Personal and Business Dollars: Why The Two Are So Drastically Different

At the twilight of your career in your 50s and 60s, you may be looking to change careers. Are you looking to dedicate your time and talents to something more in line with your value system? If you’re like many others at this pivotal stage of your career, it might not be as simple as getting a new job working for someone else. You may dream of starting something of your own. While being your own boss might sound like an appealing proposition, there are endless considerations and unique problems to solve as a business owner. 

In particular, the difference between your personal financial plan and your business financial strategy should be significant. You may think that your personal finance philosophies align perfectly with a potential business idea.

Think again.

Today, we’ll dive into the many differences between business and personal dollars and why keeping them separate tends to pay dividends in the long run. 

Difference #1: Personal vs. Business Goals Mentality

The most notable differences between the two types of finances are the goals associated with each. 

Personally, you’re building wealth to achieve short and long-term financial goals and plan for a successful retirement. 

On the other hand, your company aims to grow revenue and profits over time to support its owners and employees.

With this in mind, what should you consider regarding your overall financial strategy and philosophy?
  1. Take It Seriously: It may be simple to underestimate the work it takes to build a business from the outside in. Companies need to be nurtured, managed, and cared for over time. There is no “turning it off” or set  “work hours.” If you’re not prepared to devote the hours to caring for your company (especially in the early years), it may not be for you.
  2. Set Goals and Parameters: Like your personal financial plan, you need to set goals for your firm. You can’t start the journey if you don’t know where you’re going. Why are you starting your business? How long can you go without turning a profit? What is your target revenue in year one vs. year five? How much money do you need to earn to make it worth it in the first place?
  3. Prioritize Self Care: While you’re building your business, you have to remember to take care of yourself too. Without you, there is no business. After all, what is the point of starting a new venture at all if you’re not in a quality mental state?
  4. Expect The Unexpected: One thing we know about business (and finances in general) is that something unexpected will inevitably happen. Be prepared for that. Similar to an emergency fund for your personal finances have a buffer for financial emergencies associated with your business. For example, take a look at the COVID 19 pandemic. It’s had a widespread impact on a variety of businesses. Having some extra cash on hand will help you stick to your long-term goals. Plan for the worst and hope for the best. 

Difference #2: The Giant Impact of Taxes

Logistically, the most significant difference between personal and business dollars is how they are taxed.

  1. Common Personal Taxes: Income, property, and capital gains.
  2. Common Business Taxes: Income, employment, and sales. 

This blog is not intended to get into the details of taxes associated with owning a business. With that said, there are some foundational strategies and philosophies to deploy as you consider launching your own business.

  1. Separate Business And Personal: The cardinal sin of business ownership is commingling business and personal accounts. You should have completely different bank accounts and credit cards for your business. Doing so will allow you to proactively and efficiently track business progress and keep a clean record of your business finances for tax and legal purposes.
  2. Choose The Proper Entity: The right business entity for you will largely depend on the type of business you are trying to build. The type of business entity you choose will have an enormous impact on your tax situation. You need to consider business complexity, and personal liability (among many other things).
  3. Hire Subject Matter Experts: Simply put, be aware of the things you will take on personally as an owner and outsource tasks in which you lack expertise. Hiring a CPA for tax planning is almost a given as a business owner. You have far too much responsibility within your business to be worrying about messing up a tax return or missing the date to pay estimated taxes.

Difference #3: Your Risk Tolerance Vs. Your Company’s

When you’re investing for your personal financial plan, you’re basing your decisions on YOUR risk tolerance. Unfortunately, your company’s risk tolerance has little to do with the risk tolerance of your personal finances. When thinking about risk tolerance, you should be thinking about the time horizon of a particular goal.

Common Personal Goals
  1. Home Purchase
  2. College Funding
  3. Retirement
Common Business Goals
  1. Operating Budget
  2. Cash For Future Opportunities
  3. Saving For First Hire
  4. Growing Profitability

As you may have noticed, all of the personal goals are earmarked for future consumption at various stages of life (aka, different time horizons). As for the business goals, they are much more short-term in nature and are intended to help you grow the company over time.

Let’s take a look at a standard sequence of events.

  1. You need an operating budget so you can afford your everyday expenses.
  2. You keep cash on hand so you can reinvest in your firm.
  3. Then you reinvest in your business so you can grow revenue.
  4. Next, you grow revenue so you can hire.
  5. Then you hire so you can grow the company past yourself.

Business decisions tend to build on themselves by accumulating countless short-term actions with an eye towards longer-term goals. Unlike your personal finances, you can’t just set your business on autopilot by shoveling money into various investment accounts. 

In a lot of ways, your business is taking the place of traditional investments. It is your job to grow the company to the point where your future self can benefit from it financially (similar to a retirement account).

Ready For An Open Sign?

At Bienvenue Wealth, we see a lot of clients with visions of business ownership in the twilight of their careers. 

The successful ones have ambitious yet realistic goals and set boundaries for themselves and their work. They have a deep understanding of their personal goals and how starting a business will help them achieve them. 

If you’re interested in a career change at this stage of your life, schedule an intro call with us.