Finance & Accounting

Ensure Your Personal Financial Security

Ensure Your Personal Financial Security

Giving your all to your business doesn't have to mean risking your financial security. Create a sound retirement nest egg and personal savings that can withstand all of your business's ups and downs.

By Tara Remiasz

The Right Way to Plan for Retirement
A widely accepted belief among today’s investors is that diversification is the most effective way to hedge against risk. After all, it would be risky to have your entire life savings tied up in a single stock, yet many small business owners do just that when they rely solely on their companies for retirement assets. “If all the assets you have are tied up in the business, then you’re not very well diversified,” says Jody Cole, vice president of business banking at Burlington, Vt.-based Chittenden Bank.

There are a variety of retirement plans that are designed for small business proprietors and their employees, Cole says. Weigh the benefits of setting up a 401(k) or Savings Incentive Match Plan for Employees of Small Employers (SIMPLE), she says. Visiting the U.S. Department of Labor Employee Benefits Security Administration Web site can help you familiarize yourself with the different options.

To maximize your efforts, Cole says it’s important to consider two key questions: 1) When do I want to retire? 2) How much money will I need to live on as a retiree?

Consider the ‘What ifs?’
Not only is it important to save for retirement, it’s important to know what protections your personal financial accounts have should your business default on a loan. Kristin Nordahl, a financial advisor with The MNE Group in North Andover, Mass., part of AXA Advisors, is a certified financial planner (CFP) and chartered life underwriter (CLU), who shares some general thoughts on the protection offered by different types of business entities. Nordahl is not an attorney, and recommends that business owners consult a financial planner and a certified public accountant when establishing their own companies or retirement accounts.

“If a [business] is formed as a sole proprietor or a partnership or an S corporation, these are all flow-through business entities that don’t offer the business owner any personal protection against default on a loan,” she says. Conversely if the business was formulated as a limited liability corporation or a C corporation then you would sign as owner of the business, so your personal assets are more protected, she says.

The potential for financial institutions to lay claim to your retirement accounts also depends on how those assets are held. “If they are held in an individual retirement account or a Roth IRA, typically those assets are not protected. But if you have monies that are in a 401(k) or corporate pension plan those are usually protected under the trust agreement that handles, you know, the documents and assets of those plans,” she says. “So it depends if you individually control them, i.e. in an individual IRA … or if they’re controlled by a trust,” she says.

Nordahl also offers these tips for keeping your personal finances sound.

  • Develop a succession plan for your business.
  • Create three to six months worth of easily accessible emergency savings.
  • Live on the same amount of money all the time, even when you receive a large payment.

Consider Using the 60/40 Rule

To Janine Bolon, a financial coach in Cedar City, Utah, creating financial security is a matter of sticking to the law of percentages. Bolon is author of Money… It’s Not Just for Rich People, and says she has mentored 362 families from debt to financial security, 30 percent of which are small business owners. Although Bolon was able to create personal wealth for herself, she does not have a degree in finance, and is not a financial planner or an accountant.

The first thing that every business owner must do is give themselves a paycheck, she says. It doesn’t matter if you are a startup and can only afford to pay yourself $50 per month. Even if your business is in a period of transition or a slump, it’s crucial that you pay yourself some amount of income, she says.

Once you have a paycheck, Bolon recommends that you divide your income into a 60/40 split, with 60 percent going to living expenses and 40 percent going toward other needs. She then advises that you split the 40 percent into four different categories: 10 percent to short-term savings; 10 percent to long-term savings, such as a retirement fund; 10 percent to a philanthropic organization; and 10 percent to a religious organization or an additional 10 percent to a philanthropic organization instead of giving to a religious organization.

Giving money away may seem counterintuitive for someone who is trying to ensure his or her own financial security, but Bolon says she views the flow of money as circular. Therefore you must give money away to receive something in return.