Starting a business takes a lot of savvy. Many entrepreneurs border on genius when it comes to their particular niche, and that’s why people are willing to invest in, buy from, and do business with them. While a particular entrepreneur may thrive in her/his field, they may struggle in one common arena: Personal wealth management.
Entrepreneurs spend so much time garnering investments that they often don’t take the time to make any of their own. If you’ve ever started something you probably know all too well how easy it is to invest in a project, with no promise of a return. You pour all your time, energy and in this case money, into a venture hoping that it takes off (and eventually pays off).
One founder has set out to solve this problem. Paul Adams, CEO and Founder of Sound Financial Group, has a passion for helping fellow entrepreneurs reach personal financial success. As a result, his Seattle-based investment firm manages millions in capital for its clients. Paul has some great insights on where and why founders often struggle to manage their own personal finances.
Personal Wealth Management Tips
1. Legacy vs. Retirement Dreams
When most of us think of retirement, we think of vacations, houses and no debts. Adams and Sound Financial recommend an alternative perspective. Instead of putting your focus on how you’re going to spend your savings, think about the legacy you plan to create. “First, cast your vision of the future; then set an intention for any financial advising relationships you engage in, establish a plan and strategy and track your progress going forward.” Having this mindset helps vision driven founders find purpose in their financial planning.
2. Selecting the Right Kind of Assets for Long-term Withdrawals
Adams also details that “Anticipating a lifetime of withdrawals from a defined asset pool over an indefinite period of time is a complex challenge for which there is no simple solution. Pursuing this challenge can require creative approaches and persistent vigilance.”
Once you retire/exit/sell you’re essentially out of a job, so you’ll need to have saved well.
Solution? Plan for market fluctuation and have clear expectations of what your desired retirement lifestyle is going to cost. You’ll need to ensure that your investments are able to meet those expectations.
3. Your Business is Great, But it Might Not Be Great for Investment
The other mistake entrepreneurs make when relying on their businesses for personal success is banking on a sale price down the road. “I know entrepreneurs that have based their retirement plans on the current value of their business. The problem is, 10 years from now when they plan to sell, no one might be willing to purchase it for that price. It’s important to create a strategy that doesn’t rely on such variables.” Adams shared.
Loving your business is great. It’s natural for founders to believe that their ventures are also worthy of personal investment, but startups are risky and markets are volatile by nature, so you shouldn’t just rely on your ventures for retirement funding.
4. Mistakes in Calculating Net Worth
So much of getting a business started is pitching to the right people and selling the value of a venture. It’s not uncommon for entrepreneurs to present the best version of things in order to get people on board. Unfortunately when it comes to self-valuation things get a little tricky.
Often entrepreneurs simply calculate the most current value of the business and use that as a baseline for their own net worth. Adams shares that “There’s a difference between your personal balance sheet and that of your business. Entrepreneurs who are new to financial management also make the mistake of including the wrong assets in their calculations.
Vehicles, homes and similar assets have real value, but they shouldn’t make it into your net worth calculations unless you plan on selling them soon and not replacing them.”
Measuring your net worth is a critical part of your financial strategy because it helps you determine what investments you need to make to plan for retirement. An inaccurate assessment of your current worth may lead to shortfalls down the line.
5. Don’t Make Commitments Without Having Them in Your Existing Plans
Adams shared “I can’t tell you how many entrepreneurs get themselves into trouble by committing to things without including them in their financial strategy. Expenses like vehicles, college tuition or a better house are easy to aspire to or promise, but planning for them is a whole different game. Whenever you want to commit to something in the future for you or your family, start including it in today’s plans.
The key is having the patience to incorporate these goals as a part of your long-term strategy. It also requires a degree of self-awareness and self-control. You have to be able to realize a want or a desire and postpone it until you can assess its impact.
So to recap, Adams recommends that you:
- Plan your legacy before you plan your retirement,
- Plan what your retirement withdrawals will be based on both the kind of assets you have and the lifestyle you plan on living,
- Don’t base your retirement on the future sale price of your ventures,
- Accurately measure your net worth to help determine what’s needed to accomplish your retirement goals,
- Don’t commit to expenses before including them in your strategy.
Many leaders and founders spend more time managing the success of their business than their own finances. The fact of the matter is you’ve worked hard to achieve the success you’ve earned, so you owe it to yourself to manage it well.
Investing Photo via Shutterstock
This requires a lot of discipline during the setup phases, because that’s where most of the “pain” is experienced. Pushing through so that things are defined and happening is the hardest part.