No matter how many millions or billions an entrepreneur stacks up, without a solid financial planning in both personal and business front, he/she could end up like Anil Ambani. This pandemic of 2020 has taught us to live an economical life, cutting out the unnecessary stating that frugality is the word for future. Therefore, a prudent finance growth plan, with an imprint that less is more, and that money will multi-fold, securing the future even in uncertain times apart from growing the wealth will be key.
With all the money in the world, a net worth of $87.6 billion as of 2020, Warren Buffett, CEO, Berkshire Hathaway, one of the richest men on earth is well known for his frugal lifestyle. It’s a known fact that Buffett lives in a modest home he bought in 1958 and drives his old Cadillac. He never had the desire to own multiple homes or a fleet of cars. He saved his penny to earn and grow his wealth to billions only to donate 99% of his riches to philanthropy.
Financial planning is an exercise that keeps your business growing in terms of profitability and revenue growth. It makes an entrepreneur’s ability to predict, foresee and plan for potential roadblocks, and helps in evolving strategies to overcome the bumps.
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By looking for opportunities to get more value at a lower price like buying quality merchandise when it is marked down.
- Warren Buffett
Devise your Personal Finance Plan
Personal financial planning not just involves investing money, there are various facets to it, that is inclusive of growing wealth, money goals, wealth protection, and retirement planning.
Money Goals
Having written financial goals for the targeted month or year- either short or long term to improve personal wealth by a certain amount or percentage, gives a direction to your actions. Scattering your wealth in different baskets helps to grow your money as in stocks, real estate, bonds, mutual funds, fixed deposits, etc.
Budget spending and plan savings
Budgeting one’s spending and savings is a must. Experts say when you are mindful of both these habits, tracking these will help contribute to wealth growth.
Disseminate risks with multiple income plans
With this strategy, entrepreneurs are earning money through multiple businesses and reaping interest incomes through various investments, and with capital gains. In this way, entrepreneurs are diversifying and lowering their personal financial risk.
It is just like one’s business diversification. For instance, recently Electric car maker, Elon Musk invested $1.5 billion on Bitcoin, a calculated risk that could yield him either billions more in the foreseeable future or the money could tank. Either way, it is another revenue stream, an additional profit opportunity.
In growing one’s wealth, the entrepreneur needs to consider his objectives, investment timelines, his tolerance to risks involved. In short, choose the most suitable financial plans. However, note that holding money in the stationary form will yield no benefits. Investing in mutual funds, fixed deposits, real estate, startups will get interest income and profit percentage.
Investing in Bitcoin (cryptocurrencies)
Bitcoin is the largest cryptocurrency by market value, and it is receiving a lot of support from big companies like Tesla, Paypal and Mastercard. But before investing in this tricky business, do your due diligence. It can be as lucrative or risky as any other investment.
Safeguarding Wealth
Implementing safeguards around wealth that are invested becomes imperative, therefore placing it under an insurance policy that is designed to protect one’s finances- namely, health, life, trauma, and income protection insurance in case of any adverse circumstances.
Debt Reduction
An entrepreneur should get its debt under control, otherwise, he will continue paying interests on the debt. So, reducing one’s debts should be a part of one’s financial plan.
Living a thrifty lifestyle
Being thrifty is a virtue. Minimizing one’s needs so that he can maximize the amount into investments. Developing a frugal lifestyle is an art one can develop with long term planning, budgeting expenses, finding ways to reduce unnecessary expenses.
Keeping expenses below income
Living below your means is the way one can surplus on savings and cut down on unnecessary expenses. This will allow one to repay debt, save for rainy days, add to the emergency fund or make an investment in a lucrative deal.
Retirement Planning
Retirement planning is an important aspect of personal financial planning for any entrepreneur. A good retirement plan should ensure one’s income requirements at the age of retirement and what measures need to be taken to attain retirement goals.
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This pandemic of 2020 has taught us to live an economical life, cutting out the unnecessary stating that frugality is the word for future.
Keep tabs on business’s money-generating abilities
The ultimate goal of entrepreneurs is to convert sources of business wealth into personal wealth. Therefore, to conduct weekly and monthly check-ups on finances to ensure that one is reaching pre-defined goals. Taking stock of one’s expenses, income, employee hiring costs, and contractor fees is to make sure that business is working for the owner and not for other people.
Be smart about loans
In order to avoid the debt trap, do not overburden yourself with loans that are not essential to run the business, so avoid loans that are not adding to your sales directly or indirectly, and the pandemic has already taught us the importance of debt-free and economical life.
