Successful Entrepreneurs and Personal Finance: How to Grow and Protect Wealth by Diversifying Risk

by Yaro Starak, creator of Entrepreneurs-Journey.com

This blog is slowly evolving into the epitome of entrepreneurial information sharing. Various qualified experts frequently write about tried and tested topics in their respective fields.

You can learn from these experts and establish your own success as well, but how much do you know about money to ensure you are not only able to make it, but also able to manage it, grow it and protect it in the long run?

Some of the most successful entrepreneurs are bankrupt today. Many artists and athletes who once made millions in a single year are now begging on the streets. Why? Making money is one thing, growing it and keeping it is a completely different ball game.

There can be a big disconnect between entrepreneurship and basic fundamental personal finance. I can conclude this from my own experiences, interactions with numerous entrepreneurs from all walks of life, and observations from all around me whether it is the real world or the cyberworld that we are increasingly living in today.

It is not necessary that someone who is financially savvy and sophisticated be an entrepreneur, but the reverse is a whole different story. It is my opinion that an entrepreneur has to be financially savvy, or at least have a solid fundamental understanding of basic personal finance to succeed in business and life.

Among many other characteristics, entrepreneurship involves capital raising, cash flow management, creative thinking from a financial perspective, money management, growth, asset protection, income taxes, debt management, fill in the blanks. No matter how small or large your personal enterprise is, chances are you will be exposed to at least one of these topics.

Most entrepreneurs fail, and that is a fact. Even after establishing a successful business, many entrepreneurs end up right where they started years later. It is also a fact that they often fail because they lack the skills in one, more than one or all the areas of money and finance previously mentioned.

So whether you own a brick and mortar business, a website, blog, or plan on starting one in the near future, understand that you must be versed with at least the fundamental foundation of money and finance or failing is just about inevitable.

Diversification Mitigates Risk And Increases Wealth

I often joke around that diversity is key to anything in life, except your spouse. Think about it, having a spare tire helps when one of the main four blows out. Having a ball pen allows you to continue writing when the pencil lead breaks off. Having access to email is one way you can get a hold of someone if they are not reachable by phone. So why don’t many entrepreneurs think this way when it comes to their business and income streams?

It is easy to get carried away and end up with all your eggs in one big basket, such as your own business. What happens when that business fails? Do you have another stream of income to keep you afloat if and when the current one dries up?

Diversity is critical to risk mitigation, and one can never be too diverse in my opinion. In fact, diversifying within diversity is even better. For example, investing in different industries or sectors within your stock portfolio, or owning different types of rental properties in different areas. Doing so ensures that your exposure (or risk) is not concentrated in any one sub basket (a particular industry or geography) within your bigger investment basket (your overall stock or real estate investment portfolio).

Are you diversified today? You may be doing well in business, but do you have a back-up plan? What are you doing to make your money work for you? Or is it that you are constantly finding only yourself working for money? Do you want to continue that way for the rest of your life?

There is a reason many successful entrepreneurs have their hands in several different baskets. They are often vested in several avenues that help them manage, protect and grow their wealth. What is it that you are doing for tomorrow with the money you are accumulating today that your business is generating for you?

How do you ensure you make the most out of your hard-earned cash? Is your cash working for you in a way that diversifies your risk exposure while giving your wealth the maximum chance to grow? Are you investing some of it in stocks, bonds, real estate and other types of businesses?

Are you financially savvy enough to realize that you are effectively blowing half of your hard earned money away in taxes because you are forced to do so by your Government? Or are you smart enough to be spending pretax dollars by reinvesting back in your business’s growth and thus avoiding a huge tax bill while benefiting your bottom line in the long term?

Is your wealth protected in the event someone sues you? Do you know what steps and measures to take to protect what you have? Do a lot of these questions sound Greek to you? If so don’t fret. You are not the only one. Many entrepreneurs are right in that very same boat.

The good news is that there is plenty of information that can help you get up to speed. Even better news is that entrepreneurs generally catch on relatively quickly to topics in basic personal finance because of the inherent acumen and desire they possess. The two topics are very much interrelated. It’s usually just a matter of being exposed to the relevant information.

All Money Topics Are Interrelated – The Failures In Entrepreneurship

Most readers of this blog are entrepreneurs or aspiring entrepreneurs. But how many are students of money as well?
It has been my experience that many entrepreneurs generally gravitate toward financial education easily and naturally. Many are compelled to as they realize it is critical that they learn about money, while others are naturally attracted to the topic.

Although I have no scientific data to back up my claim, I truly believe entrepreneurship and money are two topics that are closely intertwined together. They have to be for success to manifest.

Think about it. Money is the underlying objective behind most entrepreneurial ventures. Sure an entrepreneur might say they want to make the world a better place, but would they do it for free? I highly doubt it. I call that a social worker, not an entrepreneur. But even a social-entrepreneur needs to find the funds to start it up.

Dig deep down inside and you will find that money more often than not is at the crux. It is the root of it all. I am not saying this is right or wrong, I am just stating the facts that even more so proves that money and entrepreneurship go hand in hand.

Two Key Characteristics Of Entrepreneurial Success

In my books there are two key characteristics that determine an entrepreneur’s success; an acumen for entrepreneurship and personal finance.

Many entrepreneurs fail personally even after making it big with their business(es). Why? Because they don’t understand how to manage, sustain and make their money work for them. Instead they end up losing it all and have nothing to show for their yesteryear of success.

