Small businesses are a driving force in American Society. With more than half of Americans either owning or working for a small business, it makes sense to celebrate those hard-working entrepreneurs hoping to make a difference. As a small business owner myself, I understand the struggle so many face, and I’d like to offer this small piece of advice to my fellow go-getters. If you make extra money this year, instead of investing more money in your business, invest it in yourself first. Let “slow money” be your greatest resource when it’s time to wind things down. Let me explain.
Many small business owners view the business as their best and greatest investment opportunity. They’ll typically choose to pour money into the growth of their business as opposed to other traditional investment vehicles, like stocks or bonds. For obvious reasons, they see it as the best way of maintaining control and making more money. That’s understandable too. Right now, the stock market is volatile. Many small business owners worry that if they invest in the stock market, they could lose 15, 20 or 30% at any given moment. The truth is, that is possible because we don’t know what the market will do. Here’s the catch to all this, though.
While you’ll find business owners investing back into the business by buying equipment, hiring more employees or giving bonuses, etc., it’s not necessarily the best plan for retirement. Sure, if you grow your business, you’ll make more money. For example, if you put an extra $25k a year into marketing your business, it could supercharge sales, and you could end up making more money. However, if you put that money back into a retirement account that’s invested in a good growth mutual fund or exchange-traded fund, you could likely end up with more for retirement in the long run.
As a small business owner, you may also invest more money into your business than you do into your retirement in hopes of avoiding this year’s taxes. Yet, if this is your strategy, you probably don’t have enough assets to fall back on when “life happens”. You won’t have enough cash reserves to pull from in the face of calamity. You invest in your small business hoping that one day you’ll sell the business for profit or that you’ll invest enough to make more money and start saving as you get older. Yet, here’s why that doesn’t work – compound interest. I’ve said it over and over. If you don’t understand the value of compound interest, then you are already losing.
I have a client in his late 50s who has worked hard, taken a lot of risks. He’s gone through some rough times in his business and come out on the other side. As of right now, he makes around $2 million in revenue. Just this year he started saving almost seven figures of his income for retirement. (YEP, That’s a lot!) His goal is to do this for the next four years. Then, he’ll either close or sell his business. Unlike some businesses, his isn’t really a high-multiple business, one where you can sell for 3 to 4 times cash flow. He will only be able to sell his equipment, which began depreciating in value the moment he bought it. Once he’s ready to sell it all, it won’t even be worth what it is today.
So nearing the end of his career, he’s now being forced to save a ton of money in a short period to meet his retirement goals. (Obviously, this is not the most tax efficient strategy.) Most likely, he’ll make it. However, all it takes is a downturn in the economy, and his end goal won’t be attainable. This last week he said to me, “Justin if I had it to do all over again, I would’ve maxed out my retirement account every year. And anything above that I’d have invested in my business. I’ve wasted more money than I ever should have.” This is coming from a businessman with 40 plus years of experience.
The contrast to that is that my young business owner clients in their 30s. They’re maxing out their 401(k), potentially saving almost $40k between husband and wife teams. If they do that for 20 years, regardless of whether or not they sell the business later, they’ll have enough for retirement. Their assets will cover what they need. And they wouldn’t even need to sell the business. That’s just a bonus.
So my advice to all business owners is to invest in yourself first. The best way to do that? Put money back into a retirement account. Once you’ve made your “slow money,” then put money back into your business or pay down debt or whatever plan you come up with for your situation. You will make more money in your business and have a little “slow money” growing outside of your business. This isn’t a get rich quick scheme. It’s slow, but it will work! I have a real estate investor as a client who’s always thrown off on the ‘slow money’ strategy. According to him, at any given moment he could turn a 20%-25% profit on an investment. Now some ten years later, he is singing another tune, telling me he wished he’d put more “slow money” back. It’s a great little cushion.
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My experience is that those who are pulling a little money out of their businesses every year to invest in themselves are much more at ease than those who are only investing in their small businesses. Ironically, I’ve found that they can actually be more aggressive and take more risks in business because they don’t have as much to lose. It’s definitely a less stressful way to plan for your retirement. Put the money back in basic, boring investment accounts. So, if you sell your business? Great! If you don’t, you’ll still be okay because you’re prepared.