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What Should Successful Entrepreneurs Do With Their Money?

By Sunil
18 Comments

There are blogs on personal finance, then there are blogs on various forms of entrepreneurship, but very rarely do you find blogs that discuss both topics.

I can understand the desire to laser focus in on one’s target reader, but because I don’t see much of a blend of the two topics in the blogosphere, I (hopefully wrongly) assume there aren’t very many who feel these topics are not mutually exclusive.

From my perspective, I see these as two topics that go hand-in-hand mainly because money is at the core of each of these. Entrepreneurs may become successful financially without a solid understanding of the personal finance basics, but if they want to increase their chances of doing so and more importantly remain successful over time, personal finance education becomes critical.

Knowledge of Personal Finance Ensures Your Financial Safety – Even If You Fail as an Entrepreneur

Although I consider myself a successful entrepreneur, both online and offline, I am a student of personal finance first before I am an entrepreneur. I was applying personal finance fundamentals in my own life way before I embarked on anything entrepreneurial.

For example, I was spending less than I was earning, I was saving for the short term, I was investing for the long term in vehicles like 401k plans and Roth IRAs. I was cognizant of the debt I undertook and attempted to eliminate all of it.

I leveraged arbitrage by borrowing money cheap and then investing it for a higher rate of return. One can argue arbitrage is a form of entrepreneurship and I agree, hence another reason why these two topics are not mutually exclusive.

The advantage of practicing fundamental personal finance in my life is that I slept at ease every night knowing that even if my entrepreneurial activities were to fail, I would be fine in the long run from a financial perspective, and I don’t mean fine as just making ends meet.

I don’t think it is prudent to leave your job and become a full time entrepreneur right away. There are a lot of wonderful things that can be said about a solid career in the corporate world as well. This attitude and approach helped me psychologically as well as I built my businesses over time, whether investing in real estate, buying a physical business or starting multiple websites online.

Personal Finance Fundamentals For Entrepreneurs

Consistently practicing personal finance also prepared me for the next level, which is entrepreneurship and the application of personal finance principles to business.

Here are some very specific areas of personal finance that I feel are important for an entrepreneur to grasp:

Budgets and Forecasts – Budgeting and forecasting are at the forefront of fundamental personal finance. After one gets good at managing the personal balance sheet and income statement, doing so for an entrepreneurial endeavor becomes much less daunting. When you are starting a business, resources are thin, and even the most basic blocking and tackling aspects of it need to be executed adequately if you want to succeed.

1. IncorporationDo you establish an LLC or an S corporation? It continues to unpleasantly surprise me how many online entrepreneurs will set up an LLC because of either herd mentality or the ease of execution. Little do they know the amount of money they are excessively paying in income taxes. With an S corporation, an entrepreneur can draw a salary from their business, which is not subject to self employment tax.

2. Debt – Is all debt bad? Can debt be used to propel your success? Not all debt is bad, and if you can recognize good debt from bad debt and more importantly how to leverage it in your personal finances, you can do the same for your business. This is where the importance of understanding arbitrage comes into play as well.

3. Income Taxes – Do you have a basic grasp of how income taxes work? Most Americans (maybe people in general) don’t realize how much they are truly paying in income taxes. Whether as an individual or as a business, the nature of income (active vs. passive) can impact your income tax situation significantly. Do you understand all the tax deductions you are entitled to? How much should you draw in salary vs. dividends or distributions from your company? Understanding the difference between each and more importantly each one’s tax treatment can help you tremendously.

4. Asset Protection, Management and Growth – What happens to all the profits from your business? They flow to you as the owner individual. How do you protect your wealth? How do you actively or passively manage it so that it grows or at the very least preserves its worth? Are you familiar with the different alternatives? Should you diversify? Knowledge of personal finance, even as basic as locking in your capital in layered certificates of fixed deposit can go a long way in this example.

There are several other topics as well. For example, education planning if you plan on having children, or estate planning when you start to consider what to do with all that wealth you will have accumulate closer to the time of your death. Do you want to leave a legacy? What’s the most tax efficient way to do so while accomplishing all your objectives?

Because of the space we are in and the nature of blog topics that are written about in this space, very rarely do I witness discussions of this nature, which touch on the personal finance side of the equation. I suppose that’s what personal finance blogs are for. But why not have access to a blend of the two?

We often hear about online entrepreneurs generating a significant amount of income online, but what are they doing with that income? I sure hope many have spent some of that money on their education, or hiring a professional that can help them with the personal finance side of the business. But what about those who don’t? I guess we will never know.

What Should You Do With The Wealth Accumulated Through Online Business?

Everyone has different views and beliefs about money, and while I cannot tell you what to do with it, I can share with you what I do with funds accumulated through online business.

If you are a full time entrepreneur (online or offline), your first priority is obviously to fund your living. Bills have to be paid and you need to raise yourself and your family. Anything excess of that is where personal finances starts to come into play.

