Q: Steve: I started my own business because I wanted to provide a stable financial future for my family. And while I enjoy my business, I still don’t feel that our financial future is secure. For the New Year, I would like this to change. How do I get started?
Marty S., South Lake Tahoe, CA
A: Many small business people go into business because they are good at something. They love it in fact and want to do that thing full time. The chef opens a restaurant or the artist starts a graphic design studio, that sort of thing.
But just because you can draw well or cook great it does not necessarily follow that your financial skills are equally as strong. I suggest that there are four areas in which many a small businessperson could stand to hone his or her money skills:
- Understanding the difference between liabilities and assets.
So you think you know the difference between an asset and a liability do you? Think again. Here’s a quiz: Is a new business car, financed at the dealership, an asset or a liability? A liability right? Wrong. It’s a liability for two reasons. First, the car will depreciate not appreciate. Second, the car payment is a drain on the business. So assets are investments that make the business money. Liabilities are things that cost the business money. Period.
- Appreciating the power of interest.
Many a small business is financed with credit cards or other forms of loans that carry with them high interest rates. While that is understandable and common, paying high interest rates and getting into credit card debt is not something that your business should be doing on a consistent basis. The rich don’t waste their money paying interest on credit cards, car payments, and trips they can’t afford. Instead, they invest their money so that instead of paying interest, interest is paid to them (e.g., investing in savings accounts and stocks.) For example, a 2-year CD today pays about 2.5 percent interest. It’s not a lot, but it sure beats paying 2.5 percent. One easy way to use interest to your advantage is to understand and apply the magic of compound interest. Compound interest occurs when you allow your interest to become part of your principal. That interest then begins to earn interest. $100 a month invested at 7 percent for 15 years is compounded annually yields a whopping $31,696. If your business is to ever break out it has to be on a sound financial foot. That begins with paying as little interest as possible and making as much as feasible.
- Being more frugal.
In “The Millionaire Next Door”, authors Thomas Stanley and William Danko explain that most millionaires got that way by living within their means and investing the difference. For instance, I met with a very successful real estate broker over the weekend. This is a man who is worth millions. Who has owned hundreds of rental units around Los Angeles. Who has eight real estate agents working for him. Are they all located in some fancy building in Beverly Hills? Nope. They are in a small, decent building that he owns in a normal commercial neighborhood. When I teased him about the cramped quarters, he replied, “Got to keep the overhead low, my friend!”
- Investing in yourself.
Creating a sound financial foundation requires that you invest and investing requires money. So just as you pay your other bills, you must also you pay yourself. No matter how much or little you bring home from the business, 10 percent should go towards investments. By making a few simple changes next year can be a more financially sound one for you and your family.
Real estate is a great way to begin to create that financial foundation. People like Donald Trump, Jerry Buss, and Merv Griffin all made their fortunes in real estate. Besides a historic 7% profit, another advantage real estate has over other
investments is that you can buy the property using other people’s money.
Most investments require that you alone pay 100 percent for the item. A $100 stock costs you $100. But with real estate you typically put down 3, or 5, or 10 percent of the money necessary and a lender will loan you the rest. With only $10,000
for instance, you could own a $200,000 four-plex. That’s remarkable.