Many business owners work for years to build a successful business yet arrive at middle age with surprisingly little personal wealth. Their savings, their home loan, their retirement and often their family’s security are all tied to one business. When that business has a bad year, loses a major customer or is hit by a shock such as a pandemic, everything is at risk at once.
Well-established businesses can collapse quickly. Airlines, retailers and manufacturers that took decades to build have failed within months when conditions turned against them, taking their owners’ and employees’ livelihoods with them. Earning money through hard work is one skill. Managing it so that it lasts is another.
This article covers the personal finance habits that matter most for business owners: separating business and personal money, paying yourself properly, setting aside tax, spending wisely, avoiding borrowing to consume, using the power of compounding, and building diversified wealth outside the business. It is general information only. Your situation is unique, so seek advice from a licensed financial adviser and your accountant before making financial decisions.
1. Separate business and personal money
The most important habit is also the simplest: keep business and personal finances completely separate.
- Use separate bank accounts for the business and for yourself.
- Pay business expenses only from the business account, and personal expenses only from personal accounts.
- Transfer money to yourself deliberately, as wages, drawings or dividends, rather than dipping into business funds whenever you need something.
Separation makes bookkeeping and tax returns far easier, shows you the business’s true performance and protects you if the business struggles. If you operate through a company, it also matters legally: a company is a separate entity, and money you take out must be properly characterised. Loans from a private company to its shareholders can trigger complex tax rules, known as Division 7A, so ask your accountant before taking money out of a company in any form other than wages or dividends.
Keep working capital and savings apart
Medium-sized business owners often fail to draw a line between business working capital and personal savings. When the business needs cash, they pour in personal savings. When they need cash personally, they take it from the business. Over time, the family’s financial safety becomes entirely dependent on the business.
Personal savings should be reserved for your family’s security and your retirement. The business should hold its own buffer for its own needs.
2. Pay yourself regularly
Many owners pay themselves whatever is left over, irregularly. This makes personal budgeting difficult and hides whether the business is genuinely profitable after paying for the owner’s work.
- Set a regular salary or drawing that reflects a fair market rate for your role and that the business can sustain.
- Review it periodically, increasing it as the business grows.
- Treat profit above your salary separately, deciding deliberately how much to reinvest in the business and how much to distribute.
If you are a sole trader, you are not required to pay yourself superannuation, though you may choose to contribute. If your company pays you a salary as an employee, superannuation guarantee obligations generally apply. Check the rules for your structure with your accountant.
3. Set tax aside as you go
Tax bills are a common cause of cash crises for small business owners, because the money appears to be available until the bill arrives.
- Open a separate account for tax.
- Transfer GST collected, if you are registered, and an estimate of income tax and any PAYG instalments, each time you are paid or each month.
- Do not treat this money as yours to spend.
Your accountant can help estimate the right percentage to set aside.
4. Build emergency buffers
Both the business and the household need buffers:
- A business cash reserve to cover several months of fixed costs, so a slow period or a late-paying customer does not become a crisis.
- A personal emergency fund covering several months of household expenses, so a bad business month does not force you to borrow or sell investments at a bad time.
5. Spend wisely: depreciating assets and borrowing to consume
Avoid borrowing to consume
Borrowing to buy things that lose value, such as holidays, gadgets and luxury goods, means paying interest on consumption. Credit card interest rates are often around 20 per cent a year. A $5,000 credit card balance at 20 per cent, repaid at $150 a month, takes about 50 months to clear and costs about $2,360 in interest.
A sound principle: borrow only when the expected return clearly exceeds the cost of borrowing. If you borrow $100 at $10 interest, the investment should reliably earn more than $10. Consumption earns nothing.
Watch depreciating assets
New cars, the latest phones, expensive watches and premium equipment lose value quickly. If you earn $10,000 a month and spend $10,000 a month on lifestyle and depreciating assets, you are not building wealth, however high your income. If you earn $10,000 and spend $6,000, investing the difference, you are.
Use the power of refurbished and second-hand
- Used vehicles that are a few years old often cost around half their new price while providing years of reliable service.
- Refurbished laptops and equipment can cost a fraction of the new price with similar performance.
- Second-hand machinery for a workshop can be excellent value if properly inspected.
Consider the sharing economy
Owning a car involves loan repayments, insurance, registration, maintenance and depreciation, whether or not it is driven. For people who drive rarely, a combination of public transport, ride-share and car-share services may cost much less. The right answer depends on where you live and how you travel, so calculate it honestly.
Rent or buy?
Buying a home can build long-term wealth and security, and is deeply valued by many Australians. Buying early also carries costs: a large deposit, stamp duty, loan repayments that may limit flexibility, and the risk of being tied to one location. Renting near your work, especially in the early years of a career or a business, can reduce commuting time and keep capital available for opportunities, but means paying rent without building equity and facing less security of tenure.
There is no universal answer. Compare the full costs of each option over a realistic period, including stamp duty, interest, maintenance, rates, rent increases and the opportunity cost of the deposit, and consider your career and business plans.
6. Use the power of compounding
Compounding means earning returns on your returns. Over long periods, it produces remarkable results. Regular investing, sometimes called dollar-cost averaging, also avoids the impossible task of trying to time the market, because you buy at many different prices over time.
