Talking about money can be difficult, but as an entrepreneur, it is a reality you will have to come to terms with sooner or later. We all need money to live functional, healthy lives, so it is fundamental that you have a tight grasp on your personal finances.
There are many entrepreneurs in Switzerland who pay themselves a very low salary, making their way through life by simply paying their rent, buying food and other essentials, but not really having any money for further expenses beyond the bare minimum. Conversely, the opposite is also true. There are people who live comfortable lives, relying on cushy corporate jobs and large pay checks, neglecting to invest their money in any meaningful way. This leaves them with nothing at the end of the month/year, due to their overspending. These situations can be entirely averted if you set up a personal finance system. While the advice that follows is based on the Swiss financial experience, it can nonetheless be adapted to any context.
Generally, your income will be deposited into your checking account at the end of the month (in Switzerland, this happens on the 25th). The first order of business is tackling your fixed monthly expenses. These cover the basics: rent, food, utilities, and any other recurring payments. This amount will vary depending on where you live and buy things, the size of your household, etc. The point here however is that these costs are fixed. For that reason, they should be on a budget. A good strategy is to try to keep these expenses under 1500 Swiss Francs (~1350€) per month. One way of further minimizing costs is by not owning a car. In Switzerland you don’t really need one, as the public transportation infrastructure is very good. Here is an example of a balanced spending ratio: 800-900Fr reserved for housing; 300-400Fr for food; and 300-400Fr for health insurance.
An important facet of your personal finances is keeping your money organized. To achieve this goal, it is wise to keep several accounts open, although you shouldn’t spread your money out too much. Three accounts should do the trick.
First, you will need a checking account. This is where your salary should come in, as it will be reserved for your monthly expenses and daily needs. If you overspend, you will run into trouble at the end of the month, as you won’t have enough funds to pay the fixed bills. Therefore, consider automating them. Since they are fixed, you don’t need to worry about paying them yourself anyway. Automation is key to a disciplined, organized financial landscape.
The second account could be considered your “Fun Money” fund. This one should receive a monthly payment of your choosing. It will depend on your personal preference and your need at the time. Spending money from this account should be done with a clean conscience, as it exists to finance your personal needs, be it saving up for a vacation, buying a new gadget you wanted, a book, a gift for someone. Consider this the “you” fund.
Finally, and perhaps crucially, you must have a savings account, into which you should automatically transfer a percentage of your salary every month. Ideally, you should transfer 50% of your salary into this account, although realistically that may not always be possible. The more you save, however, the faster you will be able to meet your personal financial goals. Always remember to keep about 3 times your monthly income stashed away in this account. This fund will act as a safety net should an emergency arise, or something change in your professional life. With the emergency fund taken care of, the rest of this money can then be invested. Wise investments are the key here. They allow you to expand your savings without jeopardizing your financial situation. The stock market, real estate, starting your own companies, all are viable ways of investing and collecting interest. Savings accumulated over 40 to 45 years are nothing to scoff at.
Moving on: taxes are another unavoidable part of life. In Switzerland, these are usually paid on an annual basis, where throughout the year you receive three distinct bills pertaining to your previous year. This tax burden is usually around 20-30% of your net income. One thing you can do to keep this organized is to break up your tax payments into a monthly system. By setting them to be automatically paid on a monthly basis, you will have a more realistic perspective on your personal finances.
Also related to taxation are tax deducted savings for retirement. It is important that you do not neglect this aspect, because you will have to retire one day. In Switzerland, there are two possibilities: The Third Pillar program, or a Pension fund. If you opt for the Third Pillar system, you can pay up to 6,768Fr. per year towards this fund. If you do this, then you will be able to deduct that value from your taxes, which usually translates to a 1500-2000 lower tax rate. The Three Pillars program also allows you to open multiple accounts, which is advisable, considering withdrawals must empty each account. The pension fund, on the other hand, requires that you be over 25 years old and have a yearly income of over 21K. Normally, you will be automatically included in a pension fund. Keep in mind that you can always inquire if there are any additional payments you can contribute with. If there are, and you are young enough, you can usually pay 2-3K a year, which will also be tax deductible and contribute towards your retirement fund.
Remember: you must be disciplined and automate as much as possible. By implementing this system, you will stop yourself from spending money you do not have. Through automation, the system will work its magic in the background, thus freeing you to invest your savings however you please, and enjoy a good, financially stable life.