They learn how to make money really well, but they fail to learn how to protect it, manage it, and grow it to the next level. In fact many don’t even understand the basic concept behind income taxes, and obviously fail to realize and recognize that taxes are arguably the highest expense line item on their personal financial statements. Yet, taxes are usually a way after thought in most people’s minds.

What if you suddenly realized that you pay almost 50% of your income to the government in taxes? How does it feel when you realize that you work from January to potentially June just to cover your tax expense before putting money in your own pocket? What would you do differently? Would this fact trigger any action from you?

Now what if I told you that you can legally slash that tax bill by 10, 20, 30, 40 or more percent? Would you want to do that? Would you know where to begin to do that? A successful entrepreneur sure would, or will make sure he or she finds out, or hire an expensive attorney or accountant to take care of it for them.

Hiring someone expensive to work on something you have no clue about is not something that I am a fan of, but that’s not what this post is all about. That is a whole different topic for a whole different series of blog posts so I will stay away from it for now.

A well-rounded personal finance background is critical, and the good news is that it is not rocket science. Personal finance in fact is very simple. It is unfortunate that our formal education systems forgot to teach us that, but that’s ok. Thanks to magazines, countless finance blogs and souls like Dave Ramsey, there is hope for all of us.

This clear void and the necessity for a blended education in entrepreneurship and finance is precisely what made me decide to build my blog as a hybrid of both topics. Although my intention was to build a blog specifically on entrepreneurship, I realized that one doesn’t go very well without the other. And because I had not found any other blog online that blended both topics, I attempted to fill in that gap by leveraging my entrepreneurial experiences, professional education, corporate work experience, credentials and background in accounting and finance.

Critical Areas Of Personal Finance For Entrepreneurship

Achieving excellence in anything is a lifelong process, as is learning and education. You can never be too educated. Unfortunately for many, this process ends after college when it really should only be starting at that point.

Although I can easily conclude this discussion by mentioning that one must learn as much as they can about money and finance, there are a certain set of topics that I recommend one get started with before delving into the tangents and more complex areas. The following is a brief list of finance topics that I feel are critical to understand for any entrepreneur at any level.

Wealth & Liability Protection – shielding yourself from liability, separating your personal assets from business, legal entity formation (LLC, S Corps, etc)

Managing Your Money – cash flow, forecasting, short-term and long-term funding sources

Growing Your Money – various forms of investments such as money market, capital markets, bonds, CDs

Saving vs. Investing – these are not the same. Both have different goals, objectives and mediums (vehicles)

Debt – debt is not always bad. Learn the difference between good debt and bad debt and how to use each appropriately to your advantage

Investments – these come in all shapes and sizes. Stock market investing is the most basic. Learn to diversify your risk exposure while maximizing the possibility for growth. Key topics within investments include asset allocation, investment horizon, target funds, asset class mix

Legal Entity Formation – forming legal corporate structures to separate your business from yourself.

Income Taxes – proactive tax planning and forecasting

Some other areas you can focus on beyond the basics:

Real Estate – learn about leverage, value vs. speculative investing

Small Businesses – how they work, how to buy one, how to profit from one

Buying / Selling Assets

Estate Planning – Living trusts, wills, etc.

The above four topics are not critical to your foundation, however these are some of the more common topics that many successful entrepreneurs venture out to once their businesses start doing well and make them some money.

For example, many entrepreneurs like to take their cash surplus from business and invest it in real estate. I know Yaro does. This provides them with tax advantages and further diversifies their income streams while allowing their money to work for them and grow over time.

I personally invest in real estate because it’s a different form of investment for me (tangible), one that reduces my concentration risk in any one particular income stream. Similarly, buying and selling other income producing assets such as stocks and small businesses can also fulfill the same objectives for entrepreneurs.

I slipped estate planning in my list as well because this is an area I am currently looking into in depth. As an entrepreneur starts to accumulate serious wealth over time, I feel that estate planning is an area of finance that needs to be considered immediately. It is never too early to have an estate plan.

Finally, though I did not include in the brief list above, I believe that charity / philanthropy is an activity that can propel anyone’s career in entrepreneurship or otherwise. Charity or philanthropy is not only for those who are religious or spiritual. Rather it is for anyone and everyone who believes in the greater good for a much larger cause. This is obviously not a mandatory requirement for success, but I can tell you from personal experience that the more I have given away, the more has come back to me multiple times over in all aspects of my life.

There has been much material covered in this post, and I understand that it can be overwhelming, particularly for someone who has not been exposed to it previously. But if you want to be financially successful, you must take time to learn and understand the basics of money and finance.

And if you are an entrepreneur or an aspiring one, educating yourself on general topics in personal finance is critical to go hand in hand with your entrepreneurial success. This is the only way in my opinion to truly get ahead in life and beat everyone else who is running the rat race with and around you.

My intention is certainly not to scare you, but rather to raise awareness. Balancing adequate knowledge of entrepreneurship and personal finance characteristics is mandatory if you want to succeed.

Not everyone is born with these characteristics. I certainly was not, but they can definitely be developed over time. Prevent inevitable failure by preparing yourself appropriately. Start sowing today so you can reap the rewards tomorrow.

Are you prepared? How are you diversifying your risk exposure? What are you doing to build, manage and protect your wealth? What would you like to add to the mix?

Sunil

Balancing Characteristics

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