When a business is in its first years of existence, it's very tempting for an entrepreneur to put every cent toward building the company, often at the expense of a personal financial portfolio. Years later, many owners are still neglecting their own finances, believing the investment they've made in a now successful company is all they need.
Financial advisers vehemently advocate against this very common practice, which can include tapping an owner's home equity to fund a company. Focusing all your financial resources on a business can jeopardize retirements and children's education funds, and can leave a family struggling in an emergency.
Bob Doyle, President of Doyle Wealth Management Inc., in St. Petersburg, FL, is sympathetic to a business being so engrossing that an owner can make personal financial decisions that aren't the most prudent. A small business owner himself, he said, "Our largest asset is probably the value of our business. But I have a 401(k), IRAs, investment accounts."
He likened an owner pouring all his or her funds into a business to an investor owning only one stock, a practice that most know is foolhardy. "Just as I wouldn't put all my money in Exxon Mobil stock, I wouldn't put all my money into Doyle Wealth Management," he said.
He also warned against raiding retirement accounts, which many owners do instead of trying to borrow from family and friends, or when bank loans aren't available. If the business goes south, so do retirement savings. In addition, the government will take a big bite out of early retirement account withdrawals, charging hefty taxes and penalties.
Many small business owners do realize they need to focus on their personal as well as business finances, although it can be a struggle at first to do both. When a company begins as a hobby, for example, people often put spare cash into it. Then, when it becomes a full time business, needed for the owners' livelihood, attitudes change. The business should support the owners, not vice versa. As soon as revenues become steady and consistent, owners should turn some attention to getting their personal money in order.
That calls for opening IRAs and 401(k)s, investing in mutual funds, and making sure they are adequately insured. This should include disability insurance to provide income if something happens to one or all of the owners.
Information in this article was edited from a story in the Pittsburgh Business Times.
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