In past articles, I’ve written about making your money work for you. Specifically, creating a new source of revenue that is working while you’re at work generating your primary source of revenue. There are so many ways to do this and sometimes I think small businesses may not have the time to focus on it.
If you own a small business, you may be holding extra cash. I know when I was CFO of a conglomerate of small businesses, I felt more comfortable holding cash for those unknown variables and unplanned owner purchases.
However, once I got the budgeting and unknowns under control, I invested the cash. I created a second revenue stream for the business and it paid off. I was clear with my Investment Adviser that there could come a time when I needed to withdraw some funds to cover large purchases. As long as I could give him 2-5 business days, it was no problem at all. I found that I rarely needed to withdraw and more importantly, I found that those accounts grew steadily. After a while, the account earnings were covering one salary annually. It was almost like a ‘free’ employee.
There are other benefits beyond market growth as well. One is having a better, stronger balance sheet, which can help attract potential buyers or investors in your business.
Another benefit for business owners is the pre-tax growth. Company earnings are taxed. Then the company pays the owner, who also gets taxed. Let’s take $1000 minus company taxes is now $800. Now if that money is paid to the owner it is again taxed and is roughly $600. At this point, you can invest your $600 or, since you’re the owner, you can invest the money at the $800 level.
The funds can grow over time and you can take your owners pay later, in a larger amount. In this scenario, compounding becomes a critical factor. See the Coffee & Compounding: My Wife’s Viewpoint article for how big of an impact this can have. Compounding is the secret weapon of long-term investors. It is the ability to reinvest earnings so that those earnings can generate their own earnings. Basically, producing earnings from previous earnings.
There are some things to consider before opening the account though. 1) Markets fluctuate so I would not recommend investing funds that are needed to pay day-to-day expenses. It works best when you invest funds with a long-term goal in mind (more than one year). 2) Don’t forget that you may owe taxes on earnings. If you’re paying more tax, it likely means your making more money. Not a bad problem to have.
ADAMS INVESTING TAKEAWAYS
Do you have some cash that is laying down on the job right now? Put it to work. They say the hardest part is getting started and we can help with that. Every day you delay could be money left on the table.
Note: Shanon Adams does not make security recommendations or provide related advice. Her articles simply represent a theme we wish to highlight.