Time Is Money
An entrepreneur has to make sure that the time he/she spends is monetized properly, spending time in marketing or branding activities only or doing real business, needs to be prioritized. It should all result in a real money-making business immediately or sooner than later. Business means profit through legit sources.
Make a will
Making a will before tax implications could leave the entrepreneur’s legal heirs and beneficiaries exposed to tax liabilities that could leave them next to nothing from the total value of assets. So, solid functional estate planning needs to be done.
Tax benefits
One has to separate personal and business finances for greater tax benefits, the ability to take advantage of tax deductions is a huge plus for entrepreneurs. Keeping accurate records of personal and business expenses will assist in the event of a tax audit, keeping a check will ward off the tax guys.
Fintech- a tool to manage money
Fintech today is transforming financial management capabilities of entrepreneurs and businesses. There are various personal finance tools and services that are constantly evolving that helps manage money better. This trend has been beneficial for businesses, particularly smaller enterprises, making finance automation, data analysis, and flexible financing options within reach.
Protect assets from personal creditors
Personal assets can be at risk if an entrepreneur is sued for personal wrongdoing or as a result of a personal guarantee. However, there are ways to protect personal assets from these types of claims. One can consult with an estate planner or a bankruptcy attorney to prepare a structure to further shield assets from liability of business obligations.
Keeping up-to-date
An entrepreneur should ensure that all aspects of the plans are regularly reviewed and kept up to date with any regulatory changes that could occur anytime.
Cost Effectiveness
Entrepreneurs should use cost benefit analysis before making final decisions when it comes to their personal finance. One should avoid paying more than the expected returns.
Pay yourself salary
An entrepreneur should only pay himself out of profits, not revenue. Don’t cut a big slice of profit as a paycheck or bonus, rather invest that money for it to grow.
Making more money
An entrepreneur’s mind should always keep ticking on how to maximize investment returns and knowing one’s priority on whether to invest the profits or revenue earned from business on new bonds, real estate, or in a company or to buy an expensive car. Maximizing income for the next few years before indulging in luxury should be made clear.
The Golden Rules of Warren Buffett
Going back to Warren Buffett, his personal finance habits are as renowned as his investment strategies. From spending wisely to living under your means and developing healthy money habits, Buffett’s thumb rules are textbook stuff for inculcating great personal finance habits meant not only for entrepreneurs but for the layman.
Warren Buffets Rules are as follows that lay groundwork for every entrepreneur’s personal finance habits:
Don’t lose money
Warren Buffett’s number one rule is: Don’t lose money. And this rule applies to investing- if one is working to get out from a loss, it’s much harder to get back from where you started.
Get high value at a low price
Another Buffett principle: “Price is what you pay; value is what you get,” Buffett wrote to his shareholders long back. Losing money can happen when the price one is paying doesn’t match the value you’re getting, for instance, when one is paying high interest on a loan debt.
Instead, practice frugality like Buffett- “by looking for opportunities to get more value at a lower price like buying quality merchandise when it is marked down,” Buffett had said.
Healthy money habits
Buffett advocates to inculcate good saving habits from early life. He says to pay attention to money habits and work to strengthen those that help your finances and break those that hurt your finances.
Avoid credit card debt
Buffett said in a 1991 speech, “You really don’t need leverage (borrowed money) in this world much. If you’re smart, you’re going to make a lot of money without borrowing.” Buffett is especially wary of credit cards. His advice is to avoid them altogether.
Stack up cash reserves
Buffett’s key to ensuring security is to always keep cash reserves on hand. He once revealed that Berkshire Hathaway always maintained to the tune of double digit billion dollars in cash reserves. This helped the company sail through the great recession of 2008. He therefore advises entrepreneurs and businesses to maintain cash balance for rainy days such as the pandemic of 2020.
Invest in yourself
Investing in oneself, to improve one’s talent, will yield big returns, tenfold more, Buffett believed. He said unlike any other assets and investments, nobody can tax it away.
Learn, stay informed about money
Warren Buffett might not invest in cars or fostering an expensive hobby but he sure does spend his money on books from where he learns about managing money. Buffett is an institution in himself, an icon for the business community globally.
Buffett advocates learning more, educating oneself about managing money, and personal finance. He once said, “Risk comes from not knowing what you’re doing. The more you know about personal finance, the more security you’ll have as you minimize risks.”
Give back to humanity
Buffett practices what he preaches. The 90-year-old has donated 99% of his wealth to humanitarian activities. He is the Founder of The Giving Pledge along with Bill Gates which is a promise that more than 130 billionaires so far have made to give their fortunes away.
Money- a long term game plan
Buffett, in his 2014 letter to shareholders, said people should “invest with a multi-decade horizon, their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime,” rather than on moments of stock market volatility or economic crisis.
