We often talk about how hard we are working for our money. And, in fact, earned income is the way that most of us survive. While you're working for your money, don't forget to invest and put some of your money to work for you.
This is something that's especially important for business owners. It's easy to forget to set money aside for retirement without an employer-sponsored plan to fall back on. Whether you are working hard for a paycheck at a more "traditional" job, or whether you are working for yourself as a business owner, make sure that you make the effort to invest, since that's how you put your money to work for you.
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The Wealthy Know They Should Invest
When we think of the wealthy, we often think of high-paying jobs. The truth, though, is that the wealthy don't get most of their income from salary. Instead, a large portion of their income comes from investments. A couple years ago, the country was in an uproar over the news that presidential hopeful Mitt Romney, someone who is wealthy by almost any standard, has an effective tax rate of less than 15%. There's a good chance that your effective tax rate is higher than that. I know mine is. A big reason for this is the fact that a lot of Romney's income is taxed at a favorable rate due to the fact that it is investment income.
You don't have to be super-rich to take advantage of investing over time. While you might not be able to stop working and live off your dividends any time soon, you can learn from the habits of the wealthy. And one of the most important lessons to learn is that investing is a huge part of effectively growing your wealth -- especially over time.
Where Should You Put Your Money?
The next question, once you decide to invest, is this: Where should I put my money? Some business owners are averse to the idea of risk in their personal investments. After all, entrepreneurship is a big enough risk itself. However, you might be surprised at how important it is to put your money in the right place. Using a handy wealth calculator from Stocks for the Week, I was able to see what types of investments make the most sense for me, assuming I set aside $800 a month for the next 30 years (when starting from zero).
As you can see, if I'm complete risk-averse and set aside money in a savings account, I probably won't even be able to amass $400,000 -- and that doesn't even take into account the ravages of inflation. You can see why making sure your money is working hard for you is so important, especially if you want to beat inflation. Running this calculation also showed me that I don't need to put everything into stocks if I don't want to. While amassing close to $1.8 million in the next 30 years would be nice, it's not something I need to do for success. About $800,000 is fine with me. In fact, using this wealth calculator, it's pretty easy to see that tweaking my portfolio, so that, perhaps, I put 70% of my savings in stocks, 20% in bonds, and 10% in cash, I could do reasonably well.
Understanding the relationship between risk and reward, and realizing that your money really should be working on your behalf, is one of the first steps on the road to financial freedom.
As you grow your business, don't forget to look for ways to set aside more money for the future. It's hard to think of investing in anything but yourself and your business when you are working so hard on your entrepreneurial ventures, but you could be short-changing your future if you aren't at least letting your money work for you to some degree. And, as always, the best time to start is now. If you invest that same $800 a month for 20 years instead of 30, you will top out $606,026 -- and that's if you put everything into stocks. There is no room for you to diversify your asset allocation with bonds and cash. For similar results, using the half stocks/half cash investing strategy, you need $1,750 per month. That's more than twice the amount you need if you start 10 years earlier.
Smart business owners know that they need to let their money do some of the work of building a solid financial future. Make sure you are taking some of your business income and investing it in your future.
