No successful entrepreneur arrived at where they wanted to be without first understanding -- through education and experience -- the realities of business ownership. It’s easy to dream about climbing the mountain and reaching the summit, but unless you stay grounded in the realities of your financial situation, your personal limitations and the challenges inherent in the entrepreneurial journey, it will be difficult to fulfill your goals.
The average age for an entrepreneur to start a business is 40 years old, and the majority of small business owners in this country are aged 50 to 88. This is a demographic of people that typically have marriages, children/grandchildren, homes and concerns about retirement. Misguided notions about what you really need in order to both finance a business and pay your costs of living can have serious consequences for your family and your future, so this is not an area to be broached lightly.
Getting Honest About Your Financial Situation
Even if you have a couple hundred thousand dollars set aside for your living expenses until you get your startup off the ground and can pay yourself a substantial salary, is it really enough to sustain the lifestyle you’re accustomed to? There’s an alternate version of this question, and it’s usually the more difficult one to answer: Are you willing to adjust your lifestyle to meet the budgetary constraints of starting a new business?
Your response to this question will be affected by a number of factors, not the least of which is the kind of business you’re entering into. It’ll also depend on individual characteristics, like:
- Financial priorities
Making Lifestyle Considerations
Maybe you have a family to support and you’ve been relying on a sizeable income to cover the cost of everyday living as well as added luxuries such as nice cars, private education and regular vacations. If so, it’s necessary to identify whether the money you have saved is adequate to continue funding this particular lifestyle -- or whether you and your family are willing to cut back and prioritize differently to meet the limitations of the savings you have to work with.
This can be a challenging decision to make, but it’s extremely important. If you don’t consider the realities of your financial well-being and you end up spreading your resources too thin, you’ll have nothing to fall back on in the face of a crisis. Not only can this devastate your business venture, but it could also result in financial distress for your entire family.
Using The “F” Word: Forecast
A smart way to address this risk is to spend time breaking down your living expenses and projecting your financial needs for the next five years. Use our helpful spreadsheet as a guide to itemize your monthly costs and calculate a five-year projection. Then compare your numbers with what you have saved. This exercise will enable you to determine whether you need more money or an adjustment to your lifestyle.
As your business gains momentum, you may find yourself digging into your savings less and less. Nonetheless, accounting for the aforementioned five-year period is the best way to mitigate the risk of irreparable financial trouble. The transition from a predictable paycheck to an unpredictable one can be highly stressful. Plan ahead to ease this burden and protect your family from financial adversity.
Understanding Where Diligence Is Due
The latest data from the Bureau of Labor Statistics indicates that an average of over 600,000 new businesses are started in the U.S. every year. And for every entrepreneur who actually makes the move to start up a new enterprise, there are plenty more still considering it. If you’re thinking about this option for yourself, it’s essential to perform your due diligence and ask the hard questions before jumping into action.
Determining whether you have enough savings set aside is just one aspect of the pre-business ownership investigation. For insight into 5 more essential questions you should be asking if you’re considering entrepreneurship, download our comprehensive e-book: So, You Want To Be An Entrepreneur? 6 Critical Questions To Prepare For The Entrepreneurial Journey.