The following financial planning tips could help you achieve a similar — if not better — level of success than your parents or grandparents. These tips may seem like common sense, but the odds of you actually doing them are low. It’s not because you’re lazy (I hope). It’s because the financial balance sheet of many Americans has been plummeting since the 1980s. Also, your perception of the financial industry may not be exactly positive. I guess the question you have to ask yourself is: What have I got to lose — and also gain — by making a financial plan for my future?
1. Reduce Debts.
Yes, I’m going there first. Whether you are employed or starting a business, keeping debt in check is the first step to improving your financial position. Reports have shown that debt increases from your 20s through your 30s due to unpaid student loans as well as credit card debt, life changes and investments like buying a home.
Some young people get assistance from family members to pay off debt and get down payments for businesses or home purchases. If you are not in that position, there are trusted programs for student loan repayment as well as debt consolidation options through not-for-profit groups and banks. These programs reduce your monthly payments to improve cash flow.
Which leads me to options for business financing. Building a relationship with a trusted banker or CPA can help you explore options for financing a small business with better terms and lower interest rates. The most common and worst option is to use a credit card. Instead, explore SBA loans, business incubator programs in your community and even micro-loans from entrepreneurial organizations like BCL of Texas.
If possible, another way to manage debt is to increase your income. Ask for a raise. You may not get it, but you definitely won’t get it if you don’t ask. During performance reviews, cite the ways you have added value to the company, brought in or kept customers or improved processes. Prove your value with real examples.
Tip: To pay off your debt in less time, take the portion you were paying on a paid-off credit card, for example, and apply it to your next largest bill such as a car payment or your small business loan. You were paying that amount before, so you won’t miss it. As you pay off more debt, your monthly payment toward debt will stay the same but you will be able to apply a larger amount to specific bills — paying them off faster. Reserve debt like your mortgage until last because you receive an interest deduction on your taxes.
2. Increase Liquidity.
What is the result of paying off debt? Cash flow. Cash is king when trying to save money or run a business. There is often hidden cash in small businesses that don’t review accurate or timely financial statements. For example, we commonly discover invoices 60 days overdue or longer — money that should be in your account to support cash flow.
The leading cause of business failure — or a household for that matter — is insufficient cash flow. What often happens is that we spend what we earn. That is, any extra cash created from paid-off debt is spent on other needs and wants. It happens most often when we aren’t following a budget.
The ‘B’ word. When you don’t have a budget, you fall down through impulses and convenience. For example, eating out at bars, restaurants, expensive coffee shops and convenience stores is much more expensive than cooking food at home. You can still eat out, but a monthly budget for eating out will preserve your cash (and also give you an excuse with friends for staying in when you’re tired).
In the same way, a budget for your business will show you where expenses are increasing before they get out of control. Regular review of accounts receivables will support more timely customer payments. Accurate financial statements will keep your business in compliance for taxes and loan covenants as you grow.
Tip: If you haven’t already, invest in a program like QuickBooks® to easily and accurately record and monitor your financial position as well as pay bills, produce reports and support tax planning. Business owners, you can outsource bookkeeping to your CPA. You will benefit from well-organized financials and more time to attract new customers. Cornwell Jackson also offers outsourced payroll services.
3. Build Reserves and Investments.
A common rule of thumb for saving money has been to build an emergency fund that supports your household for six months. But let’s start small. A savings account that covers even one month of expenses is better than nothing.
Building reserves is easier without debt, but not impossible. By working from a budget for yourself and/or your business, you will naturally experience more cash flow. A portion of that cash can be set aside for emergencies and eventually for investments. Business owners, on average, should have cash reserves of 15 to 50 percent. Some financial planners suggest saving up to 40 percent of your personal income, living on 50 percent and giving 10 percent (more on giving in a moment).
If you don’t already participate in an employer-sponsored 401(k) plan, a simple IRA or a self-employment pension (SEP) for retirement, start saving now. Yes I know you may distrust Wall Street. Plus, a study by Harvard showed that most people aren’t wired to save for a rainy day. Who knows if saving will add up to anything or if you’ll even be around to enjoy it? I suggest having several different vehicles for saving to make it more fun. You can invest in bonds, land, a franchise, gold…the point is that savings allows you to have options to make investments when the timing and opportunities are right. Don’t you wish you had some shares of that latest app that just went public? Yeah, me too.
Tip: The key to savings? Don’t touch it. Some people transfer savings automatically from their paychecks to their savings and retirement accounts. Business owners can either build a percentage for savings into their customer agreements (i.e. raise prices) or allocate a portion of each invoice toward cash reserves. Out of sight is out of mind.
4. Pay it Forward.
When it comes to being generous, millennials are pretty great. We are more likely to share our assets out of generosity than from obligation. Sure, it’s partly for survival purposes and partly because we like doing stuff together.
When you have a stronger financial position, you can be even more generous. Your business may allow you to select a particular cause to support — donating a portion of your proceeds or doing team fund-raisers. You can also support the livelihoods of employees. It’s a commonly cited statistic from the Small Business Administration that small businesses create a larger percentage of new jobs in the U.S. (companies of 100 people or less) than larger companies.
Your business may even target a social cause. In Dallas, the United Way of Tarrant County actually held a pitch competition with the support of entrepreneurial groups to promote social change ideas.
You can also pay it forward personally. As I mentioned earlier, I support recruitment at my firm as well as new employee onboarding. My leadership position has not only improved my income, but also my ability to give back. And isn’t that higher sense of purpose what we crave most from our careers anyway?
Tip: Who has helped you along the way and which causes pull at your heart? Look in that direction to start giving back as you advance in your career or business aspirations. You need a bigger reason for working so hard or starting a business than making money. Previous generations have taught us that.
This guide is really a wake-up call to prepare you for business ownership or new financial opportunities. You have the power and the intelligence to influence our economy. Get started now. For more tips:
- The AICPA has a campaign called “Feed the Pig” that offers many resources
- Your local bank or credit union likely has a resources section for increasing savings or exploring financing
- You can join a local entrepreneurial or small-business mentoring group for ideas as well as accountability for your goals. Find your group in the Dallas/Fort Worth area using the Meetup app.
- Read new articles on Cornwell Jackson’s blog and in our Knowledge Base section.
Mike Rizkal, CPA is a partner in Cornwell Jackson’s Audit and Attest Service Group. In addition to providing advisory services to privately held, middle-market businesses, Mike oversees the firm’s ERISA practice, which includes annual audits of approximately 75 employee benefit plans. Did we mention that he’s a millennial and will take any opportunity to be outdoors, including outdoor grilling? Contact him at firstname.lastname@example.org.