Most of the affluent in America are business owners… fewer than 1 in 5 households owns a business, but they are four times more likely to be millionaires than those who work for others. - The Millionaire Next Door
Most personal finance advice is aimed at people who want to work for others. The gist is to enter a STEM career path and maximize your salary by upgrading your job every few years. Once you save enough, you can retire on the interest.
I love that advice, but it’s not for everybody – especially entrepreneurs. An entrepreneur’s financial profile is unique. So let’s talk about what you can do to maximize its potential.
I don’t know your entire financial situation. While I’m coming at this with the intention of helping you, you need to make your own informed decisions about your finances. I am not responsible for what you choose to do with this information.
Entrepreneurship isn’t ask risky as you’d think
Most people believe that entrepreneurship is risky. They argue that an entrepreneur’s income isn’t certain, and it’s often lower than what they’d make at a salaried position. This is a viewpoint passed down by generations of people who needed excessive amounts of capital to start and grow businesses, but today, it is no longer true in many circumstances.
In addition, entrepreneurship eventually transfers into business ownership, which is one of the safest career paths in modern society. In addition to higher pay, business owners have the sole right to one of the finest asset classes in capitalism: a private business, a cash-generating appreciating asset that provides year-over-year returns and tax benefits.
Good entrepreneurs make bets with limited downside and unlimited upside. For instance, if you hold down a job or do freelance work while starting your business on the side, the only downside is spending your time on something. The upside is the potential for large profits, a bigger network, a stable job, and the freedom of your time.1
Taking out a loan increases the downside, and I recommend against it. Either get your future customers to fund your development costs, or feed your company with its own profits. Don’t chase venture capital money, either – VCs have their own interests which are not the longevity of your business.
In addition, few people realize that being an employee is not low-risk. It’s more like medium-risk. You can’t control the actions of upper management; you can’t control the direction of the company. There’s always a chance of your sector being downsized and you getting laid off. The real landscape looks more like this:
|Type of job||Salary||Risk||Assets|
|Entrepreneur||low||high, but limited downside||little to none|
|Employee||medium||medium||steadily grows over time|
|Business owner||high||low||owns a private, valuable, appreciating asset|
Here are a few of the benefits of company ownership:
- Instead of having one source of income, you have hundreds or thousands of them: your customers.
- You can diversify into multiple products to weather against changes in the market.
- If you work for a business that makes an extra $1 million, you might get a small raise and a Christmas bonus. The owner has the right to the rest.
- You can invest in your own business. These returns can be much higher than earning 7% in the stock market.
- You own an appreciating asset that people will pay multiples of revenue to buy from you. A software-as-a-service business that earns $100k/year can be worth $800k to $1.2 million.2 Owning appreciating assets helps build your net worth.
- You gain freedom over your time. You no longer have a 9-to-5 job. You don’t need to work 40 hours per week – you can set your own systems and processes to make yourself more efficient.
Limiting the downside
Now that we’ve talked about risk, let’s cover the strategy you can use to limit your risk.
If you hold down a job or do freelance work,3 you can work on your business over the nights and weekends. If it starts to make enough money to cover your expenses, you can think about going full-time.
If you don’t have enough time to get your business off the ground, ask yourself a few questions: 1. am I starting small enough, and 2. am I working efficiently?
I also recommend building up some savings before you take the plunge. Savings can be useful for buying business equipment and helping you sleep at night. The amount depends on the type of business you’re starting, as well as your personal preferences. Software businesses require little capital to start, while brick-and-mortar businesses take more.
Let’s say you want to work solely on your business without holding down a job. This is slightly riskier, but you can get a better picture of where you stand by dividing your savings by your monthly expenses: your rent or mortgage, food, car payments, student loans, credit cards, health insurance, retirement accounts, and business costs. This is how many months you have left. Your run rate is extended if your business can make a profit. Here are some examples:
- I have $5,000 in savings and I spend $1,000/month. This means I have 5 months to start a business, even if I make no profit in that time.
