How to Start a Business Without Wrecking Your Personal Finances and Retirement Plan

Successful Business Owners Enjoying Retirement

Two pillars of American life have been changing in the background of our day to day lives. Much like weight loss (or weight gain), it’s happened a tiny bit at a time, and no one has noticed.

The path to prosperity and retirement have completely changed in the last few decades.

The Old Path to Prosperity and Retirement: Pensions

A few generations ago, the path to prosperity was pretty simple:

  1. Get an education
  2. Get a job
  3. Work for 40 years
  4. Retire and accept pension

Income taxes were low, the stock market was high, life was easy. You could become wealthy working for a name brand corporation. Income taxes (one of the largest budget items in any household’s balance sheet) were low which lead to more take home pay.

With this path to prosperity came an easy path to retirement: pensions.

You didn’t have to save a dime for retirement because your employer was saving and investing for you. Which lead to more take home pay. All you had to do was go on auto-pilot from 9-5 each weekday, and accept monthly checks after your retire. You could never outlive your money.

The New Path to Prosperity and Retirement: Start a Business

Now, it’s hard to imagine someone in the accounting office of Wal-Mart becoming wealthy. Middle class, but not wealthy. The path to prosperity is much different now:

  1. Start a company (no need for education)
  2. Work your ass off 5am-11pm for a few years
  3. Sell said company and accept due rewards
  4. Reinvest rewards into next company
  5. Rinse and repeat

Education has changed from a “must have” to a “if you don’t know what you want to do with you life, go to college.” It costs an arm and a leg, postpones your earning years, and is filled with drunken debauchery. Ok, so that last part isn’t so bad.

The point remains, a college degree doesn’t mean as much as it has in the past.

Even if you do go to college, you have to start a company and work your ass off afterwards. Median household income in the US was $51,939 in 2013. A study from American Express OPEN revealed that while more than half of small business owners pay themselves a regular salary, they are receiving an average salary of $68,000 annually, 30% higher than the median US income.

But You Still Have to Save For Retirement

Unfortunately, that extra 30% already has a place in your budget: retirement.

Pension plans are dead. It’s rare to find an employer that still offers pensions. Why? It was excessive risk on the employers part. Do you want to take on the burden of telling all your employees you will pay for their retirement? I didn’t think so.

Now business owners have to take advantage of tax-saving vehicles like IRAs or 401(k)s. Which have their set of complexities:

  • You have to determine how much to save (some experts say 10%, others say 20%)
  • You have to decide what you should invest your retirement funds into. A poor decision can lead to a real crap retirement
  • You have to decide when you should retire and how social security, taxes, and the sale of your business might play into effect
  • Or you just hire someone to do all of this for you

Here’s the Right Way to Start a Business AND Save For Retirement

So. How can you start a company and focus on your personal finances at the same time? With extreme caution.

Before you start a business, there are a few personal finance steps you need to take:

  • Calculate your net worth. (Assets aka what you own-Liabilities aka what you owe=Net Worth)
  • Create and maintain an extremely strict budget. No more fun trips to Vegas or Mexico cruises for a while.
  • Every extra penny after living expenses goes to paying off your current personal debt or saving for retirement.

Your personal finances should be on the way to stable (if not totally stable) before you decide to start a company. Usually this means no car loan, no credit card debt, no personal loans, and little student loan debt. I also suggest you at least open and set up an automatic deposit into an IRA or 401(k). Your living expenses should be the only thing you “have” to pay each month. Zero debt and a little bit saved up in the bank can benefit you when the tough times of starting a new business hit.

Now you are off to the races.

Start a business, but get your own finances in order. You wouldn’t invest in a company with a poor balance sheet, so don’t. Don’t put all your eggs into one basket. An IPO and a sale of a company may make you rich, but a lot of businesses fail. Have a retirement back up plan. Start investing today.

Image: iStock

About The Author

Born in Midland TX and raised playing under the infamous friday night lights of West Texas. Attended University of Arizona and greatly influenced Greek life. Currently working as an investment manager, helping people make smarter investments