Solopreneurs by nature must wear many different hats when running their businesses. But just because you are an expert on the goods and services you deliver to your customers doesn’t mean you understand all the ins and outs of the financial side of things. If you are confused by the complexity of your monthly cash flow and second-guess yourself when making financial decisions for your family, you’re not alone. I’ve found that one of the best ways to help solopreneurs understand cash flow is to walk through conversations I’ve had with clients. The good news is, you can learn to manage your cash flow, pay down debt, and fund your investment accounts while also allowing yourself the freedom to make pivots along the way.
I encourage you to use the following story to walk through this process for your situation.
Smart Money Moves Solopreneurs Can Make Today
My client, Lloyd, is a self-employed IT Security Contractor, and things were going well for his business. He has an in-demand level of expertise that his clients value, and he’s been able to generate substantial revenue consistently.
Despite having good numbers, Lloyd found himself confused by the complexity of the decisions he needed to make with his monthly excess cash flow. He wanted to start investing more for his kids’ future but was not sure where to start. More than anything, he desired to be a good husband, father, and provider, and, like many of us, his main goal was to secure a great life for his family.
Smart Money Move #1: Get Clear on Your Cash Flow
When Lloyd came to me for advice, the first order of business was to have a conversation about his monthly income and expenses. In other words, I needed to get clear on what his existing cash flow was. In simple terms, cash flow refers to the amount of money that flows into and out of your business or household each month. Knowing these numbers helps to determine what will be left over each month after you pay your bills, and they are critical figures to nail down before making any financial decisions.
We began by diving into his debt. He had an auto loan, his wife still had some student loans, and he informed me that they were exploring a refinance on their mortgage. They had built a pretty big house the year before and decided to take out multiple mortgages to keep the interest rates lower. Fortunately for him, the timing for refinancing his mortgages into one at a much lower rate worked in his favor. So he will save a considerable amount of money and time on his mortgage and pay off his house a few years earlier than planned.
After working through his debt, we discussed the status of his emergency savings balance. He currently had $70,000 in liquid emergency savings and expected a sizable tax return that would allow him to add a bigger buffer. Considering his expenses, this amount should cover his family’s needs adequately for six months to a year in a pinch.
Smart Money Move #2: Get Clear on Your Goals
After confirming that he was in a relatively secure financial position, we transitioned into a goals-based conversation. When managing the pressures of self-employment, I feel it is important to have a clear purpose in mind for why we are putting in the work. Since his initial thoughts were regarding his kids’ college investments, we started there.
Lloyd’s primary goals were to help pay for college for his kids, but not all of it. Both he and his father had already been funding 529 plans for the children for many years. According to our projections, all three of his kids will have around $100K in college funds by the time they graduate. He felt this was a sufficient contribution without needing to invest additional dollars towards this goal.
It was time to determine his next priorities, so we turned to debt liquidation. Was it his goal to pay off his wife’s student loans right away, pay off his car, accelerate his mortgage payment so that they have the house paid off in a certain number of years? Lloyd prioritized debt payoff by focusing on the student and auto loans and paying off the house under a reasonable timeline.
With a debt plan in place, we took a look at retirement. We ran a quick calculation to ensure he was on track for a comfortable retirement and confirmed that there was no need to make any contribution adjustments.
Once I understood the current situation of his cash flow, emergency savings, debt situation, and goals, we could come up with a financial plan for his family’s future.
Smart Money Move #3: Create a Financial Plan
Lloyd was already in a reasonably comfortable financial position, but he wanted to create financial freedom for his family and enjoy the lifestyle of his dreams. And he needed a plan to get there.
We decided to utilize some of his emergency savings to pay off his auto loan, therefore freeing up $800 per month in outflow. He would then use his pending tax return to pay off his wife’s student loans, saving another $250 per month. Overall, we freed up over $1000 per month to go towards other investments.
Once the debts are paid down, we will revisit his financial plan to decide if it is time to start monthly contributions to his regular investment account or set aside for future emergency savings opportunities.
Ultimately, we finished our meeting with Lloyd knowing his next steps and feeling confident he is on the path to being the husband and father he desires to be — all because he is putting the proper resources in place for his family to have a great life. They will avoid the concerns of not having enough money for the kids’ future college expenses or disruption of income in the event of a major change to his business.
The Bottom Line
What Lloyd and I did was simple. We figured out how he could reduce his monthly expenses by liquidating his debt, refinancing his mortgage, and committing to saving the differences in either a savings account or investment account.
Now it is your turn. Take a look at your expenses. Can you eliminate some debt, reduce expenses, refinance your mortgage, or start saving more of your monthly cash flow? If so, what is your driving purpose? It is important to know your “why,” so it motivates you to follow your plan.
If you need help mastering your finances to create the freedom to build the life you want, contact us to schedule a consultation appointment.
Gabe Nelson, CFP®, is the principal and founder Gabe Nelson Financial, Inc. (GNF) is a Registered Investment Advisory firm based in Sioux Falls, SD. GNF offers fee-based financial planning and investment advisory services to solopreneurs and self-employed professionals. Clients receive personal attention from a financial planner dedicated to helping them reach short and long term financial goals with specialized insight into the particular challenges and opportunities that arise in entrepreneurship. Gabe can be reached at 605.553.9180, via email at ga**@ga*****************.com, or on the web at gabenelsonfinancial.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