- I have $30,000 in savings and I spend $2,000/month. This means I have a little over a year to start a business, even if I make no profit in that time.
- I have $50,000 in savings and I spend $4,000/month. My business is making $2,000/month. This means that I have a little over two years to make a go at my business if my income doesn’t grow.
If you don’t have any savings and you want to start a business, I’d recommend working at least enough to support yourself for 6 months. I have some tips on frugality in the next section that may help.
The profile of a first generation entrepreneur who becomes wealthy: thrift, low status, discipline, low consumption, risk, and very hard work. Their low status is actually their building block for success. People from highly educated or wealthy backgrounds are often used to consumption and have a harder time building wealth. - MND
To get the most time out of your savings, you can adopt a few of these habits. I won’t go over the boring stuff (like cancelling unused subscriptions or not buying Starbucks) – I’ll stick with the more creative ones.
- Shop at Aldi to eat on ~$20-30/week. (I did this for several months.)
- Eat before you go grocery shopping and you’ll spend less.
- When showering, turn off the water when soaping/shampooing.
- Buy kitchenware and clothes at Goodwill.
- If you’re still going to work, pack a lunch.
- If you have an expensive car payment, sell the car to get a cheaper one. For instance, a payment on a used Honda Civic is often only $100-something per month. Once it’s paid off, your Civic can be driven for over 300,000 miles with regular oil changes.
- Order sides instead of appetizers – they’re 3 times cheaper.
- Order water with lemon instead of coffee, tea, soda, or alcohol.
- Challenge yourself to a game: pick one week of the month where you won’t spend any money. And then, don’t buy anything – not food, not gas, nothing.
- Put blankets in front of your doors on cold days. This keeps the cold from seeping in under the cracks, lowering your heating bill.
- If you’ll be working from home, let your car insurance company know. They’ll often knock hundreds of dollars off their prices.
Extend your runway by a month
Credit card companies don’t charge you any interest so long as your card is paid in full each month. A good credit card will also give you rewards like cash back bonuses on your purchases. So you can technically make the credit card company pay you for spending your own money!
Put your monthly purchases on a credit card. Then, on the 1st of each month, pay off the card in full. You’ve just extended your runway by up to a month, and you’ve snagged the cashback bonuses too.
Have an emergency fund
Start an emergency fund that carries anywhere from 3 to 6 months of living expenses. Save the emergency fund for yourself, not your business. You probably won’t need it, but if you do, it’s a good thing to have.
Invest extra cash
If you have extra cash sitting around, you may want to invest it in relatively liquid assets that can still gain interest. One example is a Vanguard fund, Betterment, or Wealthfront. Individual stocks carry higher risk and I recommend against them if you’re aiming for financial stability.
In addition, if you’re just starting out, you may want to start something like a Roth IRA. (Roth IRAs are special in that you’ve already been taxed for the money that you add. Over time, your Roth IRA will gain interest, eventually snowballing into large amounts, and you will never be taxed on any of its gains or dividends ever again.) You can view more options here.
Find a good insurance plan
Working for yourself means that you need to buy health insurance. Like most other things in entrepreneurship, this is nowhere near as stressful as everyone made it out to be!
Choosing your own insurance also enables you to find a great deal that fits your particular situation. I used Stride Health to get mine, and it only took a few minutes. Stride is free. (The insurance companies pay them a commission for referring you, but you don’t pay anything extra since insurance prices are mandated by the state.)
Focus on valuable entertainment
It’s important to take time to relax and recoup or you’ll face burnout (this is a marathon, not a sprint). For instance, you might take an hour or two at the end of the day to chill out. Just make sure you’re choosing smart activities for entertainment.
|Activity||Cost||Hours||Cost per hour|
|Taylor Swift concert||$280||4||$70/hour|
|Seeing a movie||$20||2||$10/hour|
|Monthly gym membership||$60||20||$3/hour|
|Playing a video game||$60||60||$1/hour|
|Reading library books||$0||20||$0/hour|
I’m not saying to always choose video games, Netflix, and reading – just be mindful of the hourly cost of what you’re going to do. Try to find ways to entertain yourself that don’t involve blowing a lot of money.
