Financial Literacy Is Essential For New Entrepreneurs To Build A Solid Foundation

This article highlights the crucial role of financial literacy in empowering entrepreneurs to make informed decisions that enhance their business's financial health. It stresses the importance of understanding finances, managing debts, and crafting a solid business plan. Additionally, strategic investment is discussed as a means for generating passive income and the significance of delayed gratification for wealth accumulation.

According to Investopedia, financial literacy is "the knowledge of how to make smart decisions with money. This includes preparing a budget, knowing how much to save, deciding favorable loan terms, understanding impacts to credit, and distinguishing different vehicles used for retirement."

With financial literacy, creating wealth or generational wealth becomes easier. Wealth is the financial freedom that can last generationally. Wealth allows your children to do what they’re passionate about and not what they must do to survive.

Financial literacy is especially important for new entrepreneurs because if they lack it, the money they make in their business may not benefit them long term. I've seen multiple business owners go from pocketing six figures or more in their company to having to get a job a few years later or struggle until their next business takes off.

Often this happens because the business owner missed a crucial part of financial literacy: investing. Investments pay you in the future, so you don't have to work for that money later. Many new entrepreneurs set out with the goal to replace active income from the business with passive income by investing in stocks or alternative investments.

Here are my tips for new entrepreneurs to create a solid financial foundation.

Pay close attention to your finances.

Building a solid financial foundation begins with knowing your financial situation. If you don’t know where you are financially, you can’t devise a plan to get where you want to be. I check my accounts daily to know where my money is and where it's going. If you don’t know these two things, then it’ll be difficult to know how much you have to work with.

If you're new in your business and can't afford a bookkeeper, I recommend using resources like QuickBooks or Hurdlr. Both of those work well and will help you keep track of your yearly expenses.

Another tip I would give a new entrepreneur is to always keep a reserve account for their business in case unforeseen expenses or opportunities arise. Cash is king when you have an opportunity or an immediate expense that needs capital now. Net worth doesn't pay bills, and utilizing credit can be expensive, especially if the economy is like it is as of the date of writing.

Take care of debts.

You also want to clear any bad debts because by doing so, you’ll likely be able to use leverage at better terms. It doesn’t make sense to pay more interest than you have to or deal with unfavorable terms.

I suggest new entrepreneurs generate revenue through sales to cover expenses instead of relying on debt to support the business. Another option is to rely on funding through raising capital in exchange for a percentage of the company.

In my experience, both these options are better than using debt to cover the expenses of starting your business. If you have already accumulated debt, I would recommend figuring out a way to consolidate it and pay it off with better terms.

Create a plan for your business.

Once you know where you are financially, you should create a plan for your business to get where you want to be, and write it down on paper. You want to also add it to your notes on your phone and other apps that allow you to track it.

For the entrepreneurs who are interested in investing, I think a good first goal is to be able to generate $100,000 after tax as take-home pay in their business. This isn't required, but it can make things simpler for you long term. In reality, $200,000 a year for two years is necessary to be considered accredited, which can open up the door to invest in any investment you would like for the most part.

Understand the importance of delayed gratification.

Decision making is huge in wealth creation, starting in the beginning. What you do financially today will affect you—and your business—tomorrow. Delayed gratification is your friend. Too often, people get extra money, and their first thought is to spend it as a “reward” on things that aren't necessary. I’m all for people enjoying their life but not at the expense of their financial future.

When I first started in real estate, I would take the extra money I made and reinvest it in my company. This led to me getting more opportunities and creating more money, but I was missing something.

I didn’t invest the additional money I was getting into investments that would pay me passive income, which led to me being in real estate for three years and not owning one real asset. I was on a path to ending up as the person who made a lot of money in their youth but is fearful of the following month in old age because they didn’t think to create passive income.

Continue learning about financial literacy.

I was blessed to open my eyes and find the right path because of the books I read, like The Psychology of Money by Morgan Housel and The Almanack of Naval Ravikant by Eric Jorgenson. A great business book I recommend to new entrepreneurs is How To Be Rich by J. Paul Getty.

I recommend reading books like the ones I mentioned above and taking courses. You can also watch YouTube channels that teach finance or financial literacy. Most importantly, though, you want to apply what you learn when you read these books, watch the YouTube channels, or pay for the courses. Knowledge not used is wasted knowledge.

You don’t know what you don’t know, which is fine, but it is imperative to implement the knowledge as soon as possible when you do know. Without a solid financial foundation, you will not have the money to take advantage of the opportunities presented.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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