5 Personal-Finance Mistakes That Kill Promising Companies
For entrepreneurs, one slip-up can have far-reaching consequences.
For most people, personal-finance mistakes affect only themselves. For entrepreneurs, a personal-finance slip-up can have far-reaching consequences. People who get into tight financial spots while running their businesses must make difficult choices about which bills to pay, which opportunities to let go and which partners to leave.
Founders of startups are no strangers to running lean, but that’s no reason to add to the pile. Good personal-finance habits set entrepreneurs up for success by empowering them to focus their energies on the growth of their companies. Bad habits take their attention away from their businesses and hinder their ability to expand.
Don’t let your focus on your company lead you to neglect your own affairs. Watch out for these common personal-finance mistakes, and take proactive measures to keep your life (and your startup’s growth) on track.
Letting your credit score slip
No matter how far off the grid you try to run, your credit score follows you. Business loans, personal loans, credit cards and even insurance premiums all depend at least partially on your credit score. Fail to pay attention to yours, and you could quickly find yourself paying exorbitant interest rates — if you qualify for credit at all.
Take time to familiarize yourself with the different aspects that contribute to your credit score. According to Chime, there's more than one model that can be used to determine your score, but overall, total credit usage, balances and available credit are most influential. Understand the contributors to your credit score so you can take advance measures to keep your numbers high.
Carrying high-interest debt
Not all debt is bad debt, but some debts can become nightmares if you aren’t careful. Student loans tend to have reasonable rates, even though high balances can make them look intimidating. Payday loans and credit card balances carry much higher interest rates than comparable lines of credit. According to WalletHub, the average credit card interest rate hovers around 19 percent; Debt.org reports that payday loans charge several times that, sometimes as high as 500 percent.
Take inventory of all your outstanding debts, along with their interest rates. Then, start paying the minimum amount on all but the debt with the highest rate, pouring as much toward that bill as you can. When you finish paying that one, rinse and repeat the process.
Not building an emergency fund
Entrepreneurship carries substantial risk, even for people on solid financial footing. Go in without a backup plan, and you could find yourself wondering how to pay rent tomorrow. An emergency fund insulates you from short-term problems and gives you wiggle room when you have to wait a while between income sources.
Vanguard recommends keeping an emergency fund to cover three to six months worth of essential expenses. Depending on your personal situation, you may need more or less. Someone with a working spouse and a modest living situation may not need more than a month of backup, while a single person living in an expensive apartment should keep several months of funding in reserve.
Failing to separate your accounts
You’ve probably heard stories about successful founders who poured their life savings into their companies and came out on top. Many entrepreneurs fund their companies from their own accounts, and that’s a perfectly healthy way to start a company. However, if you start depositing funds from your customers’s orders in the same account you use to pay your electricity bill, you invite massive financial (and legal) headaches into your life.
Even if you’re a solopreneur doing freelance work, make the effort to open and maintain a separate account for your business. Instead of taking funds directly from your company coffers, Square recommends paying yourself a salary. When you cap your income, you can get a better understanding of where your business stands and build up savings to grow and invest.
Allowing accounts to go to collections
Don’t like to look at your bank accounts until absolutely necessary? Throw away bills without opening them? You’re not alone. Avoiding the reality of bills and budgeting can reduce stress in the short term, but the longer you avoid looking, the worse the situation becomes. Bury your head in the sand long enough, and a bill that you could have easily managed could move to a collection agency.
Not only does a bill in collection severely harm your credit score, but it can also lead to massive stress as debt collectors begin hounding you for payment. Schedule a time on your calendar once a week to go through your mail and check on your online accounts. That 30 minutes of financial upkeep per week could save you and your business thousands in the long run.
Better personal finance means better business finance, and better business finance means a smoother ride to the top. You deserve to focus on your company’s growth, so don’t complicate the matter with missed bills and poor credit. Take some time to get your affairs in order, then devote your energies to your company, confident in the knowledge that you’re on the right track.
Entrepreneur Leadership Network Contributor