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5 Reasons Small Business Owners Should Diversify Finances

a diversified portfolio

As a small business owner, it’s easy to become so engrossed in running and managing your business, that you completely neglect your broader personal and familial finances.

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Relying solely on a small business for your livelihood, no matter how successful it is, can be a risky proposition, in addition to being constantly stressful. For financial security and stability, it is absolutely essential for owners to diversify away from their businesses, in favor of other investments.

In this article, we explore a slew of other reasons why it is essential for small business owners to avoid clubbing their business and personal finances, and to stop giving a step-motherly treatment to the latter.

Mitigating Business Risk

Running a small business comes with inherent risks, including market volatility, changes in consumer preferences, and unexpected events such as economic downturns or natural disasters.

If your finances depend entirely on your business, you expose yourself to significant risk. By diversifying your investments, you create a safety net that can protect you if your business encounters difficulties.

Diversification can provide a buffer against the potential losses and uncertainties associated with entrepreneurship.

Creating Multiple Income Streams

Relying solely on your business for income can be precarious, especially during challenging times like the present.

By diversifying your finances, you can create multiple income streams, in the form of interest earnings, dividends, rent, and more.

This provides much needed financial stability for owners, and helps avoid the severe stressors commonly associated with small business ownership and the cyclical nature of the broader economy. As a result, it is essential that owners start building additional streams of income just as their primary business starts becoming successful.

Long-Term Financial Security

By diversifying your investments across sectors, geographic locations, and asset classes, you create a much-needed cushion against uncertainties.

Most small business owners remain with a false sense of security and fail to consider the uncertainties that lie ahead until they become fairly obvious, by which point it is often too late.

The lockdowns imposed during the COVID-19 pandemic acted as a similar wake-up call for millions of small business owners worldwide.

Those who had a diverse range of investments had a nest egg to fall back on, but those who didn’t had to go through a tense couple of months, depending on government aid, credit cards, and other options just to make ends meet.

Reducing Stress & Burnout

Small business ownership, in general, is quite demanding and mentally exhausting, but when your finances and the ability to put food on the table is linked to the success of your business, the stress can be absolutely overwhelming.

During good times, when your business is on a roll, if you can use the surplus generated to diversify your net worth and income streams, the stress you have to put up with during difficult circumstances will be rather manageable.

Without a nest egg to deal with the crests and troughs of small business ownership, owners are more than likely to be burned out over time, affecting their psyche and performance over time.

Create A Lasting Legacy & Generational Wealth

The goal of every business owner, whether big or small, is to build a lasting legacy and create generational wealth for their families to benefit from. This is only possible by building a robust financial foundation that extends beyond an individual business, to a diverse basket of assets.

Given the sheer pace of technology-enabled disruption we see today, across sectors and industries, most businesses may not last for more than one generation. So, if you want to truly build generational wealth for your family, the success of your business should make its way towards asset creation across a diverse range of sectors, classes, and geographic regions.

Fortunately, setting up a robust, diversified investment portfolio is fairly straightforward today, with an easy to use all-in-one investing app from the likes of SoFi taking care of everything for you. By consistently setting aside a part of the profits for your future, a sturdy nest egg is well within reach.

Wrapping Up

In the end, keeping your personal and business finances separate, and ensuring that the former gets the necessary attention it deserves, is just good business practice.

When push comes to shove, you cannot focus on keeping your business afloat, when you’re struggling to find the resources to keep the lights on at home.

Seasoned small business owners, who’ve been tested through crests and troughs over the years realize this and plan their business and personal finances accordingly. This is precisely what helps them build lasting businesses, legacies, and generational wealth for their families to enjoy.

Published: July 18, 2023

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