How I manage my own finances as a small business owner: Part 1
My firm, Lasting Wealth Principles, provides financial and tax planning services to small business owners to help them coordinate business and personal finances, which will optimize and protect their wealth. As a small business owner myself, I understand the unique challenges and needs of small business owners. Since my goal is to help small business owners minimize their tax liability, invest their money for retirement, and take care of their family's financial future, I wanted to write a blog series about how I accomplish these financial goals in my own life. I explain wealth protection strategies in Part 1 of this blog series and will explain wealth building strategies in Part 2 of this blog series. Note that these strategies are for my own financial situation and goals and should not be taken as specific advice for other small business owners. For privacy purposes, specific details about my own financial plan are not included and the lists are not exhaustive. My purpose is to just give other small business owners a general idea of some things I do in my own financial life. Note that my firm does not sell insurance products, but I provide brief explanations of insurance products that I purchased as part of the wealth protection strategy within my overall financial plan.
Wealth protection strategies
Estate planning: Last Will and Testament, Living Will, and Power of Attorney
A Last Will and Testament is a document that designates who gets ownership of a person’s assets when they die. Assets include business ownership (in addition to personal assets) so my document states who would receive ownership of my business.
A Living Will is document that states a person’s desire (or lack of desire) for end-of-life care if they are unable to make the decision themselves. My document provides language that makes the stated instructions clear.
A Power of Attorney document provides another person with authorization to manage matters (e.g., financial and healthcare decisions) on a person’s behalf if they are unable to do so themselves. My document provides language that makes sure that someone is managing my business if I am unable to do so.
Life insurance: Term coverage
Life insurance is a wealth protection tool that can provide adequate funds and financial flexibility to heirs, which allows these heirs the time to make prudent decisions for the business. To be more efficient with my cash flow (i.e., lower cost for insurance), I chose to get a term insurance policy that has level premiums (fixed annual premiums for the life of the policy).
Disability insurance: Income protection
The financial success of a business is what determines the income level for a small business owner, which means that in the event of being unable to work, disability insurance can provide a source of income to cover living expenses. I got an individual disability insurance policy that would provide me with a benefit (a percentage of my income) if I became disabled and was unable to work (i.e., operate as a small business owner).
Umbrella insurance: Extra liability coverage
Umbrella insurance provides extra liability insurance coverage against major claims and/or lawsuits that exceed the amount of liability coverage provided by a regular homeowners and/or automobile policy. The premium to pay for an umbrella policy is minimal in comparison to the benefits that an umbrella policy could pay out in the event of a major liability claim and/or lawsuit, which means that having umbrella insurance is a cost-effective way to manage risks (i.e., prudent risk management as part of an overall financial plan). I spend countless hours of work as a small business owner to build wealth for myself and my family, but I understand that all it takes is to be liable for one major claim and/or lawsuit that could potentially eliminate all my hard-earned wealth so I got an umbrella insurance policy that can protect against this type of financial catastrophe.
Cash reserves: Maintain adequate liquidity
Maintaining adequate liquidity is a core element of business operations and a successful financial plan. Liquidity is the ease with which a specific asset can be converted into cash, meaning that cash is the most liquid asset a small business owner can have on their balance sheet. To keep any business going, an owner must manage its day-to-day operations and having liquidity is the source to do so. Liquidity provides financial flexibility to cover recurring expenses such as payroll obligations, rent, and utilities. From the perspective of wealth protection, I view liquidity as a strategic asset that provides flexibility to maintain operations (continued income generation) and to navigate successfully through uncertain economic times (business can still operate in the event of negative impacts on profit). For this reason, I keep an adequate amount of emergency cash reserves in place for my business and personal finances.