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  • Writer's pictureRalph Achille

Personal Financial Planning for Small Business Owners

Personal financial planning for small business owners is critically important to the business & personal financial success of any business owner.

Any business owner will tell you they created and roughly followed a business plan before starting their business. The same should be true for small business owners as they consider their financial life.

However, that is usually not the case, and we want to educate you on why having a personal financial plan is so valuable for any small business owner.


Key Takeaways:

  • Financial planning for small business owners must be prioritized to achieve business success.

  • Because being a small business owner involves a lot of risk & responsibility, having a personal financial plan is even more important.

  • There are six key pillars of financial planning that every small business owner needs to consider (cash flow, retirement, investments, risk management, estate, and tax)

Prioritizing Your Personal Financial Plan

As a small business owner, it is so easy to put your foot on the gas pedal and focus solely on the financial success of your business.

While this can help find business success, this tunnel vision can also lead to letting your personal finances or personal financial plan fall to the waist side.

There is 100% a better way to balance this out as a small business owner. The solution is to have a living and breathing personal financial plan.

It is critically important that any small business owner finds balance in these two, somewhat competing priorities. The truth is that a great small business owner will prioritize both the financial success of his/her business AND their personal financial plan. Without truly making a plan for both, you are doing your business and personal life a disservice.

By making an effort to prioritize your personal financial plan, you will be able to reap the benefits of some of the advantages of being a small business owner. This can range from tax savings to mitigating risks as a small business owner.

Finally, by being intentional and finding time to focus on your personal financial plan, you can start to gain clarity around your personal, family, and life goals. The success of your business is certainly a priority, but if you do not understand the why behind what that means for your life, you may miss out on other personal goals that could be equally (or even more) important in the grand scheme of things.

Why Financial Planning for Small Business Owners Is Different

As a small business owner, certain financial planning strategies and decisions allow for many beneficial opportunities.

On the opposite side of the spectrum, those that are not business owners, have fewer opportunities and flexibility in this regard. For instance, most W-2 employees do not have the ability to deduct work-related expenses from their income. In addition, W-2 employees usually only have a 401(k) Plan as their retirement plan option. Depending on the W-2 employee's position, company, benefits, etc., the ability to take deductions, optimize for tax planning, or sky-rocket their retirement savings is somewhat hampered (in most cases).

For business owners, there is just so much flexibility and opportunity to make strategic decisions around planning for retirement, tax, risk management, estate, etc. Small business owners can take advantage of many benefits to these areas of financial planning.

However, it is also important to note that small business owners also have a lot of risk on their side. For instance, because they are not covered by an employer plan, saving for retirement is the full responsibility of the business owner. In addition, it is nice to have an employer cover part of your health insurance. As a small business owner, this is something that is typically more expensive (bought privately) and must be handled on your own.

Therefore, if you take a step back and think about the gaps and opportunities inherent with the "personal finances" of a small business owner, it should be clear to see that having a personal financial plan is critical. More so, if the small business owner's job is to ensure their business is successful, they simply do not have the time to figure out all the details needed to have a strong, resilient personal financial plan.

Because of this, it is beneficial for most small business owners to work with a dedicated and reputable financial advisor [VIEW ARTICLE ]. By having this partner, they will be able to make sure that their personal financial plan is on track towards their goals.

Key Pillars of Personal Financial Planning

Building trust is very important in the early stages of personal financial planning and working with a financial advisor. In addition to that, a personal financial plan only makes sense when it aligns with a client's values and goals.

Once a small business owner is very clear about their personal values and goals, only then can they dive into the key pillars of personal financial planning with their advisor. Solidifying these areas is very important for impactful financial planning small business owners.

Cash Flow Planning for Small Business Owners

Cash flow planning is one of the most important areas to consider as a small business owner.

Because there is a lot of risk in having your own business, there could be periods when income is lower, expenses increase, or something unexpected happens. For that reason, maintaining a personal reserve of cash is key. While the rule of thumb for most is 3 - 6 months, as a business owner it may make more sense to keep at least 1-year of an emergency fund in cash.

Keeping personal finances separate from business finances when it comes to being a small business owner is always recommended. This is a great tip to follow so that you do not deplete your life savings but also because you want to have a clear picture of your personal and business cash flows. By having a clear picture, you will be able to make better decisions.

Finally, cash flow planning for small business owners also involves financing, leverage, debt, and raising capital. Because there are so many different ways to finance a business, making sure that you are making the optimized decision in this area is critical to both your business and personal finances.

Retirement Planning for Small Business Owners

Planning for retirement is typically the most important goal for most small business owners. Depending on the type of business, there may or may not be an exit plan. However, by using the tax benefits of being a small business owner, saving for retirement can be quite advantageous if done right.

There are several different types of retirement plan options that small business owners have at their disposal. Depending on whether you have employees, some plan types are more advantageous than others. In addition, by saving into most retirement plans, you are able to take tax deductions on your personal returns. This certainly helps your long-term savings as you get closer to retirement.

By saving into a retirement plan, small business owners also diversify away from their business. This is critically important because you simply just never know how things will turn out.

Finally, it is also very important to model out the level of success of your retirement plan based on the assumptions that you know, other expectations, and other goals. By having a base case of your plan and finding ways to stress test it, you will start to feel more confident in the direction you are going, in your business and the personal side.

Investment Planning for Small Business Owners

When it comes to investment planning within your personal financial plan, the best path is always to keep things simple. However, it is critically important to make sure that your investments align with your goals, timeline, and risk levels.

