THE BLOG

Entrepreneurs: Don't Forget Your Personal Finances

06/13/2012 11:00 am ET | Updated Aug 13, 2012

For Women & Co. by Jonathan Clements, Director of Financial Education, Citi Personal Wealth Management

You put in long hours and hard work to build your business -- and it's easy to neglect your personal finances. But that could be a huge mistake. Consider five key issues:

Financial emergencies. If your business got into trouble, perhaps because of a drop in revenues or a legal claim, would you be able to manage financially? A common rule of thumb says you need to set aside at least six months of living expenses in case of emergencies. Arguably, as a small business owner, you may want to keep a larger stash or, alternatively, make sure your family has access to borrowed money through, say, a home-equity line of credit or an unsecured personal credit line.

Retirement. Although you may hope to fund your retirement by selling your business, you should probably have a plan B, in case you aren't as successful as you hope. Consider funding a tax-advantaged retirement plan such as a SEP IRA, which can allow self-employed individuals to put away tax-deductible savings of as much as $50,000 in 2012, or a SIMPLE IRA, which is specifically designed for businesses with 100 or fewer employees. To figure out which plan might be right for your situation, talk to a tax advisor.

Health problems. You should investigate getting both health and disability insurance. Most states have programs to help small businesses purchase health insurance. Some states also subsidize such plans, while others let small businesses band together to buy insurance at potentially lower rates.

Meanwhile, disability insurance could be vital if you have an accident or lengthy illness and are unable to work. To hold down premiums, consider getting the longest "elimination period" you can comfortably afford. That's the amount of time before benefits begin.

Liability. A qualified attorney can help you choose the right legal structure for your business, so you protect your personal assets from claims arising from your business dealings.

It's probably also a good idea to increase your personal-liability coverage in case, say, someone is injured at your home. The easiest way to do that is by adding an "umbrella" or "excess liability" policy. You can typically purchase the umbrella policy from your current homeowner's or car-insurance company.

Life insurance. The success of your business may ride on your shoulders. But what if you're no longer around? To ensure your family is okay financially, with the necessary funds to pay off the mortgage, put the kids through college and cover monthly expenses, consider purchasing life insurance.

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