I allocate a good part of my excess to savings and retirement funding. I also allocate to tax efficient vehicles that allow me to save for healthcare expenses and children’s education. I also keep a rainy day fund locked up in fixed deposits. This fund grows overtime as my family’s needs grow.

I am also a big advocate of diversification, so I also allocate to other avenues such as real estate, small scale private equity investments (there is always someone with a brilliant idea looking for capital) and physical brick and mortar businesses.

For me, diversification and the pursuit for more passive income streams is the key. With appropriate financial knowledge and management skills, a financially successful entrepreneur can reach a point where their income and investments generate enough funds for them to live on.

I have been studying personal finance for well over a decade. From everything I have experienced in life and have written in this article, it is apparent to me that entrepreneurship and personal finance are very much intertwined. I truly feel they are not mutually exclusive at all, but I’d love to hear your thoughts in the comments section below?

I am definitely not advocating training yourself to be a professor of personal finance. Rather, embrace the topic and educate yourself. Knowledge of fundamental personal finance principles in my opinion is just as important as knowledge of the entrepreneurship endeavor you are involved with or are interested in.

So whether you are already successfully profiting from your online business(es) or not, invest some time in your personal finance development. This knowledge will help you tremendously whether or not you succeed in entrepreneurship.

What About You?

Do you feel personal finance and entrepreneurship are mutually exclusive topics? Why or why not? Hypothetically assuming that you are not familiar with either, if you were given only one option between the two, which one would you rather have exposure to? Why?

Sunil

Photo courtesy of Alan Cleaver

About Sunil

Sunil is the author of the Extra Money Blog, a platform that discusses expedited wealth building through multiple streams of active and passive income where you can download his FREE report on How to Establish a $1,000 a Month Passive Income Stream in Your Spare Time in Less Than 180 Days. He was a CPA in his previous life and has also authored the CPA Requirements portal which guides CPA candidates in passing the CPA exam and expediting their career success.

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18 Comments

  • Great post! I agree entrepreneurship and personal finance go hand in hand and many entrepreneurs fail because they lack control of their personal finances. Financial literacy is crucial.

    Question: Is it true with an S-corp you are subject to double taxation? Tax on the S-corp profits as well as what you paid yourself in salary? While an LLC is a pass-through entity meaning your profits and losses pass through to your personal taxes, therefore only being taxed once? My understanding is an LLC provides the same tax deductions as an S-corp. Which make it ideal for a small one-person/family biz, and potentially a greater tax savings.

    • it’s actually the other way around. in a single member LLC, everything is pass through and you get taxed as an individual. in an S corp, you don’t pay self employment tax on part of your income as you are paying yourself and then deducting that salary from the S corp as “salary expense”. you still get taxed on all the income, you just avoid some self employment tax. in an LLC, if all income comes to you, you pay SE tax on all. make sense?

      ***this is not tax/legal advice***

      • Olga

        An LLC, single or multiple members, may elect – commonly done – to be taxed as a corporation, C or S, by filing with the IRS.

  • Great Post Sunil.

    Well I have studied personal investments and finance for so long too.
    My first internet business “course about getting in shape for busy professionals and the main model was me :D generated 200+k in 18 months”

    My second internet business “dating through facebook generated 150+k in 18 months”

    Due to currency difference my net revenue was around 2.2 million Egyptian pound – I love how dominate your currency is :D

    So I’ve invested the money from my first and second internet businesses as wise as I could.

    First I needed a continuous income stream so I bought a property and started a cafe lounge “Starbucks style” applied some awesome marketing tactics I learnt years ago from the late Chet Holmes and I experienced explosive growth.
    That growth allowed me to open a second retail after a YEAR. It’s a high end restaurant. Applied same principals and it’s growing handsomely.

    I Invested The rest of the initial 2.2 million EGP in the stock market. targeting new companies with promising business model by it’s smart management -I learned this from Warren Buffet. It’s a long term investment but it’s paying off. Even after the Egyptian revolution when all stocks are crippling. The stocks I chose still performing very well.

    Now thanks god my income is enough to diversify it even more -I like commodities- as the demand never decline.
    So mainly I buy agriculture lands, poultry farms, Gold and real estate properties -I have four and they are new branches for the cafe and the restaurant.

    Even in the stock market I focus in the same. commodities like Gold, Oil, food … etc
    This is my strategy that didn’t fail me even with the current horrible economy in Egypt. Assets and commodities. Focusing in investments with a stable demand.

    Thank you Yaro for bringing this up. Hope I helped.

    -Mohamed

    • you are certainly well diversified, and because these are not too passive in nature I imagine a lot of head ache on your plate? how are you managing it all day to day?

      • Hi Sunil
        They are not headache at all. Because of the way I manage them. I believe in hiring the best talents and motivate them.

