Saving to Start a Business — Why It Needs Three Separate Pots

The capital. Whatever the business needs to begin: deposit on a space, equipment, stock, registrations. Usually a known figure, needed at a point you may not control precisely.

The household buffer. Several months of family costs, held separately and never counted as business money. This is the one that gets raided, and raiding it is how a difficult first year becomes a permanent setback.

The living costs while it establishes. The pot people forget entirely. A new business rarely pays the owner properly for a while, and the family still needs to eat, pay fees and run the house during that period.

One number covering all three is the commonest arrangement we see, and it always turns out to have been sized for the first one only.

This goal has a feature that makes it different from most: you often do not choose when it arrives.

A space becomes available, a partner is ready, a supplier arrangement opens up, or a job ends unexpectedly. The opportunity sets the timing, not your plan, which means this money may be needed sooner than you assumed.

So it cannot take the risk that a fifteen-year goal can. Money that might be called on within a couple of years belongs somewhere stable, however far away the plan feels today. Our page on asset allocation sets out that rule, and it applies with more force here because the date is not yours.

Where the plan is genuinely five or more years out, a portion can take a longer horizon, with the risk reduced deliberately as the date comes into view.

Different jobs, different places, and this is the practical heart of it.

• The buffer stays stable and immediately reachable, as our page on building an emergency fund covers. It is not investment money and it is not business money.
• The first-year living costs also stay stable, because they will be needed on a schedule during a period when nothing else is predictable.
• The capital, if the date is near, sits somewhere stable too. If the date is genuinely years away, part of it can be invested with the risk brought down as it approaches.

The instinct to put all of it somewhere that grows is understandable and it is the wrong instinct for two of the three pots.

Most businesses in this city start with some combination of savings, family money and borrowing, and there is nothing wrong with that.

What we would avoid is the version where a household plans to fund everything from savings, finds the amount short at the last moment, and borrows in a hurry on whatever terms are available. A loan considered in advance is a different arrangement from one arranged under pressure.

We are mutual fund distributors and we do not arrange loans or advise on them, so the terms and whether borrowing suits you are questions for a lender and for somebody who sees your full position. Our post on the questions we cannot answer sets out where that line sits.

One thing we will say: money borrowed against the household home is not business capital in any meaningful sense. It is the family security placed behind a business outcome, and that deserves a longer conversation than it usually gets.

A large share of the people who ask us about this are employed today and planning to stop, and there are a few things worth doing while you still have a salary.

Everything that is easier with an income should be arranged before the last day rather than after. That includes any borrowing you have decided on, since terms available to a salaried applicant differ from those available to somebody who left three months ago.

Your provident fund balance deserves a deliberate decision rather than being forgotten. It is retirement money and it is not business capital, whatever the arithmetic looks like on a difficult month in year one.

And the practical detail that catches people: instalments and standing instructions attached to a salary account. When that account stops being funded, they fail quietly, which our post on what a job change does to your SIP covers. Move them to the account that will actually be operating.

The financial problem changes shape rather than ending, and this is where our page on SIP for business owners takes over.

The two things worth establishing early are separation and consistency. Business money and household money in genuinely separate accounts, so that both can be seen clearly, and something going out of the household side regularly even when it is small.

That second one matters more than the amount. A business owner has no employer building anything for them, so the retirement provision our page on SIP for retirement describes has to come from the household side deliberately, and the years when everything goes back into the business are exactly the years it does not happen.

Five steps, and the first two protect the family rather than the business.

• Build the household buffer first, before any capital is accumulated.
• Fund the living costs pot next, sized for longer than you think the business will take.
• Then accumulate capital, placed according to how soon it might be needed.
• Keep something long-horizon running for yourself throughout, even a small amount.
• Do not touch the first two for the business, at any point, for any reason.

The households we have watched survive a difficult first two years are the ones that kept the buffer intact. That is the whole finding, and it has nothing to do with which scheme anything was held in. To work through the three pots and where each belongs, get in touch.