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Four Financial Habits of Effective, Wealthy CEOs

Terry Vine | Blend Images | Getty Images

In a recent survey by the American College, about three-quarters of entrepreneurs admitted they didn’t have a formal written retirement plan. Shocked? Don’t be. The dominant entrepreneurial mindset goes like this: Take care of the business today, and it will take care of you down the line. Don’t lose focus.

Many entrepreneurs become so passionate about what they’ve built and where it’s headed that the thought of thinking a bit more about their own well-being—taking a bigger salary, for instance, or selling some equity or stock options to redeploy in personal accounts—seems at odds with their goals for building the business. (Read more: Entrepreneurs and the Retirement Trap.)

That’s precisely the thinking that can bring on huge risks to business owners and their families and heirs. The problem with all that passion, focus, and confidence is that it makes a lot of brilliant business minds either oblivious to or dismissive of the single most important factor that will guarantee—yes, guarantee--lasting wealth: diversification.

Having every penny of your net worth riding on one investment is lunacy—even if that investment is your thriving, growing business. No matter how great everything is going today, can you tell yourself with 100% certitude that the good times are guaranteed to continue? That's not me betting against your success. I’m just suggesting you protect yourself and your family. And the only way to do that is to diversify some of your assets away from your business.

You’re dangerously naïve if you think diversification is some pedestrian concept for rank-and-file regular folk. It’s no less vital for every entrepreneur—including Facebook’s new millionaires. I’d bet good money that your personal finances are lacking in the diversification department. If you think I’m wrong, here’s a checklist of investment strategies to think about. See how you measure up.

1. Fund a dedicated retirement account.

This sounds stupidly obvious--and yet only a fourth of the entrepreneur population follows through. If you don’t already offer a retirement plan at work, you need one, and so do your employees. If you work only with contractors, you may be eligible for an individual 401(k), which allows you to sock away up to a maximum of $50,000 this year for retirement. (If you’re over 50 years old, you can put away even more.) And fund it to the maximum allowed. If that means pulling more salary from your baby, so be it. I hope your business remains so successful that what you end up socking away in retirement accounts becomes a superfluous footnote on your net worth years from now. But in the meantime, this account is insurance against any number of possible outcomes that don't follow your script. Besides, there are some tax advantages to doing some smart retirement planning.

2. Don’t overload that account with your own stock.

Your retirement account should not be filled up with company stock. Period. This is where your overconfidence and passion can kill you. You need to invest outside of your business. And you need to invest outside your circle of competency. Sound crazy? Well, what I see all too often are successful entrepreneurs whose idea of diversification is to buy stock or invest in start-ups that are all in the same industry. That’s like suggesting a wine cellar is well stocked because it has 100 cases--of the same wine and vintage.

3. Sell some equity; diversify; repeat.

Exercise some options; sell some equity--because you can’t tell me (or, more important, yourself) that you know with 100% certainty that your business will never suffer a setback. Besides, diversify now, and you’ll never find yourself having to sell under pressure in the event you need to raise some cash when you can’t extract maximum value from your options or equity.

4. Consult a personal finance team outside the business.

The person or team handling the books for your company is not the ideal tax advisor for your personal wealth. You want a tax pro who specializes in tax strategies for entrepreneurs. Task No. 1 is to devise a long-term strategy for handling options and equity; there are major IRS potholes that can seriously erode your net profit when you exercise.

Lastly, an estate-planning attorney is another must-have. You’re working so hard to build your business; aren’t you equally passionate about making sure the wealth you accumulate will be shared exactly as you want? Setting up the proper trusts, perhaps a foundation, is how you ensure your business success continues to pay off for you, your loved ones, and the causes you are passionate about.

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