Rome wasn’t built in a day––your future empire won’t be either. Future entrepreneurs planning to build and grow a business need patience but must also get their own house in order. Have you checked your net worth lately—or ever? How’s your debt-to-income ratio? You’re the boss of your finances; not being able to answer these questions should lead you to rethink your financial priorities.
Running a business forces us to follow good housekeeping rules, such as maintaining our books, managing day-to-day operations, and maximizing our bottom line. Like many other things, if you follow the tried-and-true best practices to the best of your ability, you’ve increased your probability of success significantly.
What many entrepreneurs don’t realize is there’s so much more to financial management than focusing on just the numbers. It’s time to ditch the overcomplicated financial advice and overly complicated spreadsheets. Here are 5 financial rules all future entrepreneurs should master to build a solid financial foundation now and in the future.
1. Know your net worth
Before you begin thinking about creating a financial plan for yourself or your business, you need to know exactly where you stand. A common mistake people make is sitting down and creating financial goals that are wildly unrealistic based on the current state of their finances.
If you want to be successful in creating a financial plan, you’ll need to start by figuring out one simple thing: Your net worth. This magic number reveals exactly where your current finances are and will help you determine which path to take forward to achieve your financial goals.
Your net worth is the total value of your assets minus your liabilities. If you owe more than you own, you have a negative net worth. If you own more than you owe, you now have options. It can take years to get the needle to inch toward the positive end of the net-worth spectrum (particularly if you have a student loan), but if you’re heading that way, you’re on the right track.
The knowledge of your net worth should become the foundation for all your future financial decisions. Where do you want your net worth to be in one, two, or even 10 years? Knowing how your investments, purchases, and projects will change this number—for better or for worse—will become your guiding compass. For example, once you start your company, part of your net worth will be directly related to the valuation of your company.
2. Differentiate between good debt and bad debt
Far too much of the conversation in the money management world is about how debt is the enemy and should be avoided at all costs. In some cases, this is true—but not always.
Bad debt is a liability that you either can’t afford to repay or costs an arm and a leg to pay off. Credit card debt is the most obvious example of bad debt; it’s a “silent killer” when it comes to monthly budgets, with average interest rates reaching as high as 22%. The longer that debt hangs around, the more you’ll end up paying.
But not all debt is bad debt, and many people are surprised to hear that there is such a thing as good debt. Good debt is a liability that will provide some benefit or advantage in the future, like a mortgage. Every time you make a payment, you’re building equity that you can tap into in the future (ever heard of HELOCs? That’s what those are for). With each payment, your net worth inches toward the positive (see why it’s important to figure that out first?).
Some debt might look like good debt, but a closer look at the fine print will show a different picture. Some business loans are debt traps in disguise. While a business loan may give you the capital you need to get your business off the ground, a high-interest rate and hefty monthly payment can seriously cut into your cash flow, and therefore your ability to sustain your business while you’re trying to get traction with customers. Reading repayment terms of loans and determining if they’re good or bad debt will save you headaches—and money—in the long run.
3. Shun the get-rich-quick urge
The road to wealth requires a plan, patience, and perseverance. Anyone who tells you otherwise is likely trying to scam you. One of the biggest mistakes I see people make with their finances is being lured away from their financial plan toward some get-rich-quick hack.
We could all always make good use of more money. That’s understandable. But there are many dishonest players out there that prey on this instinct of wanting more financial security, whether it’s by selling poor-quality products, pushing investment schemes, or even simply trying to steal your account information. To put it simply, if it sounds too good to be true, it probably is. If the person selling you their new idea is showing themselves driving a Bentley, run.
If you’re ever considering investing your money into a business, a project, or a financial product, do your due diligence before you commit to anything. You can verify a business’ credentials with the Better Business Bureau; the Federal Trade Commission also regularly updates its site with information about the latest scams, and even includes tips on how to protect yourself from becoming a victim.
4. Protect your future self
Every business has a plan for the worst-case scenario. Your personal finances should have one, too. Protecting your future self is one of the most essential financial rules you should adhere to. Building an emergency fund now means you will be protecting yourself in the future from an exogenous event (like a pandemic disrupting your distribution channel).
For future entrepreneurs, the golden rule is to have three to six months’ worth of emergency savings tucked away for when the unexpected happens, meaning the fund should be able to cover six months’ worth of living expenses. These funds should be easily accessible, preferably in high-yield savings so you earn interest payments on the funds (with interest rates currently around 4%, there’s no reason not to).
An emergency fund protects your future self and gives you the freedom to remain independent from a variety of bad situations, like losing a major client. In a worst-case scenario, you’ll have a reserve that can keep your life afloat while you adjust your business plans. A cushion of cash keeps your door open to new opportunities—because whether we like to admit it, cash is still king.
5. Play the long game
What people don’t seem to realize is that learning how to manage your money, and what you do with it, is a lifelong commitment. Today, money dictates how we live, where we live, and what we’re able to do.
As I touched on above, there is no quick fix to making all your money problems go away. Paying off debt takes time. Building a solid emergency fund takes time. Even learning how to balance a monthly budget takes time. Now is the time to accept that you’re playing the long game with your money, no matter how big or small your financial goals may be.
It’s also essential to keep the long-term in mind when thinking about your investments. There’s an app for everything these days, including investing, but that’s not necessarily a good thing. Sure, you can start day trading from your iPhone, but really, the risks far outweigh the benefits. Ditch the gamified stock trading apps and focus on investing for the long term in vehicles like mutual funds and ETFs.
Bottom line
You’re the CEO of your money. Following these five financial rules will build a strong foundation for your financial future—and don’t forget, this is a journey that’ll last a lifetime.
Mark E. Watson III’s mission is to support the next generation of entrepreneurs building purpose-driven, innovative, technology-enabled companies. He does this through Aquila Capital Partners, a proprietary capital investment fund he founded in 1998. Over the course of Mark’s career, which spans three decades, he built two public companies, the most recent being Argo Group, a specialty insurance, and reinsurance provider. Under Mark’s leadership, Argo Group went from being nearly insolvent to a global business with clients on six continents and over $3.5 billion dollars in revenue. He’s also credited with creating a new approach to specialty insurance and reinsurance.
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