#6 Steps to Plan Your Finances Before You Turn Entrepreneur
To be used only during emergencies, there should be a separate sum of Rs 2-3 lakh kept in the bank
Starting a business is tough. The sweat and the sacrifices can take a toll on a start-up ninja. But what’s tougher is keeping it afloat long enough for it to pick up traction. Your business starts with you, so it will be extremely important to keep your very own personal finances in order. Apple’s Steve Jobs, Microsoft’s Bill Gates, Infosys’ Narayana Murthy or Paytm’s Vijay Shekhar Sharma made it big because they had sorted out their finances smartly.
Once you plan your finances well, you will be free to chase your dream. As you refine your big idea and get set to take the plunge, here are six boxes you need to tick so that your personal finance house is in order.
Ready Your Oxygen Reserve
In the financial world, money equals oxygen. Turning an entrepreneur does mean that you will not have a monthly salary for sometime.
So, its imperative that you have money to take care of your own monthly expenses and prior financial commitments. We are not talking about your business expenses here. Things like EMIs, grocery, utility bills etc. will still need to be paid. In case you are the lone bread-winner in your family, a 12-month oxygen reserve will ensure that your personal expenses are taken care of, no matter what.
If you need Rs 30,000 a month for personal spends, accumulate Rs 3.6 lakh. If you don't have that reserve, give time and build it. You may have plan A and plan B, but both plans for your business will require your unfettered attention. Your business will run smoothly, if the you are focussing all the energy on making it happen, instead of worrying about this month's groceries and child's annual school fees.
Reduce Unnecessary Expenses
Successful entrepreneurs have a common thread — they worked hard, and were relentless in their pursuit. Partying came later, much later. You may like clubbing, eating out, fancy holidays and buying cool gadgets, but that was when you had a fixed salary and bonus!
As an entrepreneur, today you will have your hands full and pockets nearly empty. So, fun has to wait. Starting and growing a business will require you to spend less, and cutting back on the hedonistic pleasures. Review all your expenses, and cut flab wherever possible. This means putting a stop to all sorts of discretionary spends. Be frugal wherever possible, and choose the cheaper option when it comes to travel, entertainment and day to day spends. Surviving a year without fun is actually easy if you set your mind to it.
Continue Your Existing Insurance
Becoming an entrepreneur is fun, but do remember that medical ailments can still strike you and your family. If you are single and carry any education loan or other debt, continue paying your annual premium for the term insurance. If you have a family, the advice is same ---don't stop term insurance.
In an unfortunate situation of your death, your life partner or family will get a tidy sum that will set them up financially and help clear any existing debt. You can get Rs 1 crore term insurance for less than Rs 30 a day.
Health insurance, too, is extremely important. Since you will be leaving your job, the existing corporate health insurance will not cover you. Buy an individual floater cover for yourself and family that covers the risks adequately.
If your spouse enjoys a corporate cover, evaluate the need to increase the health cover especially if you have dependent parents. Taking care of these risks will give you peace of mind, a key ingredient for becoming a successful entrepreneur.
Build Emergency Funds
The one thing about life is that its unpredictable. Nothing happens with a forewarning. The same is true for emergencies. Your business may be doing very well, but a personal emergency may require you to spend a lot of money at one go. If this happens when you are least prepared for it, you will literally be in a soup. So, get your emergency fund ready.
This fund is separate from your oxygen reserve. To be used only during emergencies, this should be Rs 2-3 lakh of money that is kept in the bank. Share the details with your family, so that they can use it when the occasion calls for it. This personal fund will be your last resort, when you run out of all other financial options. Keep the emergency fund for your business separate.
Lower High-cost Credit
Many of us pile on personal loans or use our credit cards at will. It’s high cost credit, but our salaries ensure that such debt is rolled over, or paid every month. Once you become an entrepreneur, staying away from credit cards and personal loans will be a wise thing to do. Servicing any personal debt that drills a large hole in your finances is a strict non-no.
Before you start your own venture/business, try to pay off these type of loans, or lower the outstanding to extremely manageable levels. Paying 40% annual interest on a Rs 1 lakh outstanding loan means you will end up paying 40,000 bucks just interest, and then there is principal repayment. Personal loans charge 15-20% interest a year, and are costlier than asset-backed loans. Pre-paying all your high-cost loans will save you a lot of hassle and money as well.
Keep Your Family Aware of Your Plans
Two heads are better than one. This theory also applies to all personal finance plans. You can be married or single, but discussing your money plan with your immediately family is a smart move. They could help you with certain expenses, thereby reducing the load.
If your partner is working, try to find out till what tenure will he/she be able to support you financially in case your business takes time to get off the ground. List out the assets and liabilities, and have open conversations about concerns.
This will clear the air, and bring everyone on the same page. Of course, be ready to answer their uncomfortable questions, and be open to suggestions. A good discussion will reassure everybody about how you have planned your personal finances for the next 12-15 months. Pay attention to important inputs, and incorporate them into your plan.
Well-planned is half the war won. Best of luck!
Anil Rego is the CEO and founder of Right Horizons, an end-to-end Investment advisory and wealth management firm. An MBA and CFA degree holder, Anil believes in the Contrarian approach of wealth management. His areas of expertise includes Corpus fund management, tax planning and end to end financial planning for both residents and NRI investors .
Anil has worked for Wipro as Business Planning and Merger and Acquisition Manager before starting Right Horizons in October 2003. RightHorizons has branches across Bangalore, Mumbai, Chennai and Hyderabad.
Anil has been a columnist in leading Indian newspapers. He also routinely answers queries in mainline publications and websites. He is also a Guest Lecturer with various business schools like ICFAI, ITM and Union Bank School of management. Anil has also served as member, Board of Governors, at IBSAF.