Many small businesses are interwoven with the owner’s personal life. The money that the small business generates is used to buy food, make mortgage payments, etc., as well as to buy the supplies needed to perpetuate the business.
This week I met with a client whose house has to be totally re-plumbed; the cost for this work is close to $36,000. Our meeting topic was how to best structure the payment for this work.
Perhaps there is planning for buying a new computer or software package for the business, but home repairs which have to be paid out of the same “pot” are not usually figured in. Homes and automobiles are not designed to last forever, and both are expensive to maintain or to replace. Roof repairs and air conditioning units are examples of high expense items that most homes will eventually need.
Your challenge this week is to set up a reserve account. I recommend that a minimum of 5% to 8% of all income is deposited into a savings account before it is used to pay for any other expenses. The argument “But I need it all to pay my bills” is not acceptable. Now is the time to do one of two things:
Reduce your expenses.
Increase your profit.
I advocate that you should have a six month reserve to operate your home and business plus a reserve that is increased monthly to pay for unexpected expenses as you forecast them to occur. For example, if you have a 20 year warranty on a new roof that cost @15,000, you should be saving an additional $750 per year so that at the end of 20 years you will have the cash to buy a new roof. No, I did not figure for inflation, but you get the point. You should set a replacement reserve amount for each of the major home and business expenses that will definitely occur.
Your challenge this week is to do the “scary” math and examine your future needs for both home and business and start your savings plan today.
Retirement is another issue that all small business owners have to face. We will address that in a future challenge.
Tips & Advice by Nick Petra, CFP – Founder of BizQuack and StrategicDuck
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