Starting a business is a huge endeavor that requires lots of resources and investments. Before you go down this path, it’s smart to consider how financially healthy you are as an individual.
4 Ways to Evaluate Your Financial Health
When it comes to launching a startup or new venture, most entrepreneurs create far too much separation in their minds between themselves and the business. And while it’s good to establish separation as a legal protection, the reality is that very little division exists in the initial stages of launch and growth. For better or worse, you are the business.
If you aren’t in a stable place where you can launch a business, the venture will struggle to get off the ground. If, on the other the hand, you’re in a nice spot with adequate time, resources, and creative energy, success becomes tangible.
When you recognize that the success of your business hinges – to a large degree – on your own personal stability, you’ll begin to understand why your personal finances matter. And it’s at this point that you should dig in and evaluate your financial health.
Here are some things to look at and consider:
1. Credit Score
“It is critical for your financial well-being to understand how credit scores work and ways you can boost your score if yours is low,” CardGuru points out. “In general, FICO credit scores, the most common type of score that lenders use, range between 300 to 850. The majority of consumers have credit scores that range from 600 to 799, with few at the top or bottom of the scale.”
Not sure what your credit score is? It’s pretty easy to find out these days. You can use any number of free online resources to help you track your score and understand which factors are weighing you down or propping you up.
With a strong credit score, you’ll have more opportunities to secure favorable financing and get your business on the right track.
2. Emergency Savings
When starting a new business, the first few months (if not years) will be lean. You may be forced to go without a paycheck for a while. And even after you begin taking an income, it’ll probably be small. It’s for this reason that you need emergency savings on hand.
How much cash do you currently have set aside? The general rule of thumb is to have enough to cover a few months of basic household expenses. But if you’re preparing to start a business, you may want as much as 9 to 12 months worth of expenses on hand. If you only have a few thousand dollars, it would be wise to save up and wait.
3. Debt
Debt is a big issue for most Americans. Between credit cards, student loans, car notes, mortgages, and medical bills, many people find themselves drowning in payments. Are you in this group?
One telling metric is the debt-to-income ratio. This is calculated by taking your total monthly debt payments and dividing this figure by your monthly gross income. So if your debt payments are $2,000 per month and your monthly gross income is $8,000 per month, your debt-to-income ratio is 25 percent. Most financial advisors recommend keeping your ration below 30 percent. (Below 20 percent is considered even better.)
“Your debt-to-income ratio is important for a couple of reasons,” personal finance expert Chris Muller mentions on Money Under 30’s website. “First, it’ll give you a good sense of whether or not your debt is under control. If you’re approaching a debt-to-income ratio of 40-50 percent, it’s time to start worrying. Second, your debt-to-income ratio is a primary factor in your credit score and in getting new credit.”
4. Sleep Habits
A simple litmus test is to gauge your sleeping habits. If you’re sleeping well at night, this is probably an indicator that you aren’t spending much time worrying about money. If you toss and turn and find it difficult to turn your brain off at night, then you may not be ready to throw something new into the mix.
Are You Ready?
After reviewing your financial health and evaluating both quantitative and qualitative factors, you’ll have to make an honest decision about whether or not you’re ready to jump in and launch a new business venture.
There will always be risk involved in starting a business, but the goal is to mitigate as much of the risk as possible. By waiting until you’re financially stable, you’ll give yourself a solid footing to stand on. Practicing patience and discernment will serve you well.
