4 Ways Entrepreneurs Can Better Manage Their Money

Man using laptop in cafe
Sam Edwards
When you're an entrepreneur, you have the freedom of being your own boss. You can also provide yourself work that allows you to build and change the world around you.

It can be highly rewarding, but it doesn't come without pitfalls and major stress. Entrepreneurship means walking away or saying no to traditional employment -- and investing your time, energy and resources into a big unknown.

And don't forget that many entrepreneurs invest financial assets into their dreams and businesses, too. That can leave you in a shaky money situation, especially there are no steady paychecks and consistent hours, built-in support systems and employer benefits.

I don't mean to scare you off this path; I really believe entrepreneurship makes good sense for many members of Gen Y -- I'm an entrepreneur myself.

But before you take a leap into the unknown, make sure your financial knowledge can help you reach success. Start by looking at these four ways that you can better manage your money as an entrepreneur.

1. Embrace Frugality and Bootstrap Your Business

Eager entrepreneurs are often willing to spend whatever it takes to ensure the success their business. While investing in your business is a key aspect to growth, bootstrap when you are getting started. Bootstrapping refers to starting and growing your business with limited resources and keeping expenses low. Instead of getting caught up in what all you can buy for your business, keep it simple and save. Embracing this mindset will increase your business' sustainability and improve cash flow -- which is vital to your business' success.

Before you launch, figure out how you can cut down personal expenses. Simplifying your own financial situation will help put you in a good position to focus on the growth of your business without being terrified about paying your monthly bills.

The more savings you build up before you launch, the more peace of mind you'll have. However, no amount of savings may ever feel like it's "enough," so sometimes you just have to have guts and go for it.

2. Understand Your Retirement Options

Investing in your business might be a no-brainer to you. But you also need to invest in yourself and your future. That means thinking about retirement -- and just because you don't have access to a 401(k) doesn't mean you can't contribute to your retirement.

You can start by maxing out a traditional individual retirement account (if you need the up front tax deduction) or a Roth IRA. Often, your income is lower the first few years of your business, which means that you're in a lower tax bracket, so I would encourage you to contribute to a Roth IRA while you still qualify.

Once you're business is consisting doing well and you want to increase your retirement plan contributions (and get a tax deduction), you can look at setting up a retirement account for your business such as a SEP-IRA or Solo 401(k) which is specifically designed for self-employed folks. If you have a few employees, you might want to consider setting up a SIMPLE-IRA for your small business.

Contributing to both a Roth IRA and a pre-tax retirement account can strengthen your retirement portfolio since we don't know what tax rates will be in the future.

3. Work Your Strengths but Hire Out for Your Weaknesses

As an entrepreneur, it's easy to adopt a superhero mindset and think that you can do everything. Being so passionate about your business is great, but doing everything in isolation can lead to burnout and failure. Let's face it: you can't do everything and you aren't good at everything.

Maybe you're a creative mastermind who brilliantly designs products, but your brain simply shuts down in the presence of financial equations. In that case, hiring a bookkeeper and accountant can help your business avoid costly mistakes.

If you spend all your time trying to figure out something that doesn't come naturally to you, you're wasting precious time that you could be going to what you do best. Don't limit your income potential by trying to do everything.

At first it may seem counterintuitive to spend money on hiring others, especially when you want to follow that advice to be frugal and bootstrap things as best you can. But in some situations, outsourcing will save you time, money and stress.

You don't have to hire someone full-time when you start to need help. Look at hiring freelancers part-time to work on specific projects or outsourcing tasks that are no longer worth your time. I know that my business would not have been able to grow at the rate that it has if I hadn't hired a part-time bookkeeper, content manager and financial associate last year. It freed up my time to be able to focus on marketing, meeting with potential clients and keeping current clients happy.

4. Adhere to Key Financial Principles

With all the risks that come along with starting your own business, it's key that you adhere to key financial principles, to stay afloat. To get started, get back to basics:
  • Spend less than you earn -- personally and professionally.
  • Save extra during high-earning months; don't splurge and pay yourself more. Building up business savings can help you get through lean times when work is slow -- or when you have a professional emergency that requires lots of cash to fix. Don't forget to set aside money for taxes throughout the year.
  • Track your expenses and use some sort of bookkeeping system like Xero or Quickbooks Online. This is one of the easiest things to outsource once you're ready and will make tax time much easier.
  • Think long-term, not just short-term. Invest in your retirement; pay yourself first; hire help when you need it; and start by keeping the business lean so that you can become profitable as soon as possible.

Sophia Bera is a virtual financial planner for millennials and the founder of Gen Y Planning. She is location-independent but calls Minneapolis home. She offers a free Gen Y Planning newsletter and is getting ready to publish her first ebook to provide a Gen Y guide to empowered personal finances.
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