Financial Strategies to Help Your Business Thrive
As part of Create + Cultivate’s Money Moves Summit , Lauren Anastasio, a CFP® here at SoFi, presented some key concepts to help you get your business money right.
She also answered some common questions regarding making sound money moves despite the uncertainty caused by the coronavirus.
Here are some of Lauren’s tips for helping your business thrive financially.
Key Concepts for Financial Thriving
When it comes to basic financial guidance for entrepreneurs and employees alike, there are some concepts that stand true regardless of ongoing events.
Key Concept 1: Organizing Cash Flow
No matter what your financial situation may be, it’s hard to get a handle on it without making some concrete plans. That’s why a budget is essential—and that goes double for business owners.
Entrepreneurs often wonder whether or not they really need to separate business and personal finances, and Anastasio highly recommends they do so. It may take more time and effort, she says, but “your life is going to be a lot simpler if you’re treating you as you and your business as your business.”
Once your finances are separated out, however, there’s still the question of how much to pay yourself—and how to allocate those funds as they roll in.
Anastasio, and other financial specialists, suggest the 50/30/20 rule: spending 50% of your income on fixed expenses like rent and insurance, 30% on discretionary expenses like travel and dining out, and keeping back 20% for savings.
Of course, this regimen may or may not be realistic for you, especially if you’re in an area with a high cost of living. If so, Anastasio urges you to try to preserve the 20% savings metric at all costs, allocating additional necessary expenses from your discretionary portion. (For instance, your revised ratio might be 60/20/20 or 70/10/20.)
Meticulous budgeting can help you figure out how much to pay yourself from your business and also paves the way toward creating a firm financial foundation—which is the next key concept she covered.
Key Concept 2: Developing a Solid Financial Foundation
Business owners in particular need to have a plan for inconsistent or “choppy” cash streams—and as many regular employees have discovered in the wake of COVID-19, no one is immune from financial surprises.
Developing a firm financial foundation can help safeguard you against emergencies while also paving the way for longer-term financial goals. Anastasio recommends beginning with three fundamental steps, particularly for business owners, before prioritizing the rest of your cash flow.
• Creating a safety net, or a cash cushion of about one month’s worth of essential expenses, separate from your personal emergency fund.
• Eliminating bad debt, which Anastasio defines as any debt with 7% interest or higher.
• Creating an emergency fund of at least three months’ worth of expenses, all the way up to a full year depending on your personal financial situation. Anastasio does tend to recommend self-employed earners trend toward the higher end of the spectrum.
Anastasio then laid out eight steps for prioritizing your general cash flow. She recommends tackling financial goals in the following order:
1. Creating a safety net.
2. Getting your retirement match, if possible.
3. Protecting your income.
4. Attacking bad debt.
5. Creating an emergency fund.
6. Saving 15% of your total income for retirement.
7. Saving for other goals.
8. Paying down good debt.
Prioritizing how to spend your “next best dollar,” as Anastasio put it, can help you make headway toward your ideal financial future.
Key Concept 3: Saving and Investing for the Future
Most of us have heard about the importance of saving for retirement—but a well fleshed-out saving and investing plan includes other sorts of goals, too.
Anastasio recommends parsing out your savings strategy to include short-term, medium-term and long-term goals.
Short-term goals are those you plan to enact in three years or less. Funds for these goals might be stashed in a high-yield savings account or a CD, but they shouldn’t be invested in the market, which would expose them to risk.
Mid-term goals are those you plan to enact between three to seven-ish years. For these, investing might be a smart move, but Anastasio recommends veering mostly towards conservative assets like bonds and fixed income securities.
Long-term goals are those planned for seven to ten years out, and for most savers include retirement. Because of the longer time frame, Anasasio says, “we want to try to be a little bit more aggressive with these investments,” which may be allocated to stocks and other more volatile securities.
In the case of retirement specifically, special, tax-incentivized accounts can be used to help maximize the earning potential of each contribution. Along with traditional and Roth IRAs, self-employed earners can look into SEP IRAs, which can dramatically increase their maximum annual contribution allowances.
Anastasio also emphasized that most people should ideally be aiming to funnel 15% of their income, or more, toward retirement savings.
She also covered the importance of staying in the market even in the face of adversity—missing even just ten of the best days over the last decade of market performance would drop an investor’s average return from 7.20% annual to a just 3.53%.
Key Concept 4: Developing a Team of Specialists
Anastasio encouraged audience members to recruit a team of professionals to their money management team. “There is no one I would not recommend hiring an accountant,” she said.
SoFi members are also able to consult with financial planners, like Anastasio, and career coaches to help them get a better overview of their smartest money moves.
The key to benefitting from these professionals, Anastasio suggests, is leaning on their advice all year round, not just at tax time.
Having an external source with an unbiased perspective on your finances can help you get ahead of potential problems before they have a chance to fully develop.
Need More Guidance?
Along with covering these fundamental pieces of financial advice, which hold true, Anastasio says, regardless of other circumstances, she also dove into audience questions regarding COVID-19 and other general best practices.
For instance, regarding the CARES Act and its impact on student loans, Anastasio recommends taking advantage of the payment and interest waiver even if you can afford to continue to make payments.
If you’re experiencing other cash flow disruptions, you might be able to use the extra money to your advantage—and if you can still make the payments, you’ll have the same end result if you simply save up the cash and make a large lump-sum payment at the end of the period.
Many people have also responded to the virus-related market volatility with anxiety, wondering if they should rip all their money out of the market — or go hard in the other direction and invest as much as possible while prices are low.
Anastasio recommended against either of these extremes, reminding the audience that “we have lived through things like this before,” though many millennials were too young to remember what it felt like. “We account for times like this when we think about the expectations of our returns for highly risky, highly aggressive, volatile portfolios.”
And for those working on paying down bad debt and improving their credit, she recommends the snowball method: put as much extra money as possible toward the account with the lowest balance, pay it off, and then continue up the ladder from there (while continuing to make minimum payments on other accounts).
Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC .
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