Let's continue our conversation regarding financial serenity with some ideas for business owners this week.
For the
business owners who want to grow their business to the point where it becomes
their retirement vehicle, while reinvesting all their earnings back in the
business might seem like the smart thing to do, it may prove a disastrous
financial sacrifice in the long run. According to the sensible principle of
diversification, you should never put all your eggs in one basket; and when
that basket is your own business, especially if it is a service-based business
that relies heavily on you, that may be a very dangerous path to follow.
A wiser
decision may be to save some of the money earned through the business in a
retirement account – either pre-tax or after-tax – that will accumulate over
time and be there when the business owner is ready to retire. Besides the tax
advantages of this plan, the main benefit consists in the fact that the
retirement money is not directly tied into the business, and it is protected
from any hardships that the business may encounter, plus it will be available
when the owner of the business wants or has to retire.
Most people are
familiar with the term “compound interest” but that is usually in an abstract
sense; they are familiar with the fact that it is important, that it can work
in one’s favor or against them. And for the majority of people, that is where
their knowledge gets blurry. They do not understand that the more time they
have, the more they can benefit from the effects of the compound interest.
Some
of the most frequently used examples show friends who save for retirement at
different times. While one starts in their 20’s and only saves for about 10
years, the other starts saving at the same time the first one stops and
continues saving until retirement age. Even so, the first friend ends up with
more money at the time of retirement – depending on the amounts used and the
interest percentage used in the example, the difference can be from a few tens of thousands
to some hundreds of thousands.
The
difference between the two friends comes not from the amount saved but from the
time they invest. The more time you give the compound interest to work for you,
the more your savings grow, while the interest gains interest upon interest.
I’m not
going to get on my soap box lamenting the lack of financial education from the
US school system. Even though it is important to raise the level of
understanding for all the people growing up in an economy so very different
from the one experienced by their parents and grandparents. While the good news
is that more and more people start businesses and/or become self-employed, the
bad news is that these people’s financial security and safe present and future
is in their own hands, since their employers are no longer present to provide
the benefits that will take care of them in the long run.
Most
solopreneurs make the decision to put all of their income back into the
business in order to build the business. They think that it will all pay off in
the future because they will make more money and, in the end, can sell the
business. Unfortunately, most of the time, this is not a solid exit strategy.
Nobody wants to buy your job. Therefore, the only way to have a sellable
business is by building systems that can be followed and duplicated.
For the business owners reading these lines, I would like to suggest a great book that gave me a lot to think about, and made me tweak a few things in the cash flow of my company: "Profit First" by Mike Michalowitz. He uses the principle of "pay yourself first" - so often used in personal finances - and adapts it to the set up of a company. I would encourage anyone who wants to find their financial serenity, to read Mike's book and apply the knowledge he shares. It will change your life - literally!
And if you are an employee, don't despair, there is also a path to financial serenity for you! We will talk about it next week.
