If you run your own business, you likely put a lot, if not most, of your time and all of your energy into it. You probably pour your heart and soul into making your company a success. You may have even invested your life savings. Are you getting what you need out of the business in return?
For your business to remain successful, it’s important to take care of yourself too! Otherwise, you could create the successful business you had always dreamed of, just to lose it if and when you ever step away – and that’s if you’re able pass the reins and retire! In our experience helping business owners in San Antonio, Texas (and nationwide, for that matter) plan for the future and create a sound exit plan, we find that many business owners have no strategy for retirement. Even if you never plan to retire, the day may come that you need to, so it’s crucial to have a plan just in case.
How do you do this while juggling the many other tasks that come along with entrepreneurship? For one, make sure you’re paying yourself first – and that doesn’t just mean a salary. At PAX Financial Group, we help business owners maintain their own financial security while making sure their businesses also thrive.
We’ve realized in our more than 100 years of combined experience helping clients plan for the future, that many business owners don’t really know what “paying yourself” means. Like a parent who always puts the kids first, a business owner’s own needs can easily get put on the backburner. But this is risky for many reasons. If you don’t have a plan, how will you ever retire? Will you have enough to live on in your Golden Years? Will your business survive a transition to the next generation? Will you need help from family later on?
As entrepreneurship continues to reach new peaks, the team at PAX Financial Group thought it was time for a refresher: What does “paying yourself” really mean; or should mean and probably doesn’t? There are 4 elements that we see many business owners overlook.
Depending on how your business is structured (sole proprietorship, S-Corp, C-Corp, LLC, etc.) you may be required to pay yourself a regular, reasonable salary, comparable to industry standards, and withhold taxes.
But that’s not all you should be doing.
While you may be getting a paycheck, many business owners in San Antonio (and nationwide) aren’t saving enough for retirement. Too many expect the sale of their business to be their retirement plan, but it doesn’t always work out that way. Talk to a financial advisor about establishing a retirement fund, if not only as a backup plan, then at least to supplement your retirement income.
The truth is (unfortunately, we’ve seen this happen many times), if you don’t have other financial means to support yourself in retirement, you may be forced to settle for less than your business is worth when you go to sell, are unable to leave your business to the next generation or even have to find part-time work later on. Having a Plan B in place gives you something to fall back on, and may even give you more time to wait for a better offer.
When you own a business, getting started with a retirement plan can be complicated – after all, you can’t just call HR and request the forms to register for the company-sponsored 401(k). You have to investigate your retirement options and decide what plan makes the most sense for you.
Remember: Offering a retirement plan for your employees as well can also benefit you! (Read our recent blog post.) And saving for retirement can also offer tax benefits! By setting up a qualifying retirement plan, like an IRA or Solo 401(k), you contribute pre-tax dollars, which means reducing your tax liability. If you open a personal Roth IRA, you contribute after-tax dollars, reaping the tax benefit later on in retirement.
There are a lot of factors to consider when choosing the type of retirement savings for you, such as tax advantages (and the timing of those tax advantages), income eligibility, contribution limits and the administrative burden. Discuss your options with a financial advisor who understands your situation.
Here’s a scenario we’ve seen too many times: Your water heater needs to be replaced, your refrigerator dies, and your car needs a new transmission, but you don’t have enough in your personal checking and savings accounts to cover these emergencies while continuing to pay the bills. The business checking account is healthy, however, and therefore, it’s tempting to dip into those funds to help you cover your personal expenses in a pinch. But treating the business like a piggy bank isn’t just a bad idea; it can be illegal!
Instead, make sure to establish an emergency fund, saving enough to cover your bills for three to six months. This way, you’ll be able to comfortably cover unexpected costs when they pop up (because they will) like car repairs or replacing a kitchen appliance without using business funds for personal expenses or incurring credit card debt.
Investing Outside of the Business
If your entire financial future is reliant upon selling your business, what happens if the business doesn’t sell for as much as you hoped, or worse, you can’t find a buyer or have to close the business before you have the chance to sell it?
Business owners in San Antonio can minimize personal and business risk by investing outside of their business. Talk to a financial advisor about investing in industries and sectors other than your own. As the saying goes, you don’t want to put all your eggs in one basket!
Reaching Your Personal Financial Goals
Chances are, creating a successful business is only one of your financial goals. Do you hope to buy a house someday or pay off your mortgage, cover the cost of your children’s education or take a trip you’ve always dreamed of? Are these other dreams of yours a reality?
Work with a financial advisor who specializes in helping business owners to find the right balance between business and personal success. Creating a plan can help you progress with the same commitment and discipline you give your business.
The Bottom Line
Business ownership takes a lot of hard work and sacrifice, but you don’t need to sacrifice your personal future. Remember to take care of yourself and your family by surrounding yourself with the right tools and support team to help you achieve all of your financial goals. Make sure you’re really “paying yourself,” and not just taking home a paycheck.
If you’re a business owner who is lucky to have survived and thrived for some time already, talk to a financial advisor to make sure you’re not missing out on strategies you’re unaware of.
At PAX Financial Group, helping business owners in San Antonio, Texas is one of our specialties. If you’re ready to have a serious conversation about your future, schedule a no-obligation conversation with our team. A simple discussion can have a big impact.
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.