If you’re like many entrepreneurs, you probably borrowed money, in one form or another, to start your business. According to the Kauffman Foundation, nearly 65 percent of entrepreneurs rely on personal and family savings for startup capital, and close to 10 percent carry balances on their personal credit cards. Now add student loans, mortgages, car loans and other expenses, and you may find that your financial stress is adding up quickly.
A recent study by John Hancock Retirement found that debt is one of the most significant indicators of financial stress, with 59% saying debt is a problem, and more than one in five calling the problem “major.” But while it may be tempting to normalize financial stress as you start and scale your business, the effects on your physical and psychological well-being can be devastating.
Start the new year with a commitment to improve your financial well-being. Here are five tips to get you started:
- Don’t put your finances on the back burner. One coping strategy often recommended to entrepreneurs is compartmentalization, but I recommend facing the issue head on instead. While it may seem easier to ignore financial problems for the moment, real peace of mind comes with the decision to create and stick to a financial plan. A study conducted in 2018 showed that those with a plan reported a higher level of confidence and a more positive outlook on their financial security.
- Seek a holistic financial adviser who will place your interests first. As humans, we often hope to find a quick fix to get ourselves out of a financially troubling and stressful situation. One of the best things you can do is find a financial adviser who understands that your personal life is intertwined with your business. An adviser who views your finances from this standpoint will place you in a process that will immediately begin to relieve your pressure. A clear process that focuses on your entire situation—from assets and liabilities to tax planning and beyond—orients you and makes opportunities visible.
- Don’t be lulled into a false sense of security. Entrepreneurs can be lulled into a false sense of financial security if they have good cash flow and are paying down debt systematically. But it’s critical that you not rely on your gut or a false sense of security around your personal finances or those of your business, because financial security is relative.
Your spouse may feel that you need to be saving more and paying down more debt. Even if markets are going up, your tax bill may not be going down. Don’t believe everything will somehow work out once you sell your company in a successful exit strategy. Instead, use an adviser who can guide and educate you on the best route forward, helping you design a strategy for the future, and (gently) challenging your status quo.
- Embrace transparency. Most people feel incredible stress when discussing finances, because they don’t arrive in an adviser’s office already understanding everything and knowing how to solve their problems. They don’t know it’s normal to begin without having all the answers.
What’s most important in your situation is to be transparent—first with your spouse, and then with your adviser. In fact, your adviser should insist on involving your spouse, because money can be a major source of conflict within a marriage. Tell your spouse and your adviser everything, warts and all, so your adviser can work with the two of you to create a realistic plan that truly works.
- Communicate, communicate, communicate. When working with your adviser, you are the content manager, meaning you are in control of knowing the “here and now,” your goals and objectives, and anything else that comprises your life story. As we discussed, you are responsible for sharing that information with your spouse and your adviser. The right adviser will take this content, put it through a robust process, and come up with alternative solutions.
When the adviser makes recommendations to you as a result of that process, your role is to evaluate them and make a decision. Then it’s back to your adviser to implement your decision and monitor progress until you provide further information. This may seem simple until you realize how fast an entrepreneur’s life can change. Whether you face a merger, acquisition, sale, new product, new employees or new business model, your adviser needs to know.
The entrepreneurial personality is a reactive one. An effective financial adviser takes the opposite approach, balancing your tendency to focus on putting out fires or search for a quick solution. Without that opposing view challenging you, it becomes too easy to normalize financial stress, ignoring the pain because it’s too distracting from the day-to-day work of keeping a business and family running. With these five steps, you can start 2020 on the right foot toward prioritizing your financial well-being.