If your burn rate is $1500/month, a single Taylor Swift concert will take away nearly 20% of a month that you have to make a go at your dreams.
Don’t overpay for education
You don’t need a college class to teach you how to program, design, photograph, or market something – you just need a few blog posts and YouTube videos. You can find most books for free online.
As a self-taught developer and designer, I’ve learned that a great skill is knowing how to ask questions to search engines. There isn’t a problem in entrepreneurship that a search engine can’t solve.4
You can also ask your network for advice, or talk to people on sites like Indie Hackers if you get stuck.
Set the right foundations
Don’t be a sole proprietor – set up an LLC, or your country’s equivalent. You don’t need to go through a lawyer or an expensive service to register a company – my state, Pennsylvania, had an online form that took 15 minutes and cost next to nothing.
After you have an LLC, set up a bank account for it with a local bank. This is a single, friendly meeting (banks love business customers) and only takes an hour or two. Plus, you get free bank coffee – which is surprisingly delicious.
Don’t do your own taxes – shop around to find a talented, reasonably-priced accountant for tax season. Many local accountants are good at what they do.
And finally, if you’re a business owner in the US, you’ll be paying ~40% income tax since you’re self employed. This means that if you earn a profit of $100,000 after all costs, you only have the right to keep $60,000. Luckily, you won’t be double-taxed on this $60,000 – it’s all yours and you can literally write a big check to yourself and deliver it in style. Make sure that you price your products appropriately and keep enough savings in your business to pay these taxes.
Take advantage of tax write-offs
You can save a good amount of money by writing off your business expenses. Here are a few things that can be written off, provided they are used solely for your business:
- travel expenses
- insurance, taxes, and licenses
- legal and accounting services
- continuing education in your line of work
- books, online courses, conferences
For instance, if you need to buy a computer in order to work, this is a business expense and can be deducted from your taxes. To keep things simple, if you earn $10k and buy a computer for $2k, you will only be taxed on the $8k, not the full $10k.
Should I be an entrepreneur?
If you have grit, an idea, savings, and the ability to make it happen, you’re in a good position to start. I recommend working on the business as a side project until it begins to make money or gain traction. Then, make your own informed decision about what your future may hold. If you’re young and starting to think about entrepreneurship, I also recommend reading Capital Gaines and The Millionaire Next Door. I’ve taken notes on each of them and published them at those links.
In the long run, I don’t think that there’s much risk involved. Risk is gambling on the lottery, or investing in cryptocurrency, or going to war and not knowing if you’re going to come back – it’s not losing a little bit of time and money.
Business opportunities are like buses – there’s always another one coming.
In summary, entrepreneurial personal finance advice is basically:
- Limit your downsides
- Be frugal
- Focus on value
- Set good foundations
If you have your own tips, tweet them to me @markthomasm. I’d love to hear.
Even if you quit your job entirely to start a business, the only downside is paying your monthly living expenses from your savings. ↩︎
Software-as-a-service businesses trade at 8-12x annual recurring revenue. ↩︎
Many entrepreneurs become freelancers while trying to build their companies. As a freelancer, you can usually pull in a number comparable to your earlier salary (if not a little more) while gaining more control over your time. To get higher rates, you can fall back on your professional network. Past teachers, professors, professional service providers (doctors, insurance salesmen, business owners), and past managers are a good place to start – a personal intro leads to more business than a cold intro. ↩︎
One tip is to put “Reddit” at the end of all of your searches. Reddit is an enormous discussion forum where people upvote good answers and downvote bad ones. Finding advice on Reddit is much faster than trying to aggregate information from a random blog (which is likely filled with affiliate links, ads, and is needlessly wordy in order to rank higher on Google). ↩︎