Starting a business is already a stressful endeavor for small business owners. But growing a business while simultaneously securing your personal finances requires planning, saving, and tough decisions.
There are lots of factors to consider. For instance, how do you create multiple sources of income for yourself while also planning for retirement? On one hand, it makes sense to grow your business by investing in it. On the other hand, it puts your personal finances at risk; If your business tanks, your personal bank account will take a hit too.
Use these 5 personal investment strategies to secure your personal finances and set yourself up for success:
- Create an Individual Retirement Account
- Diversify Your Investments
- Establish an Emergency Fund
- Open a CD
- Invest in Real Estate
Let’s dive in.
1. Create an Individual Retirement Account
When you own a small business, you’re responsible to set up your own retirement plan.
It’s important to start saving as early as possible that way you have enough to support yourself if your original plans fall through. For instance, if you’re planning on selling your business, you should never assume you’ll receive enough money to cover retirement costs.
Set up an individual retirement account (IRA) so you can start putting money towards your future. IRAs are the easiest way for small business owners to plan ahead and save. There are two retirement plans in particular we recommend for self-employed or small-business owners: Simplified Employee Pension (SEP) and Traditional or Roth IRA.
Here’s the breakdown of both:
- Simplified Employee Pension (SEP) IRA:SEP IRA is best suited for business owners that are sole proprietors. You and your employees can make pre-tax contributions, investing up to 25% of net income.
Maximum cap per year: $55,000
- Traditional or Roth IRA: If you’re a younger business and are saving less than $6,000 a year, choose a Traditional or Roth IRA. The contribution limit is $5,500 per year, each employee has their own IRA, and withdrawals aren’t taxed.
Maximum cap per year: $5,500
2. Diversify Your Investments
Investing 3 to 6 months of work into a liquid account can safeguard your personal finances if your business isn’t performing well. By investing in other companies, you create a secondary stream of income for yourself–if you do it the right way.
Most important, if your business ever experiences significant loss, you have multiple sources of income to glean from.
Protect your portfolio by investing in a variety of companies and industries. It’s not uncommon (or wrong) to invest back into your business, but varying what you invest in creates a better safeguard for yourself. Plus, you should never bank your networth all in one company.
If you need guidance in which companies to invest in, consult a financial advisor. Small business owners wear a lot of hats; get a handle on your financial trajectory by calling in an expert.
Invest the smart way (and protect yourself down the road) by looking outside your business and your industry.
3. Establish an Emergency Fund
It’s also smart to set aside money each month towards an emergency fund. 82% of businesses don’t establish an emergency fund for a rainy day, and that becomes problematic when inevitable one-off bills pop up.
When something does come up (like a Hurricane wiping out your beachside surf shop), you’ll be able to dip into your savings or an investment account. Even if it isn’t something as drastic as a natural disaster, you’ll want money reserved for property repairs, equipment repairs, or paying your employees.
It doesn’t need to be a lot of money up front either–you can start as small as $5-$10 a week. If you’re new to investing, there’s a whole host of basic how-to’s to help you hit the ground running.
4. Open a CD
If you’re wary of investing in stocks and you’re able to stow away a chunk of change for an extended amount of time, you can open a certificate of deposit (CD). Investing in a CD is less risky than investing in stocks since your money is insured.
CDs are different than emergency funds in that you’re unable to deposit or withdrawal money out of your account for a fixed period of time. The longer the fixed time, the higher the interest you earn.
Not all savings or checking accounts earn interest (or enough of it), so opening a CD is a great option to create supplement income that can go towards your retirement income and Social Security.
5. Invest in Real Estate
If you want to avoid solely investing in stocks, investing in real estate can bring in a steady stream of income.
Housing prices usually rise faster than inflation, so if you’re smart about the home you purchase, your property’s value could skyrocket. Within a few years, you could cash in extensive profit.
There are a few ways to benefit from investing in real estate:
- Investing in up-and-coming areas
- Renting your property
- Flipping your home
- Purchasing commercial office space
- Invest in a peer to peer lending real estate debt pool like PeerStreet for a more passive approach to real estate investing
Buy real estate in an area of town you see growing in the coming months and years. You can also buy a house and resell it for profit, especially if one’s underpriced or undervalued.
Depending on how big your business is and the rate at which it’s growing, it may make sense to purchase some office space. If you know your business is ready to move, will continue to bring in steady income, and will stay in the same location, consider buying commercial space. You’ll save on rental costs, and will facilitate your business’s growth even more.
In short, save now and invest outside of your business
Planning is essential to running a small business, and it’s equally as crucial when it comes to protecting your personal assets. Secure your personal finances so that if your business crashes, you won’t go down with it.
Here’s a refresher on how to invest and grow your business, while creating safety nets for yourself:
- Start planning ahead for retirement by creating an IRA.
- Invest in well-researched companies using a fixed maximum amount each month.
- Create an emergency savings account for rainy days.
- Consider opening a CD.
- Supplement your income by putting money towards real estate.
About the Author
Lily Wachtor is a freelance writer who focuses on small business, finance and technology—and how to combine them for success. When not writing, she enjoys reading, traveling, and finding new restaurants. Catch her on Twitter @lilyawachtor.
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