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3 questions every entrepreneur must ask before launching a new business

Key Points
  • 20% of small businesses fail in their first year of business, according to the Bureau of Labor Statistics.
  • Tara Falcone, founder of ReisUP, says that entrepreneurs should be wary of overlooking their own living costs when starting a new business.
  • Falcone also recommends that entrepreneurs don't put too much of their own personal capital into their ventures.
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Tara Falcone: Here are three questions entrepreneurs should ask themselves

Being an entrepreneur is not easy work. Twenty percent of small businesses fail after just one year; that number climbs to 50% after five, according to a recent report by the Bureau of Labor Statistics. So before you even lay out your business plan, Tara Falcone, a certified financial planner and founder of ReisUp, a company dedicated to increasing financial education and access for all generations, says it's best to ask yourself these three important questions to see if you are ready for the challenge.

How much is in my savings?

First, Falcone says an aspiring entrepreneur must ask how much they have saved to live off of. The simple fact is that most companies are not profitable when they are founded. Entrepreneurs should never overlook their living costs when they start a new business.

How big of a risk is it to leave my current job?

Falcone says a budding entrepreneur must also calculate the opportunity cost of starting a business. If they are in a high-paying job, they should determine how big of a risk it is to leave that job for their new endeavor.

How much of my own personal capital am I willing to invest?

A final consideration entrepreneurs must make is to establish how much of their own personal capital they are willing to put into the venture, according to Falcone. Entrepreneurs should calculate how much they are able to give and how much they will need from outside investors.

Avoid these 3 common mistakes

In addition to asking these three questions, Falcone identifies some common mistakes that she says should be avoided.

First, she has seen many entrepreneurs racking up credit card debt that they aren't able to pay back, which could sink their credit.

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Tara Falcone: Three common mistakes I see entrepreneurs making

She also says entrepreneurs often don't properly separate their personal finances from their business' finances, which hurts them come tax season. Finally, Falcone says entrepreneurs will sometimes put too much of their own personal capital into their business without seeking out private funding.

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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.