Working for yourself can be a lot of things: exciting, stressful, demanding, freeing, rewarding and (hopefully) profitable. If you have your own business, you know all of these feelings, plus probably 20 more. Working for yourself affords you the opportunity to be as successful as you want to be. With this success also comes the responsibilty of handling the books of the business in addition to your personal finances, and also understanding how the two work together. Once your hard work and dedication starts to pay off, your goal should be to maximize what goes into your pockets. Once you've accomplished that, the real financial decisions begin. You're making good money, so what are you going to do with it?
5 Ways to Maximize Your Wealth
1. Have an emergency fund
A "rainy-day fund" should be equivalent to 6 months salary, with that number being a working one. Start small and work your way up. The emergency fund is there for when life comes at you (car repair, appliance on the fritz etc), you don't have to mess with number 2. And oh, by the way, you just saved six-months salary!
2. Have a debt reduction plan
I'm going to let you in on a dirty little secret: not all debt is bad debt. There are some well-known industry-types who will tell you to pay off any and all debt immediately before saving a penny. If you work for an MLM, you likely hear the company recommend paying off all your debt or reward people for paying off their house as well (there's a reason why, and if you'd like to know, shoot me an email). While we do put paying down high interest debt in top priority status, debt reduction should be strategic and fall in line with a savings/investment plan.
Consider this scenario: if I gave you $350,000 to buy a brand new home in cash, in 10 years, you'd have a $350,000 10-year old home, right? What if you paid $250,000 up front, took out a 10-year mortgage which you paid off with 10 years of income and invested the other $100,000? In this case you'd have a 10-year old, $350,000 house AND $100k + market earnings. Seems like an obvious decision to me.
3. Have a plan for taxation
If you work for someone else, this tax stuff if pretty simple as they take out the taxes for you. If you are going at it alone, you have a lot of small things to consider. The goal with tax planning is ALWAYS to maximize what goes into your pockets instead of Uncle Sam's. Tax planning, like debt reduction, is part of a larger savings/investment plan. For example, saving $10,000/year in the proper tax sheltering vehicle can reduce your personal tax liability by $2,500. Are you utilizing all tax savings vehicles available to you? (SEP IRA, 401(k), etc).
4. What about retirement?
If you are making good money in the short term, things are all gravy, baby. But, do you plan on working this hard forever? If you work for yourself, you can minimize your tax liability and save for the future by utilizing one of the retirement vehicles mentioned above. The key (just like with anything else in your business) is it's on you to set it up (but hey, that's what we're here for!).
Stat of the day: a person who starts saving in his or her 20s will have on average $2-4MM more than a person who starts in his/her 30s and so on. <WHAT ARE YOU WAITING FOR>
5. Be aware of your Risk Profile
The more successful your business becomes, the more your net worth increases. How are you going to protect it? Consider the following:
- How much insurance do you have?
- Estate Planning (Have you thought about Wills, Trusts, Power of Attorney)
- What is your business structure? (Sole proprietorship, LLC, etc.)
Each of these are key pieces to the larger overall plan.
At Wealth Club, we are all about providing financial education to help our clients construct and implement a plan to increase their quality of life. A financial plan is especially critical to a person who runs his/her own business as he/she can focus on her passion, knowing the behind the scenes stuff is secured.
Want more info? Let's talk!
