Every entrepreneur should understand the difference between business emergency funds and personal emergency funds. Here’s why.
The great American Dream is enduring and magnetic. Annually, thousands of individuals, partners, and groups form entrepreneurial ventures. Some of them pour everything to make their dream occur—literally everything. And why not? Aren’t there hundreds of stories of multi-millionaires that sacrificed all to get where they are now? Not exactly. Some of those stories are exaggerated. Think fisherman stories with omitted parts. Do any of these stories talk about how these success gurus had backup plans? Do they ever talk about how at least some of their assets were protected? Hardly. Moreover, what is often forgotten is that annually thousands of ventures fail for one reason or another.
While taking business risks is an integral part of business, there are some factors to consider. First, there are stark differences between business risks and calculated business risks. The former usually has a department (Risk Management) in place to prevent them. As an entrepreneur, risk management must be taken care of on a business and personal level. Pouring everything into your venture without a personal emergency fund would be similar to jumping out of plane without parachute. There’s a chance you might make it out alive, but it’s a really, really, really, really slim chance.
Few know this better than Michael Manning, who currently presides over the self-named Manning Wealth Management Group. He relates that hedging against potential loses of one’s personal assets “creates a safety net that will reduce the impact and provide some stability in the event their business fails.”
Giving Yourself Options
Investing every penny of your income into your venture cuts off your options. While some take the all or nothing approach feeling that it forces ones to work as hard as possible, this thinking has its drawbacks. First, working at maximum speed all the time leads to early burnout. Secondly, good business is marked by a series of good decisions. Individuals that are in do or die mode often make rash decisions (see Hitler). Conversely, having a personal emergency fund reduces stress about critical business decisions. It’s also a life-saver if you have a family to support.
Smart business decisions are often made when one has good partners that offer excellent advice. Strada Capital collaborates with small businesses and entrepreneurs every day. If your business is in need of working capital, feel free to fill out one of our quick finance applications.