One of the expected side effects of full time entrepreneurial life is the psychological toll it takes on your personal life, particularly your financial situation. After making sacrifices to ensure the success of your company and your team, eventually losing track of personal expenses almost becomes a given. Considering that many entrepreneurs are shelling out money from their own pockets to keep things afloat, it’s essential that every founder, freelancer and budding business person establish a formal approach to managing their personal finances. The knee jerk response would be to set up a nice and neat personal budget. But I say screw that. Learn to let go of the idea of budgeting entirely and reflect more on your financial behavior instead.
Adjust your financial attitude
At their core, entrepreneurs need to remain optimistic in both business and in life. You need to imagine every worst case scenario, whether it’s investing all of your money into a venture that eventually fails or throwing a million dollars of investor money at a party that no one shows up to, and still feel confident that you can dig yourself out of it. So, having the right attitude towards your personal finances is a critical factor in maintaining that necessary positive outlook. Using budgeting apps or spending hours creating your own Excel spreadsheets is downright depressing and many simply act as a scolding tool or rely on negative reinforcement when you overspend. That is not conducive to the optimistic outlook an entrepreneur needs to have and often causes entrepreneurs to end up struggling to find tools that can lower their inevitable financial anxiety.
Truth is, a budget is just not going to cut it and provide the insight you need to keep your personal finances under control while investing in your business. Budgets fundamentally work against the unpredictability of a new startup or businesses where there is no such thing as month-to-month stability. Your company financials are going to be volatile, so it’s unrealistic to think that personal expenses would be any different. You must have a way to manage your spending behavior to ensure that it doesn’t spiral out of control, but creating strict rules in a budget is not the way to go. The real solution begins small by simply being mindful of your personal spending behaviors.
Be mindful…not militant…about your finances
It’s surprising how many entrepreneurs have no real understanding of their personal financial wellness. To me, financial wellness means knowing where your money is coming from, where it’s going and how individual spending decisions impact your overall lifestyle. Does the latte habit in the morning make you happy? Does instinctively taking cabs everywhere because you’re busy reduce your stress? Or are they activities that have short-term benefit but cause even greater long-term stress? No one wants to give up a certain way of life, but if the alternative option is bankruptcy, it would be wise to examine your current spending habits before you even get started; it’s going to need to change. Use tools that can help you identify your money habits rather than set up a budget. Figure out where your money sits and where you can cut back, without having to give up all aspects of fun for the next few years. How many recurring fees and needless subscriptions are being automatically processed that you aren’t paying attention to? That adds up to hundreds or even thousands of dollars instantly saved once eliminated. Many of these same tools can take this a step further by identifying exactly what big items you can also cut down on, so if you’re paying an exorbitant amount of parking fees, it might be time to reevaluate the joys of public transportation.
Change your spending behavior
Once you’ve taken a micro level look at your financial situation and cut back on those five block taxi rides, it’s time to start changing your regular spending behavior long-term. Budgets create tight organization, but it takes time and most people can’t be bothered. It’s tough to follow the basic budgeting process: allocate spending in buckets ahead of time, buy stuff, and then reconcile spending buckets at the end of the week or month. Entrepreneurs would benefit much more from practicing mindful spending – quickly assessing the pros and cons of every spending decision by applying a simple framework at the moments you are making purchases. It’s a method that is much better suited for the fluid lifestyle of the entrepreneur than a static monthly budget. Once freed from the constraints of a budget, entrepreneurs can focus more on their spending behaviors and make small, daily decisions on how to cut back when they’re pushing the limit or take the time to indulge when spending is slow.
The lesson here is not that entrepreneurs should ignore their finances or that the startup life is all work and no play for the first few years. It’s simply that a traditional budget is insufficient for developing healthy financial habits that can help you keep your head on straight. Entrepreneurs need to look for the money management tools that can meet the demands of their unusual lifestyle and help them understand their financial behavior and how to change it so that they don’t burn out.
Image credit: CC by Harsha K R