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As entrepreneurs, many small-business owners are comfortable taking risks. But their business is often their biggest asset, as well as the largest source of their household’s income, which means it’s especially important for them to follow basic personal finance and investing guidelines. Not doing so can cause business owners to take on too much risk and endanger their business and income.
Here are three tips that small-business owners should use to guide their personal-finance and investing decisions.
1. Establish an emergency fund
Business is cyclical, meaning there will be times throughout the year when business is better than at other times, and income can vary from month to month.
That’s why it’s critically important to set up an emergency fund account containing enough cash or liquid funds to cover the months when your income does not cover your household’s living expenses. Keeping at least three to six months’ living expenses is a good rule of thumb, and more is even better.
Money market accounts are good places to store this emergency fund, because they give you a better return than most traditional savings accounts while remaining free of stock market volatility, which is important for a short-term savings vehicle.
2. Diversify, diversify, diversify
I’m sure you’ve heard, probably more than once, that diversification is one of the most important concepts in investing. For small-business owners this is a critical point, because many of them invest all of their assets back into their businesses. While investing in your business is a good idea, you should consider setting limits on it.
When small-business owners invest their funds back into their companies, they are concentrating funds into one asset. This increases their level of risk because if something were to happen to their business, it would endanger the household’s financial security.
When reviewing investment options, make sure you invest as much money as possible outside of your business, as well as outside of your industry and sector. Doing this will help protect your portfolio if the markets change and your business’ sector goes out of favor.
3. Customize your investments
Don’t overlook getting help when evaluating investment options. There is no one-size-fits-all investment approach, and it’s easy to get bogged down with research. When reviewing their overall portfolio, business owners sometimes forget to include other investments they hold, such as their companies or real estate investments they may have, as assets. This can lead to less-than-optimal investment decisions.
Working with a professional can help you factor in all of your investment holdings, determine your right time horizon, evaluate your risk tolerance, and weigh your options against your current holdings to help you select an investment strategy that is tailored to you.