Below are a few key tenants to consider within your investment plan:

  • Asset Allocation: This has to do with your percentage allocations within the major asset classes (stocks & bonds). However, you can also go even more granular to consider your allocation across U.S. Stocks, International Stocks, U.S. Bonds, International Bonds, Alternatives (Real Estate, Gold, etc.), & Cash. Ultimately, you want to align your time horizon and risk levels with how your portfolio is allocated. For example, if you are in retirement and very risk averse, your asset allocation will likely hold a lower percentage of stock. As a business owner and depending on the riskiness of your business, that may play into your portfolio's asset allocation.

  • Asset Location: This has to do with the strategic decisions around the types of investments held into your different investment account types. For instance, if you have a taxable investment account, you may want to put less dividends or yield-producing holdings in that account so that you do not have much taxable income from that account.

  • Investment Policy Statement (IPS): This type of statement or document would outline your goals, risk levels, and preferences of how your portfolio is to be invested. In addition, you may create a benchmark to consider when comparing your long-term performance. By having an IPS, you are getting more specific of how your portfolio should be invested.

Risk Management or Insurance for Small Business Owners

Reviewing all elements of the risk side of things is very helpful for small business owners. The personal risk management that must be taken into consideration can be lofty, but when done right, can be a lifesaver on the personal financial plan of a small business owner.

Below are the most important areas to consider:

  • Life Insurance: The purpose of life insurance is to cover an income or expense need if you were to pass away. There are different types of insurance, such as term life, whole life, and universal life. In addition to this core need, there is also a business need in some cases for buy-sell life insurance.

  • Disability Insurance: Disability insurance will cover the income or expenses in the case of disability, where you are still alive but no longer able to work. This is often a gap in most personal financial plans, and that is especially tough to see, given that you are more likely to have a long-term disability event than to die.

  • Personal Property & Casualty (P & C) Insurance: Even though auto, home, and the other P & C coverages are not as impactful, it is still important to make sure that you have the appropriate coverage and are paying reasonable premiums.

  • Personal Liability (Umbrella) Insurance: This is another often missed one. This type of coverage is very cheap, but having it ensures that your nest egg is not in jeopardy.

  • Health Care Insurance: As noted earlier, private health insurance for small business owners can be expensive. Because this burden is on you, it is especially helpful to work with a reputable financial advisor to help guide you here.

  • Long-Term Care (LTC) Insurance: A long-term care event is unlikely to occur for most people, but if it does, it can single-handedly ruin someone's financial plan. By going through exercises to see if a LTC Insurance policy makes sense for you (vs. self-funding), you will be more prepared to manage this risk.

Estate Planning for Small Business Owners

When it comes to estate planning for small business owners, the most important topic has to do with plans for the business to survive to the next generation or be advantageously sold.

Thinking intentionally and early about this is crucial for many reasons. First, you are able to lower estate taxes. Second, you may be able to lower lifetime taxes related to the business. There are so many different creative planning opportunities in this realm. For instance, you may need to reorganize the business to allow for different types of ownership for family members (using a Family Limited Partnership, or FLP). In addition to this estate tax-savings strategy, you may also need to consider buy-sell life insurance or buy-sell disability insurance. These types of considerations will be helpful in an efficient transfer of the business.

While the legacy and exit planning are most important for small business owners, it is also still advisable to make sure that you have all of your basic estate planning documents in order:

  • Will: Your will determines how your assets will be distributed after your passing.

  • Durable Power of Attorney (POA): This is needed so that someone is designated to handle your financial affairs on your behalf.

  • Advance Medical Directive: This is needed so that someone is designated to make medical decisions on your behalf.

  • Guardianship: If you have minor children, this is very important. You want to make sure that you think through who you would want to raise your children if you (and your spouse) were to prematurely pass away.

  • Revocable Living Trust: Sometimes a Revocable Living Trust may be more beneficial than simply just having a Will. The Trust will outline where your personal assets go, but the critical piece here is that a Trust avoids Probate (whereas a Will does not).

Tax Planning for Small Business Owners

As with most financial planning-related things, taxes play a big part. For small business owners, having a good handle on their tax picture is critically important to the long-term success of their personal financial plan.

For the small business owner, it is important that they work with a competent CPA or EA (Enrolled Agent) that understands their personal finances and business finances. It is likely that their tax professional will be filing their personal tax return and their business (or corporate) tax return.

The tax planning element comes into play when the small business owner, the financial advisor, and the tax professional all work together in a proactive manner to optimize all decisions around tax savings. This could mean contributing more to charity (or a donor-advised fund) in some years or by accelerating depreciation on an asset. In addition, it may make sense to change the retirement account type that is being used for the business. Ultimately, the goal is to look for ways on the business and personal side of how the small business owner can save taxes in the long run.

Other Financial Planning Areas for Small Business Owners

Below are several other areas of personal financial planning that could be beneficial for small business owners:

  • College Education Savings & Planning

  • Student Loan Debt Management & Planning

  • Social Security Optimization

We Can Help!

Being a small business owner takes a lot of time, commitment, and focus. However, the last thing that you want to do is forget about your personal financial plan.

Finding the balance between achieving success for your business and prioritizing your personal financial plan is not easy. We value small businesses and want to help guide you along the way towards your personal financial goals.

Our firm is here to be your partner in ensuring you achieve all you want in life, personal finances, and your business. We specialize in working with Haitian American immigrants, small business owners, and members of the South Florida community. Please get in touch with us to schedule an introductory call.

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