average cost of a private college was $39,723.
“For small-business owners who are putting all their energy and funds into getting their businesses started, where does the money come from to put into a 529 [college savings] plan?” Williams asks.
“Business owners may delay saving for college until their children are older,” Stanich says. “Unfortunately, people don’t realize the importance of saving over time.”
No matter how little you can contribute, Williams recommends starting a 529 plan as soon as each child is born. “These plans grow tax-deferred, and the money can be taken out tax-free for qualifying college expenses,” he explains. “Making consistent contributions gives it a chance to compound over time.”
Remember, you aren’t the only one who can contribute to your child’s 529 plan. Williams suggests encouraging grandparents and other family members to make contributions as holiday gifts “instead of buying the kids the latest electronic gadget.” He also recommends looking into ways to lower the college tab, whether by spending the first two years at a community college before transferring to a larger school or by seeking financial aid.
Start saving for retirement
The cornerstone of any personal finance road map is retirement planning. If you must choose between saving for retirement, buying a home and financing your children’s education, Williams recommends making retirement savings your priority. You can get a loan to finance a home purchase or your child’s college education, but there’s no such thing as a retirement loan.
“Most people have saved far less than they will need to fund a comfortable retirement,” he warns.
Small-business owners are better positioned than most people for the reality that people are living longer and therefore need to work more years to save enough for retirement, Williams says. But small-business owners’ attitudes may get in their way.
“I’ve observed a characteristic mindset among small-business owners,” Blayney says. “They are apt to see [investing in stocks] as very high-risk, when in fact, if managed properly, the risk is far less than their investment in their own businesses.”
Blayney says entrepreneurs often view the stock market as something they can’t control, while they feel completely in control of their own businesses and are therefore more comfortable with those risks. As a result, many “small-business owners often fail to diversify their net worth by using other financial assets to offset the risks of the business itself,” she continues.
Cost is another factor scaring entrepreneurs away from retirement planning, according to Stanich. “Some business owners hesitate to set up a retirement plan because they’re afraid of the expense involved,” she says. “[In reality], a retirement plan may provide significant tax advantages, both for the business and the owner personally.”
There are retirement plans available for every size of business today, even for sole proprietors. And if you’re already over 50, you’ve still got time. In fact, Williams says, if you are 50 or older, you should take advantage of catch-up contributions. They allow you to contribute more to a retirement plan than younger people can.
For a small-business owner, succession planning is a crucial building block of any retirement strategy. The Northern Trust Institute’s “Business Owner Benchmark” found that 70% of survey respondents already had a succession plan.
“They may assume their kids will take over their businesses or that it will be easy to sell,” Williams says. “Even so, put time and effort into building your succession plan five to 10 years before you expect to retire.” Your financial planner, lawyer and accountant should all be involved in creating the succession plan.
Here is where your personal and business financial plans intertwine: “Unless you’ve done your own retirement planning and figured out what you will need [to retire], you will not have the information needed to make a sale or exit decision about your business,” Blayney warns. If you don’t know what your needs are, you might sell too soon or at a bad price, she adds.
Cover your assets with insurance
The glue holding your entire financial plan together is insurance. “Insurance planning and implementation play a key role in an entrepreneur’s financial planning,” Blayney says. Small-business owners face unique challenges here. Along with all the insurance coverage your business may need—such as commercial property insurance, liability insurance and health insurance for your employees—business ownership may create special personal insurance requirements.
You may need:
- Life insurance coupled with a buy/sell agreement to enable a successor to buy out your spouse or other family members in the event of your death.
- Disability insurance to protect your income if you can’t work in the business.
- “Key man” insurance to ensure that the business can continue if you die or are disabled.
“Ask yourself what would happen to the business if you couldn’t work or you died,” Stanich says. “Those are real risks that insurance can protect against.”
Don’t forget health care costs, Williams advises. Fidelity’s “Retiree Health Care Cost Estimate” states that “an average retired couple age 65 in 2022 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement.”
Additionally, according to the Administration for Community Living, “one-third of today’s 65 year-olds may never need long-term care support, but 20% will need it for longer than 5 years.” And that care is not inexpensive—according to Genworth’s 2021 “Cost of Care Survey,” the median annual costs of assisted living were $20,280 for “adult day health care” and $54,000 for an assisted living facility.
Long-term care insurance is underutilized, Williams says. If you can afford it, the earlier you buy it, the better off you’ll be. “Forty- and 50-year-olds aren’t thinking about it yet, but if you wait until you’re 70, it’s prohibitively expensive,” he continues.
Regarding insurance, “business owners should keep in mind that group policies are generally less expensive than individual policies,” Stanich says. “Always try to get group rates if you are eligible.”
Find a financial planner for entrepreneurs
Now that we’ve given you an overview of your financial planning road map, start zeroing in on your personal needs as an entrepreneur. “Your first step should be to hire a competent, experienced planner, ideally a certified financial planner [CFP accreditation follows their names] who’s familiar with the issues of small-business owners,” Blayney says.
This person will become a key member of your advisory team. “Most small-business owners have an accountant and usually an attorney, but these professionals, as valuable as they may be, aren’t necessarily able to coordinate both your personal and business circumstances,” Blayney continues.
If it feels overwhelming, Stanich says to take baby steps: “The important thing is to keep moving in the right direction.”
This article was updated April 2023. Photo by Dragon Images/Shutterstock