Why Business Owners Need To Think Differently About Their Money

Would you describe yourself as a “risky person?” Most people would probably answer that question with a “no.” Yet, as an entrepreneur you have taken on more risk than most others. This is because you have considered the risks and potential returns of entrepreneurship and decided they are worth it. Owning your own business is a calculated risk. 

There is a big difference between taking a calculated risk and flying out to Vegas to put it all on black.

 Oftentimes when financial planners talk about risk, it’s in the context of a client’s investment portfolio. This is an important conversation, and one that absolutely must be had. Yet, for a business owner the conversation about risk can’t stop there. When working with our business owner clients we like to think about your “true total portfolio” – that is, the combination of your human capital (or earnings potential) and your assets, in a unique way.

 For most W-2 employees their salary mimics a high-quality bond. A bond typically pays regular interest and an investor could see some increase in the value of the bond, though that is not guaranteed. As part of your total portfolio it’s fairly reliable. You can plan around it.

 When you own a business, your human capital and income tends to be more like a stock. Yes, you could make the case that your income is actually quite diversified as a business owner because you have many clients or multiple streams of revenue. You’re not wrong. We could think of your income as an entrepreneur as being more of a stock index fund, but at the end of the day, it’s still generally riskier than a high-quality bond.

 (This is not investment advice. Speak to your personal CERTIFIED FINANCIAL PLANNER TM about your personal situation.)

 As a business owner, you know your income can be highly variable. You may have your best year ever, followed by a sharp decline in earnings. Perhaps you’ve experienced significant, ongoing growth in your income, and you expect it to simply keep climbing. Yet we know that continued income growth is only one possible outcome among many. 

After all, business growth often comes with increased costs.

 What does this mean? Having an income that’s more like a stock than a bond means you need to structure your finances differently than many of your friends who are not self-employed. You may need to hold more cash. You may need to set up your own 401(k) plan. Your investments might need to be a little more conservative (depending on your business). You may need to manage risk differently. You may need to manage your personal debt in a way that helps to protect you from income variability. You may be able to save a lot of money some years and very little money in other years. Exit or transition planning may also be on your plate.

 All of these variables, and more, have far reaching effects on your personal finances both in terms of opportunities and risks. At Spark Financial Advisors we are committed to helping you, the business owners and entrepreneurs, live confidently with the knowledge that your personal finances are well taken care of so you can focus on what matters most to you.

Questions for Lauren?

Financial planner and advisor, Lauren Zangardi Haynes, CIMA®, CFP®, works with business owners in Richmond and Williamsburg, VA. She also works virtually with clients nationwide. As a fiduciary, she offers comprehensive Fee-Only financial planning and investment advisory services so you can live your dreams with confidence.