How much of your networth should you invest in your business?
Many Entrepreneurs do not start out having a high net worth. I have met many Entrepreneurs who operate their start up on a shoestring budget, hoping one day their business will take off and money will be pouring in.
Having a business idea that you’re confident will be successful, can drive you to invest more money than you can actually afford. It’s best to find investors willing to invest in your idea so you can focus on building a successful venture. If you cannot find investors, how much of your networth should you invest in your business?
Know your networth
To get started, you need to know your networth. Use NerdWallet’s calculator. Assetts – Liabilities = Networth. Without including your salary, take an inventory of everything you own of value: Real estate, bank accounts, safe deposit box contents, auto mobiles, retirement accounts, investments and other valuables. Deduct everything you owe (liabilities) from your assets. Now that you know your networth, how much of it should you invest in your start-up?
What percentage should you invest in your business?
No more than 5%. I was once advised to never invest more than 5% of my networth in my business. Prior to learning this, I had never invested more than 5% of my networth in my business. What I had done was far worse. I was investing a small amount of money in every business idea I had. Not one investment was more than 5% but combining all these small business ideas (hobbies) together, in a year, I exceeded the 5% mark.
Avoid this pitfall
Focus on your main course, say no to side business ideas. No matter how little you think you’re putting into a side business idea, you’re actually hurting your main business idea.
My main business was renting and selling throne chairs. But over the years, I would have side business ideas based on my interests that weren’t fruitful, for example:
- I’m an avid cook and would experiment with different spices. Someone once approached me to create a lemon pepper spice recipe – spent some money concoting different recipes.
- Or the other time when I was encouraged to start a sewing school. I spent quite a lot on this hobby which flopped.
I can go on and on but the bottom line is, you cannot serve two masters. Just like a marriage, you can only be married to one person at a time. Try having a wife, a mistress and a girlfriend, you will be constantly under stress and your marriage will suffer.
How to avoid investing more than you should?
Here are 5 tips to follow to spend 0%-5% of your networth on your business idea:
- No distractions: Select one business idea and focus solely on that idea.
- Stay on budget: Create a budget for that specific business idea and stick with it.
- Re-invest: Once you start to earn a revenue from that business, re-invest all of the money back into the business.
- Get Investors: Now that your business is generating more than you’ve put in. You want to scale up. With financial data at hand, you will find that family, friends, banks and investors will be more willing to take a chance in your business.
- Access free money: Apply to pitch competions that often give financial incentives. Seek out and apply for grants.
Let’s say your networth is $100,000 and you invest 5% or $5000 of it in your business. If your business idea fails, you will have only gambled $5000 on yourself and move on with your life. You can recoup a 5% loss.
The key to avoid investing more than you should in any business is to be disciplined enough to focus on your main course, maximize your revenue and get other people’s money to grow your business. Whether you win or lose, 95% of your networth will remain solid.