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Even if you choose to get the help of a professional firm, IDS consulting, to handle the finances of your business, you still have your personal finances to grapple with. 

Here are some tips for entrepreneurs on managing their own money

Income – Salary or dividends?

The first consideration to make when managing your personal finances is how much money you are taking home every month. This depends, of course, on how much your business is making, but also on how you pay yourself. 

Depending on your role in the business, you could receive a salary as a director, dividends as a shareholder, or a combination of these. If you have an irregular dividend income, it may be helpful to take an average of last year’s total income, and use that as a basis for your budget.

One helpful budgeting rule is outlined by Elizabeth Warren and her daughter Amelia Warren Tyagi in their book “All Your Worth” – the 50:30:20 rule.

Expenses 

Simply put, the 50:30:20 rule outlines the ratio which you should split your monthly income into:

50% for needs,

30% for wants, and

20% for savings

You don’t have to follow these percentages strictly, but they are a helpful starting point. At higher income levels, you may well be able to put more towards savings and your wants.

Minimising your non-negotiable bills

You need food, shelter, healthcare and a minimum amount of clothing to live. As such, these form part of your “needs” section in your budget (groceries, rent, utilities, transportation and health insurance all go here). That said, as your business excels and your income increases, it can be helpful to keep your bills low. 

At every income, especially for large costs like housing, you should make sure to get the best deal possible, so the rest of your income can go towards other needs, wants, and most importantly, towards savings. Shop around for the right insurance providers, monitor your food waste at home, and take other steps to ensure you are not wasting money.

Saving for personal goals

Given the risky nature of self-employment, you should prioritise a healthy emergency fund.

Apart from financial security, you may have other goals that require large upfront payments, like buying a house, growing your family or starting a second (or third, or fourth) business. This is where some of your 20% should go.

Saving for retirement

The rest of your savings should go towards your retirement. As an entrepreneur, you have the sole responsibility of saving towards this. You don’t have an employer making automatic deductions from your paycheque to invest in a pension, or making payments to SSNIT on your behalf. 

Nonetheless, you need to prepare for a time when you will no longer able to work, even if you wanted to. The closer you are to retirement age, the more important it is to start saving for retirement if you have not already. 

Making time to enjoy the fruit of your labour

What sets Warren and Tyagi’s approach to personal finances apart from many others is the clear recognition that you should set aside money for things you simply want. Whether it’s for a regular hobby, going out with friends or regional travel, there should be room in your budget for things that you can enjoy now. 

After all, you work so hard to fulfil your obligations to yourself now, as well as provide for your future – you deserve to enjoy the rest.