        What I did in the cafe lounge, the restaurant, agriculture land and farms are the following

        1) Find the very best talent who are “cool” and friendly at the same time and this is the hardest part!

        2) I give them the salary then ask for with all the perks and holidays they want.

        3) We set together, I listen to their plan to grow the business. And I present my ideas. So I can learn a lot from them too.

        >> Here I listen to their prediction and forecast of how much they would generate for the business in a matter of a year. And I will use that later. in the next step

        4) I Give them an option to get 10 to 15 percent of the net revenue of the business “besides their salary and all the perks” IF and ONLY IF they reached a certain growth level of at least “what they predicted ”

        Needless to say. Everyone worked like hell to get to or even exceed the revenue target that they set :D And they kept me informed .. always.

        Results were pretty awesome. They ALWAYS exceeded their targets for the first year. And continued to grow even more after .
        I try to emotionally attach them to the plan. So they work to get more money “this is the main reason” and they would appreciate the generosity “their desired salary, holidays and perks plus 10 to 15 percent share” that I made.

        As no one is offering that kind of perks. Specially in the retails industry and a down economy.

        Plus I already chose a friendly person who I get along just fine so he/she would feel good and nurture a friendly working environment.

        **I actually try to make them leave and rest a little. Everyone seems to enjoy the place and they are all smiles and happy all the time.
        Ah the waiters and the staff also gets a share of the revenue. So they work to increase sales. Plus a monthly customer service training so we are constantly building loyal and happy customers :)

        Neat right? :D

        Would love to talk about this in one of Yaros famous Podcasts one day :D

        Again thank you Sunil for the awesome topic.

        Best

        -Mohamed

  • Entrepreneurship and finance are absolutely connected in every way. Just like life and financial solvency are connected. Of course it’s not automatic and the points in the article provide a good start.

    I have been a stock broker, registered investment adviser, real estate and building professional and now blogger. In my earlier years (I’m fairly ancient now) I was always seeking the “big deal” and the next million dollar win. This kept me from a regular savings plan.

    It’s not that I didn’t budget, I just didn’t put money away for retirement. If I had one suggestion for those in their early and mid years that would be to always “spend less than you earn and save.” Doesn’t mean you can’t think big! Doesn’t mean not to shoot for the stars. Just be smart.

  • Great topic and agree they go hand n hand. It’s all about making good money choices, and that is not easy to do without education. Have a great day on purpose.

  • Olga

    Re “1. Incorporation – Do you establish an LLC or an S corporation?”

    An LLC (single or multiple members) may elect to be taxed as a corporation, C or S, by filing with the IRS. Commonly done and a well known fact.

  • I’m so glad you wrote about this, and I feel it’s a must read for any entrepreneur, financial expert and freelancer who’s trying to make their business a success. This is partially the reason I started my blog, because I found that handling my finances was not only good for building wealth, but to find the right balance with everything else in life. From careers, to education, to having my own business – it’s all intertwined.

    I especially like your point about not following “the herd” and creating an LLC without calculating what your needs are for your business. You’re right, not many biz owners know or understand their tax situation and often pay way more (or even less) in taxes than they should.

    Being the PF geek that I am, I’d probably have to choose exposure to personal finances over entrepreneurship. Although, I’m an entrepreneur at heart, so it’s a tough call.

  • I definitely believe they are intertwined and I can think of a way they wouldn’t be unless you aren’t taking any of the income, which wouldn’t make any sense.

    Personally, I put almost everything back into growing my business. There will be a point where I will do things differently and be able to live off the income, but not at the current time.

    This really has me thinking though, thanks!
    -Gabe Johansson

  • It’s good that the post entertains the notion of failing as an entrepreneur and how good financial practices can help cushion the blow of a failed business. Too many articles are focused on successful scenarios, or the creation of these, even though failure common among entrepreneurs.

  • YESS! I am a student of personal finance first before I am an entrepreneur. Even when i have been an entrepreneur, Yaro.

    We ned more tutorial in finance at our school.

  • Agree with a lot of things in this post. There is no point of making the money if you can’t manage to hold on to it anyway!

  • Would be great to make enough money from blogging to be able to wonder about how to manage it. But on a serious note, I do agree. It strikes me that being able to organise your monies, etc, is a reflection of how you organise yourself, and therefore your business/website.

    The well organised ones are more likely to succeed, and will probably take better decisions on where to reinvest income to help build their business, etc.

  • I agree, except funds, market research and resources are also important for entrepreneurs, every entrepreneur has to hard work first to just set plans for funds and resource management .. without planning its quite difficult or nearly impossible to become good entrepreneur.

  • I, too, put nearly 100% of my income back in the business, to educate myself and make investments that will hopefully increase the profit. Having his money in the right place is as important as having everything else in the right place and always knowing about it.

  • If I ever be in situation that my online business earns enough money, I instantly move out to the countryside. I dont care about full time job – too boring for me.
    Best Regards

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