Have you ever considered starting a business? Maybe building a real estate portfolio? How about drastically changing careers? Sounds pretty risky right?
While there is no way to eliminate risk, a solid financial base and developing hobbies you are passionate about can make these “risky” endeavors much less risky.
The Leverage of Not Using Leverage
It typically takes a lot of money to start a business or buy a rental property. If you are living paycheck to paycheck, you may have no choice but to seek financing (leverage or debt) of some kind. Leverage is a tool that can help a business to grow; however, the costs of lending can strain the finances of a fledgling business. Further, even being able to obtain leverage for a new venture is not a slam dunk either.
Having substantial savings can reduce this barrier to entry. Self funding setup costs or acquisitions remove the added pressures from trying to make loan payments or meet lender qualifications.
Maintaining a Focus on What Matters
It’s been said that giving yourself no choice but to succeed can help propel you to success. A “burn the boats” approach, if you will. Perhaps a single individual with no kids or other dependents could benefit from this approach, but when there are more mouths to feed, things get a lot more complicated. It’s awfully hard to focus on the task at hand when you are constantly worried about such “trivial” matters as: How to put food on the table for your family? How to pay the bills?
With a proper “war chest” of savings, you can fund these critical living expenses to support your family, while you focus on your mission.
What Does Failure Look Like?
We always want to think we will be successful. But the vast majority of new businesses fail. Many successful business owners have failed multiple times before ultimately finding success. Depending on your financial foundation, failure can look very different.
If your finances are on shaky ground (lots of debt and living paycheck to paycheck), failure can be devastating. You could lose your home or vehicles, destroy your credit rating, and strain relationships to the breaking point.
With a solid financial base to stand on, failure can be more along the lines of resetting a video game. You are angry that you lost, but you can get right back at it. What did you lose? Time and money. Yes, that sucks, but you still have security and your families’ needs provided for. It’s much easier to pick yourself up and dust yourself off and move on or try again.
Photo by Ian Kim on Unsplash
Build Your Base on Bedrock
As a geotechnical engineer by trade, I have to sneak a soil or rock reference in here every now and then. Anyways, how do you go about laying your financial foundation on solid ground?
Maximize Your Savings Rate
This is perhaps the most vital tool in gaining a firm financial footing. Your savings rate is defined as your spending divided by your take home pay. Creating a positive gap between what you spend and what you earn allows you to pay off debt, build savings, and make investments.
Track your spending and evaluate whether the value you receive from the things you are spending on is worth it. If not, cut them out and save. Search out lower cost alternatives to meet your needs (i.e. shop wholesale, or switch from cable to streaming services).
Minimize Your Debt
By eliminating debt, you free up cash flow that can be used to build savings to cover living expenses or to fund business investments. It also can help improve your credit rating which can lower your costs when you do need to borrow money.
Develop Passive Income
Passive income can help cover your day to day needs while you work to pursue your dream. It can come in several forms: dividend paying stocks or bonds, cash flowing rental properties, leasing unused space, or any number of options. Most passive income streams require monetary investment themselves, so maintaining a high savings rate and minimizing your debt are key to developing these streams.
Set Your Savings Goals
Proper planning far enough ahead of time can ensure you have your financial needs covered while you take the plunge on a new venture. Identify your likely spending needs, whether they be cost of living or business expenses. Tracking your spending is a great way to account for the potential living expenses you need to cover.
Consider also the amount of time you will need to cover your spending with your savings. It is wise to be conservative with this time frame, as many unforeseen difficulties can crop up with any new venture. One year with little to no income can stretch to two quickly.
If you are looking at a single investment such as a rental property, or a specific piece of equipment you can establish that cost as a goal. Again, some additional padding is recommended for unanticipated costs.
Once you have your goal(s) in mind, break the total down into smaller monthly goals. You can employ a short-term saving strategy to grow and protect these funds.
The Powerful Advantage of Hobbies
Hobbies can be a triple threat to allow you to reduce the risks involved in taking bold actions.
Make Play Out of Hard work
Hard work is key to any successful venture. If you are passionate about your hobby, much of this hard work is really play disguised as work. This reduces the risk of burnout while you pursue the venture.
Skill Development
Ventures typically require skills outside your formal training and previous work experience. These can be developed from your hobbies. As an example, if you wish to start a rental real estate business it is helpful to know about home maintenance and renovations. Home improvement-based hobbies can help develop these skills or understanding that can come in handy as you start your business.
Specific Knowledge
Specific knowledge or unique insights are the backbone of many successful ventures. These insights are developed from deep study of a topic. By honing your hobbies, you can put yourself in a better position to gain a thorough understanding of a topic and identify unmet needs or develop innovative approaches. This also helps you account for issues that others would not foresee, greatly reducing your risk of failure.
Let me know your thoughts? To those of you who have taken on an ambitious venture, would you be willing to share any lessons learned?
Thanks for reading!
