Courageous and energetic in the pursuit of their entrepreneurial ambitions, many self-made businessmen end up ignoring some critical aspects of their personal finances. Naturally inclined towards risk taking and endowed with natural optimism, those who run their own ventures are prone to making these financial planning mistakes. Make sure you’re not repeating any of them yourself.
Lack of Boundaries
Many entrepreneurs lack the necessary discipline to draw strict lines between personal and business assets. Driven by the strictly one-off story of the “billionaire who sold their wives’ jewelery to stay in business”, they fail to recognize that for each such success story, there are a hundred other horror stories of entrepreneurs who put their personal assets on the line, only to fail in their pursuits and dig themselves into holes they cannot get out of.
Entrepreneurs tend to be disinclined towards ‘boring’ investments like Mutual Fund SIPs that afford them little excitement and also have limited prospects of reaping short-term rewards. They also tend to be averse to locking themselves into committed saving plans that entail saving a fixed sum of money on auto mode each month, preferring the thrill of speculation and leverage instead. Resultantly, many of them end up being off-track when it comes to their sacrosanct financial goals, such as their kid’s education or retirement.
Lack of Safety Net
Six months’ fixed expenses in an easily accessible liquid fund – how many times have we heard this advice? And yet, most entrepreneurs choose to ignore this tenet of financial planning and live dangerously, month to month, without realizing that lean cash flow periods could be just around the corner. As an entrepreneur, your monthly cash flows, at least for the first few years, are bound to be erratic. In such a scenario, it is absolutely critical to have a robust emergency fund to draw upon to fund your deficits during lean periods.
Lack of Risk Coverage
The natural risk takers that they are; many entrepreneurs simply find the notion of transferring risks to an insurance company to be unnecessary – after all, ‘bad things only happen to other people’. Hence you often find many businessmen underinsured on the term and health fronts. This may have catastrophic consequences for their families, especially if an unfortunate eventuality leaves them saddled with the entrepreneur’s previous debts. Even health related emergencies can prove to be disastrous, as an entrepreneur may be lacking in free cash for the first few years of their business.
And lastly, borrowing too much
Entrepreneurs tend to be less averse than most to borrow money. After all, they are confident that the green shoots that are currently on display will mature into massive oaks in no time, affording them the chance to pay back these loans well in time! You’ll often find entrepreneurs with mortgaged assets, multiple personal loans, outstanding rolling amounts on their credit cards… this sets off a vicious cycle that eventually comes back to affect their peace of mind and decision-making ability, and counterintuitively winds up stymying their business growth too.