Finances include income and expenses; businessmen face difficulties in managing them. The leading reason is the cohesion of personal finance and business finance, which interfere with the management and growth of both. If you are experiencing the same issue, you need to separate business finance from the person immediately.
How to Separate Personal Finance from Business Finance?
To begin with, these are two completely different cash flows.
Business finance is aimed solely for increasing wealth; it is comparatively more sensitive and risky, and fluctuate with the business. Besides, it would help if you apply for a Virtual Credit Card for business to be on a safe side. On the other hand, personal finances do not indulge in making a profit; they are a bulwark of your security. Their goal is to maintain and increase your living standards.
In addition to the essential, there are also purely practical reasons to separate one from the other:
- The danger of physical bankruptcy. By tying all the money to a business, you risk staying with nothing if it burns out.
- Ineffective personal spending management. Controlling your own expenses will help to put them in order and foster financial thinking.
- Ineffective company management. You need to clearly identify the assets, debts, income, and expenses of the business in isolation from your wallet.
- Inability to create a financial cushion and start investing.
You need to start by calculating income and expenses, and be sure to know the best finance podcasts. It is not necessary to be too scrupulous here. Our goal is to roughly understand how much can now be allocated from a business for personal needs.
Avoid Investing Personal Funds Into The Business:
After the allocation, always try to avoid personal fund infusion into the company. It is better to turn to investors or business loan lenders than to jeopardize yourself and your family. If the situation forces you to invest your personal fund into the business, you cam this amount as “Debts of the business”, which you need to return to yourself.
However, you need to create a clear plan that shows what you really want and how to develop your business to achieve what you want.
Any plan begins with goals. Always act according to SMART strategy: specific, measurable, achievable, relevant, and time-bounded.
What is the 50/20/30 rule?
To deal with the expenses, some businessmen prefer the point-by-point analysis of all expenses and reduce unnecessary ones. Others follow the lightweight version and follow the 50/20/30 rule:
- 50% of the income goes to meet basic needs, such as food, housing, transportation, etc.
- 30% are all kinds of entertainment and luxurious living.
- 20% is dedicated to the future and achieving goals.
If you have debts and loans, then it is advisable to consider paying them off from the 50% mentioned above. Moreover, the liabilities also include the additional amount that you took from your own business.
It is also vital to foster financial thinking. Before you make a big purchase, think: “How much I had to work so that I could afford it”. Do not measure spending money, but hours and days of hard work.
How To Create And Fill A Financial Cushion?
The 50/30/20 model has a drawback – it does not consider a financial cushion or capital to start investing.
This financial cushion is a reserve fund for a bad time. For instance, you may use this money when there is no income for a specific period. It can also be assumed as a partial investment if you fix deposit this money in the bank; banks pay interest against this nature of the deposit.
It is worth noting that unforeseen expenses include:
- Emergency situations (accident, fire);
- A sickness – requiring serious treatment.
However, insurance covers such emergency expenses in most of the cases. But if it is not, you will have to use your savings. In any case, the probability of unforeseen expenses and loss of income is minimal.
Moreover, the financial cushion is not directly related to business finance and entrepreneurial risks. To do this, you can create a separate fund.
Where to Save Financial Cushion?
The best way to keep a financial cushion is with a bank deposit. Cash will not work keeping in mind the temptation and increasing inflation. These days, many financial institutions, including banks, do not charge fines if you withdraw the fixed deposit before the agreed time. This is especially important since you may need quite unexpectedly.
How to Invest Wisely?
Investing is a new tactic in increasing personal finance. Suppose 2-4 years have passed and a financial cushion has been created. 20-30% of the income is saved and you can probably spend it somewhere else.
Investing is an excellent mechanism, which is no longer aimed at accumulating funds, but at increasing income. Investing money, in most cases, involves risk; after all, if the company burns out, it impacts your income. Besides, the passive source of money will become a pillar if something happens to your own business.
- The first method is to decide how much and when to invest in the business. You can invest in a specific startup without intermediaries: provide a loan to an entrepreneur or buy a stake in a business.
- Another method of investment requires the highest degree of financial insight and experience. In addition, usually, a lot of money is needed here. For instance, mutual investment funds will become an alternative to independent investment. Each company can create a mutual fund policy and invite anyone to invest in it. When enough funds have been raised, the company uses them to invest in business projects to increase the fund’s capital and pay money to investors.
- The third way requires less money and less experience with a higher level of risk, i.e., buying stock exchange shares. It would be safer to purchase through a stock brokerage exchange. Besides, the collapse of the company is a complete loss of investment.
- Although buying or investing in bonds is not so profitable, but the safest method. It is 100% guaranteed that you will definitely get your money back – and even with interest.
Whatever method of investing you choose, the most important thing is to set the goal correctly (using the SMART model). This strategy enables you to determine exactly how much you plan to earn, when and whether it is achievable. Choose at least two independent ways to invest (for example, mutual funds and bonds); it prevents losing everything at once. The constant monitoring of your investments is also very essential to make the right decision at the right time.