A good saving and investing plan will scale like a startup. By Hilary Martin (Certified Financial Planner, Family Wealth Consulting Group)
My philosophy is simple, but ground breaking - you can dramatically improve your financial situation through consistent application of healthy practices.
Add these key concepts to an informed collection of personal finance best practices, and you’re definitely on your way to achieving financial freedom!
1. You’re not just starting a company, you’re already running one.
What I’m suggesting here is a powerful mindset shift — I want you (today, now) to appoint yourself the CEO of your Personal Financial Future Corporation (PFFC). This may sound a little silly at first, but it helps take the emotion out of money, and the less emotional you are about it, the better! Your PFFC is the primary business you’re running, always. So when you’re building your startup, you are swinging at the fences by investing, and risking, the resources of your PFFC.
Think of it like this: large corporations like Intel incubate startups extensively. They dedicate time and financial resources to an idea, but they never risk everything. You are passionate about your business ideas, but never let yourself get into the mindset of the concept being more important than your PFFC. Don’t mortgage tomorrow to pay for today. For example, never pull money out of retirement accounts to pay for lifestyle or business expenses, and always keep lifestyle expenses below your income.
2. Hope is not a financial plan.
Too many women fail to plan for their financial future, opting instead to spend everything they earn and hope for a change in their circumstances. As an entrepreneur, it’s tempting to forget about saving money now, and just hope for a multi-million dollar exit. Statistically speaking, though, that’s a recipe for failure. Leave hopefulness and optimism for the areas of life where it is appropriate, and in the area of your finances, plan to succeed. And then execute!
Women often fall into one of two camps when it comes to our finances — we either suffer from a cognitive bias called over-confidence, or confusion that leads to no action.
- Over-confidence. Women bold enough to strike out on their own in business might also feel confident enough to actively trade their own investment portfolios, but study after study shows that going it on your own in the market is a very costly mistake. One study showed that the actual average returns produced by do-it-yourself investors are a full 6% per year less than a simple buy-and-hold of the market.
- No action. For those of you who might feel timid or confused about investing, know that your fear is very normal. Also understand that the nature of compound returns means that money left sitting in cash loses value every day. You don’t need to know how to pilot the plane to fly in it — commit now to making the effort to move through discomfort and find an advisor or plan that works for you. Remember you are the CEO of your PFFC, and every CEO needs a good CFO!
Speaking of plans, a good saving and investing plan will scale, and it’s part of learning how to preserve wealth. Get plugged in to a successful diversified investment strategy now, so if and when your income increases dramatically, you can simply include your new wealth in the plan you already trust, and help yourself avoid the common — and often irreparable — mistakes made by financial windfall recipients.
3. Make your startup part of your financial plan.
Start with the end in mind. Are you building a lifestyle firm, where you can grow a team and expect to captain the ship for many years? In that case, your income will be relatively consistent and you can save accordingly. If you’re targeting a buyout or IPO, don’t just build it and expect that they will come.
Create and cultivate relationships with firms that might be interested in what you’re doing, make sure you understand their product roadmap and customize to their needs. A company with good buyout prospects has more sizzle for investment bankers, too. In this case, you’ll need to keep lifestyle expenses very low until your first exit, and never spend like the next exit is a foregone conclusion.
Editor's note: Got a question for our guest blogger? Leave a message in the comments below. About the guest blogger: Hilary Martin is a personal finance expert, author, and fee-only financial planner in Silicon Valley, CA. Hilary blogs about healthy money practices, investing insights, and the psychology of money. Hilary is a member of the National Association of Women Business Owners and has served on the Board of the Academy of Finance. She blogs at Healthy Wealthy Families. Follow her on Twitter at @wealthyfamilies.