As the cliche goes, "Money makes the world go 'round." Like it or not, money is a crucial consideration for every entrepreneur. Increasing profits while cutting costs will make all the difference for your cash flow, and will influence your ability to stay in business during tough times.
We've all developed a mindset in which we work hard for our money, in which cash management can become a dominating factor in everyday business decisions.
In reality, however, you can (and should) strive to get your money to work for you. Developing smart practices with your personal finances will ultimately carry over to your business and help you enjoy financial stability.
1. Dedicate a set amount of your income to savings each month.
Few things are more important than saving for the future, yet so many entrepreneurs struggle to do this. They worry about paying bills or waste money on frivolous expenses before they even think about saving.
I like Nicholas Cole's recommendation to make monthly savings the equivalent of taxing yourself. If the government increased taxes for your business, you would find a way to pay them.
You should view your savings account in a similar manner. Putting money into savings is mandatory and should always be one of your top priorities. While stock investments or retirement accounts are best, even a high-yield savings account is better than nothing.
To make this process easier, consider setting up automatic withdrawals to a savings account each month. Set a goal of saving 10 percent of your income, which will grow over the years without the need for additional management.
2. Invest in a way that reduces risk.
While a lot of us view stock market investments as the path to wealth, many are intimidated by the seeming complexity of stocks and bonds.
For more insight on this, I recently spoke with Ken Berman, founder and CEO of Gorilla Trades. Berman's company has helped investors manage their portfolios for over 20 years, with an emphasis on picking high-growth stocks and establishing stop loss levels.
During our conversation, Berman noted that many people allow emotion or "gut feelings" to take over their investment mentality. Investors should remove emotion from this process, as this often leads to knee-jerk decisions based on headlines or hearsay.
Instead, he recommends turning to trusted sources of financial information that emphasize risk management, backed by sound research. Investors still need to make the final decision to buy or sell, but with emotion out of the picture, they are much less likely to make a catastrophic mistake.
3. Proactively eliminate unnecessary debt.
Few things kill your money's potential to work for you like debt. In May 2020, the U.S. hit a new record for total consumer debt of $14.3 trillion. Despite a decline in credit card debt, an increase in borrowing for automobiles and education resulted in these astonishing numbers.
While a large percentage of that debt is locked up in mortgages, there is no denying that many people get into debt for unnecessary expenses.
Sure, taking on debt can help you make a purchase now that you might not be able to otherwise. But entrepreneurs in particular should consider the long-term cost that comes from accumulating interest payments.
Paying down personal and business debts help you redirect your money toward other important goals. If you have multiple debts, start by paying off the smallest debt first so you can start paying more to larger debts.
4. Develop sources of passive income.
For entrepreneurs, few things can contribute to financial security quite like developing passive revenue sources.
Yes, you will likely always need to depend on the day-to-day work you perform for your clients. But with some creative thinking, you can find other ways to make money using your skills and abilities.
For example, many entrepreneurs will condense their knowledge into an e-book or online course that they can sell on their website. Many content creators use monthly subscriptions to monetize their audience.
Be creative when considering how you could adapt your services into a "product" that provides a passive income source. Always be mindful of the needs of your target audience and strive to create something that provides real value.
Getting your money to work for you will require a bit of effort, especially initially, as you change your money-management practices. Over time, however, consistent effort will allow these good habits to become second nature to you. When that happens, your money will truly work for you in a way that ensures it is no longer a stressful burden.