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Why Entrepreneurs Have a Leg Up in Personal Finances
 

Laura Vanderkam, author of new book on personal finances, explains why entrepreneurs have a better mindset about money than most people, but warns that business owners still make mistakes.

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Money, traditional wisdom tells us, can't buy happiness. Laura Vanderkam would beg to differ, at least partially. She's the author of a new book released last week called All the Money in the World: What the Happiest People Know About Getting and Spending that digs into the relationship between happiness and money, uncovering the ways we spend money that fail to improve our lives, and offering a new framework to think about making and spending your money to maximize happiness.

Rather than obsessing about strict budgets, Vanderkam argues, we should think of money as a tool that enables us to create the lives we want. Elaborating on this premise, Vanderkam interrogates how happy expensive aspects of the traditional American dream like the big house in the 'burbs really make us, and concludes that in general we underspend on experiences like learning and travel and overspend on material goods.

It's a subject most of us could benefit from studying up on, but in an interview Vanderkam explained that when it comes to thinking about personal finances in a constructive way, entrepreneurs generally have a leg up over salaried workers. "Entrepreneurs have a better way of thinking about money than most people," she says, arguing that those who start their own ventures have a different and deeper understanding of money:

We look at both sides of the equation and that's smarter money management because there's really a limit to how much you can cut, whereas at least in theory, there's no limit to how much you can earn. Entrepreneurs are smart in that they focus on both sides.

Many people do not have a very good sense of where money comes from. It just shows up in a certain chunk every two weeks and they haven't really thought about why. Whereas if you're running a business you know exactly why. It's because your customers paid you and you know that you did something that made them want to pay you, so there's a clearer connection. Entrepreneurs know that what you're aiming to do is bring more in. You always want to keep your cost base low, but ultimately the point here is to bring more in. That's not necessarily a mindset that many people who aren't entrepreneurs have about money. When they think of money management they think: 'how can I cut coupons and cut my costs?'

But don't get too cocky that your status as an entrepreneur makes you immune from common personal finance pitfalls and fallacies about money. Vanderkam suggests that business owners can be just as vulnerable to showing off as anyone:

Make sure that every dollar is being used in a smart way, in a way that is going to help your business grow, because entrepreneurs, like everyone, get into the showy stuff. You want lots of swag with your business name on it or the office before you really need the office. That's the same thing people go through in their personal life, acquiring stuff just because they think they need stuff. But ask, really is this going to help my business grow or not?

Especially for young entrepreneurs, Vanderkam insists it's also smart to think of building assets as building future options and not to focus too much on what you're missing out on. "It is so painful to cut back from your current standard of living. That's one of the major problems with a lot of personal finance literature. It's incredibly dreary," she says. So instead of notching up sacrifices, ponder all the choices the money you're not spending will buy you.

"When you're young you want to be careful not to lock yourself in to a level of expenditure that's going to be hard to maintain if you decide you want to do something different because, frankly, most people decide to do something different in this day and age," she warns young entrepreneurs. "If you want to scale down because of family responsibilities or if you want to change careers later in life, money gives you options. So the sooner you have the money the better."

What have you spent money on that failed to improve your happiness, and what purchases truly brought you joy?

Last updated: Mar 6, 2012

JESSICA STILLMAN is a freelance writer based in London with interests in unconventional career paths, generational differences, and the future of work. She has blogged for CBS MoneyWatch, GigaOM, and Brazen Careerist.
@EntryLevelRebel




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