Save for 2 Years of Personal Expenses Before You Startup
Starting a business can be challenging, especially when it comes to income consistency. It may take a while before a business generates enough revenue to provide a stable salary for the entrepreneur.
To counteract this, it's recommended to have at least two years' worth of savings for personal expenses, kept in liquid cash for easy access. These savings can act as a startup capital to sustain oneself for the initial years of the business. Moreover, recognizing that your time is also an investment, entrepreneurs should pay themselves for their time.
Having a consistent income from savings can provide a sense of security, making it easier to focus on growing the business. This can help avoid the "feast or famine" mindset that many entrepreneurs experience, where at some points, they feel like they are making a lot of money, and at other points, they fear that the business may fail.
This emotional rollercoaster can be distracting and detrimental to the focus on the business. To mitigate this, it's important to save money for two years and pay yourself a salary from those savings while running the business. Additionally, any income generated by the business should be invested back into the business to build a solid foundation and a valuable asset for the future.
As an entrepreneur, it's important to consistently invest in your business to grow it, rather than using all the income for personal expenses. When you are running a business, you are building an asset, not just working a job.
There are various ways to invest in a business, including taking out loans, selling equity, and reinvesting cash flow generated from the business. Consistently reinvesting cash flow back into the business, rather than withdrawing it for personal expenses, can lead to compounding growth over time.
Keep in mind that, it takes time for a business to grow and become profitable. It is not realistic to expect a business to consistently generate profits within 6 months, it takes time, focus, and patience. It may take 2 years with good focus, but it's recommended to give 3-5 years of time to invest in your business.
It may be difficult for friends and family to understand why you are saving money for personal expenses in fixed deposits and liquid instruments, rather than investing in assets such as real estate, gold, stocks, or cryptocurrency. They may argue that these investments have higher returns. However, it's important to remember that investments with high returns often come with low liquidity, meaning that the money may not be accessible when needed. This can cause confusion and uncertainty.
If you are serious about growing as an entrepreneur, it's important to have a different approach to investing money than what most people do. Instead of focusing on returns, you should invest money in yourself to ensure that you have enough to cover your basic needs, bills and lifestyle expenses without worrying about month-to-month expenses. Additionally, you should invest your time into your business, and as the business grows, invest the money back into it, to build it into something big.
After running a business for 3-5 years and consistently reinvesting the cash flow generated back into the business, you will start to see the effects of compounding growth. This can lead to significant profits, at which point, you can withdraw money from the business to support yourself for the next 3-5 years, in terms of personal expenses, while continuing to reinvest cash flow back into the business for growth.
This kind of growth plan is only possible if you have a strong conviction in the work you are doing and the value that your business is creating for customers. There's no need to take money out of the business and invest in stocks or other companies when you can invest in your own company. Entrepreneurs who truly believe in their business, and have no plan B, will make the business successful as they have no other option, and this kind of mindset is what makes them successful.
Many people may find it difficult to implement this kind of financial planning for their business, as traditional financial advice focuses on maximizing returns on cash. However, the approach outlined in this article, of protecting oneself and investing back into the business, has proven to be successful.