Before you embark on your entrepreneurial journey, you need to have your personal finances in check. This requires introspection, diligence and planning that will also benefit you when you’re running a business. As someone who aspires to manage their own company someday, you must first understand how your current living expenses, debt and spending habits impact your future. Before you start your business, examine these areas of your life so you can begin your company with strong money management skills and in good standing.
Cost of Rent/Mortgage
Shelter is the most important expense everyone has, but far too many people are stretched so thin that the majority of their paycheck goes to keeping a roof over their head. You can’t eliminate your need for a home, but you can evaluate whether your current mortgage matches your financial abilities to pay. Rent is also something typically non-negotiable, which means you have to evaluate whether you are living in a building or area that promotes financial prosperity.
Most young adults can’t become financially independent given the high cost of living in metro areas, but they can find ways to cut back and save more. Having a roommate is one way you can cut your housing bill in half; some couples even move in with another couple to reduce their housing expenses temporarily. If you own a home and think you have solid credit, consider refinancing. And if you plan to sell within the next few years, track the market and find ways to increase your property value. Aim to spend no greater than 40 percent of your monthly income on housing; this gives you greater leeway to invest in a business without risking your security.
Food and Utilities
Living expenses are the second largest drain on people’s incomes. To become a better saver, start buying in bulk, choosing more affordable alternative to brand name products and become more mindful of your energy consumption. Changes do not have to be monumental to be significant, and this is especially true when it comes to personal finance. The more you save, even just $25 month, has a compounding effect on your budget. As you evaluate your own spending habits, consider the three R’s: reduce, reuse and recycle. Only throw away, rebuy or spend when you can’t repurpose what you already own.
If you are in college or thinking about returning to school, consider the effect of student loans on your future. Know the different student loan limits for different types of loans. A federal loan will have different limits, interest rates and terms than a private loan, and you should always explore both options thoroughly before committing to one. Signing up for student loans is essentially agreeing to go into debt for years on end, possibly even over a decade. To maximize the return on investment, ensure that you get as much out of your financial aid as possible. When you start your business, you’ll be able to hopefully generate enough profit to fully pay off your loans in a few years. But before that, you’ll need to be smart about how much you borrow and how much you can save by applying for grants and scholarships.