Consider investing $500 a month for 20 years, contributing $120,000 in total. At illustrative average annual returns, before fees and tax:
| Average annual return | Value after 20 years |
|---|---|
| 4% | about $183,000 |
| 6% | about $231,000 |
| 8% | about $295,000 |
The earlier you start, the more time compounding has to work. Over ten years, the same contributions grow to between about $74,000 and $91,000 at those rates. The extra ten years more than doubles the result.
Returns are never guaranteed. Investments can fall in value, especially in the short term, and higher potential returns come with higher risk.
7. Set financial goals by life stage
Goals give financial decisions direction. A goal should be specific and have a time frame: “accumulate $500,000 in investments outside the business within 15 years” is more useful than “save more”.
Goals change with life stage:
- In your twenties and early thirties, priorities often include building skills, starting to invest, avoiding consumer debt and keeping flexibility.
- In your thirties and forties, priorities may include a home, children’s education, growing the business and building investments outside it.
- In your fifties and beyond, retirement planning, succession or exit from the business and protecting accumulated wealth become central.
Set goals that reflect your situation and your family’s needs, then work backwards to the savings and investment required.
8. Diversify beyond the business
Your business is probably your largest asset, and it is concentrated in one industry, one location and often a few customers. Building wealth outside it reduces risk.
Understand asset classes
Common asset classes include:
- Cash and term deposits: low risk, low return.
- Fixed interest and bonds: moderate risk and return.
- Shares, directly or through managed funds and exchange-traded funds: higher risk, higher potential long-term return.
- Property: potential income and growth, but costly to buy and sell, and hard to diversify.
- Superannuation, which holds a mix of these assets in a tax-advantaged structure for retirement.
- Gold and other commodities: sometimes held for diversification.
Asset allocation, meaning how much you hold in each class, drives most of the risk and return of a portfolio. It should reflect your goals, time frame and tolerance for risk.
Invest only in what you understand
If you do not understand an investment, how it earns returns, what could go wrong and how easily you can sell it, either learn more or stay away. Be especially wary of schemes promising high returns with low risk. ASIC’s Moneysmart website offers free, independent information on investing, super and avoiding scams.
Seek licensed advice
A licensed financial adviser can help you set goals, choose an asset allocation and select investments. Check that any adviser is registered on the Financial Advisers Register, and understand how they are paid.
9. Protect what you build
- Insurance: consider income protection, life and total and permanent disability cover personally, and business insurances such as public liability, professional indemnity and key-person cover.
- Business structure: the right structure can provide some separation between business risks and personal assets, though personal guarantees and directors’ duties can override it.
- Estate planning: a current will, powers of attorney and, for business owners, a succession plan.
10. Keep investing in your own skills
The best investment many people make is in their own capability. A new skill, such as digital marketing, financial analysis, programming or a technical specialty, can raise your income, open new business opportunities and become a business in its own right. People increasingly pay for content and learning, so expertise you build can become a product you teach.
A worked example
The owner of an electrical contracting company has run the business for twelve years. Revenue is healthy, but personal finances are fragile: business and personal spending mix in one account, the owner draws money irregularly, a large tax bill last year required an overdraft, and almost all wealth is tied up in the business and the family home.
With the help of an accountant and a financial adviser, the owner:
- opens separate business, personal and tax accounts;
- sets a regular salary, and transfers a fixed percentage of each customer payment into the tax account;
- builds a business cash reserve of three months’ fixed costs over a year;
- clears a credit card balance and stops financing vehicles for personal use;
- starts making regular contributions to super and a diversified investment portfolio;
- reviews insurance and updates a will.
Five years later, the business has had one difficult year, but the family’s finances are secure, tax bills arrive without stress and investments outside the business have grown steadily.
Common mistakes
- Mixing business and personal money, which hides problems and complicates tax.
- Treating all business cash as available to spend, forgetting tax and future obligations.
- Putting every spare dollar back into the business and building nothing outside it.
- Lifestyle inflation: spending rising as fast as income.
- Chasing high returns in investments you do not understand.
- Delaying investing until the business is “settled”, which can mean losing years of compounding.
Frequently asked questions
How much should I invest outside my business? There is no single figure. It depends on your goals, the business’s needs and your risk tolerance. Many owners aim to build investments steadily each year, so that their family’s security does not depend entirely on the business.
Should I pay off debt or invest? High-interest consumer debt, such as credit cards, usually comes first, because the interest saved is a guaranteed return. Decisions about home loans and investments are more nuanced and benefit from professional advice.
Is my business my retirement plan? It can be part of it, but relying on selling the business at a good price at the right time is risky. Building wealth outside the business provides a safety net.
Summary
Business owners need personal finance discipline as much as business skill. Separate business and personal money, pay yourself regularly, set tax aside as you go and build buffers for both the business and the household. Avoid borrowing to consume, watch depreciating assets and use second-hand and shared options where they make sense. Start investing early to benefit from compounding, set specific goals for your life stage and diversify beyond the business through an asset allocation you understand. Protect what you build with insurance and estate planning, and keep investing in your own skills.
Sources: small-business training notes on financial independence, wealth management and personal finance for business owners, together with general Australian personal finance information. Figures are illustrations, before fees and tax. This article is general information only, not financial product advice. Consider your circumstances and seek licensed advice.
