STEP 4: INVESTING YOUR PROFITS AND BUILDING BUCKETS
At this point, you are ready to start working through various phases of investment options. You are out of bad or reductive debt, and you have your six-to-nine month emergency fund with plenty of liquid cash available for problems or opportunities. Most importantly, you have started to better optimize your business for success by implementing a more comprehensive strategic plan and organizing a Wealth Management Team including a board of directors or advisors to assist you on your path. Because of these steps you have taken, if you haven’t already started to see growth in the profits in your business, I’m confident you will—and soon. So now, it’s time to plan for the next phase of investing.
I really feel that one of the most important takeaways of this entire book, and the foundation of Step 4, is that we as entrepreneurs need to harvest profit from our business and redeploy it more strategically. For some reason, we get deceived into thinking our business is our greatest and only asset supporting our retirement, and thus, we drive all of our profits back into our business month after month, year after year. This is NOT a wise strategy and certainly won’t help you on your path to financial freedom.
A key step in this process is changing our perspective as I stated earlier and to quit having tunnel vision in regards to our wealth building, relying wholly on our business. We need to start creating other buckets of assets, investments, and streams of income. Stated otherwise, let your business fund your financial freedom plan—don’t make the business itself the plan. This is a major change in the mindset of an entrepreneur (hence Chapter 1 of this book), and now this is the point in the book where we start to talk about these other investments that will be funded and supported by your business.
We as entrepreneurs need to diversify our assets, and frankly I hate to even use the word diversify. This is because of the Wall Street connotation, and I need to be clear that I’m not talking about your stock portfolio. I’m talking about diversifying ALL of your assets and possible streams of income.
The first point I want to make in this process of investing is that we are all at different phases in our lives. Regrettably, I wish I could just lay out the 5, 10, or 15 steps you need to take and the order in which to do it. For example, start a Roth IRA, buy a home, fund your Health Savings Account, start a 401(k), buy insurance . . . the list could go on and on. But the truth is everyone is different, and the phase OR the strategy you implement is going to depend on a lot of variables. How old are you? Single or married? Your income? Do you have children? What part of the country do you live in? What have you already started to fund? What are your goals? What type of risk taker are you? The answers to all these questions will place you in a different phase of investing than someone else.
To try to help those who read this book or to introduce this book to others around the country, we have developed the Business Owner’s Financial Readiness Challenge™ (take it at www.eguidetofinancialfreedom.com). This is a questionnaire in which the answers will help indicate where you are on a spectrum of investment options and in the Business Owner’s Financial Landscape™ (more on this below). It will help guide you generally as to what investment strategy you might want to consider next. Of course, no written quiz will be exact or completely able to design a comprehensive financial plan for someone, but it certainly doesn’t hurt to get a rough idea of where to start.
As Randy and I considered the best way to teach this concept and present the chapter, we literally turned to the actual conversations we have had with entrepreneurs every day in our practice, and we both realized that we use the word buckets quite a bit. You may or may not like the analogy, but we feel it is at least clear. All of us should be able to understand the concept of phases, and we added the words buckets into the dialogue to further build a visual as to what your investment path may look like.
But we needed a “landscape” to discuss the unique path each person may take on their way to financial freedom. Thus, we created the Business Owner’s Financial Landscape™. Figure 9.1 on page 80 is a diagram that serves as a discussion point to start building a frame of reference for these phases and buckets an entrepreneur can pass through.
This landscape also creates an outline for the rest of the book, or at least the next eight chapters. A lot of these buckets need some explaining, and, as I discussed earlier, a new perspective by entrepreneurs. The new perspectives on these topics will accelerate your progress to financial freedom! Now, I KNOW this all sounds very cliché! In fact, as I was writing this section of the book, I almost started to roll my eyes.
But then, I literally thought back to three conversations I had with clients this past week. Each one centered on these VERY issues of creating income and reducing stress in their business. In fact, one client asked me point blank, and I share this word for word: “Mark, I’m out of debt and have a little money set aside for emergencies. What should I invest in next? I just don’t know where to turn.” This client felt lost because they didn’t trust a banker or Wall Street advisor, let alone a wild search on the web.
Figure 9.1—Business Owner’s Financial Landscape
That question is WHY I wrote this book and partnered with an independent financial advisor to do it! Entrepreneurs are desperate for sound financial advice that makes sense with them as a business owner and not as a W-2 employee.
So in the chapters to follow, I am going to discuss the serious topics of:
Selecting health care options
Buying a home
Creating IRAs and 401(k)s
Self-directing your retirement accounts
Reviewing insurance options/strategies
Investing in Wall Street
Purchasing rental property
Implementing Social Security strategies
Investing in vacation homes and timeshares
Some of you may think that a few of these strategies or investments are no-brainers, for lack of a better word. However, I caution you to not jump so quickly to that conclusion. Based on your situation, you could be in a phase of life or part of the country that lends itself to a different approach or strategy from the next business owner. Otherwise stated, don’t think they are a perfect investment for you or anyone.
I realize many of you may be asking what the “perfect” investment is for you. I know because I asked the same question of my financial advisors time and time again. However, does it really exist? In a nutshell, the PERFECT investment would have the following characteristics:
100 percent safe
100 percent liquid
100 percent return on investment (ROI)
100 percent tax-free
100 percent passive
Doesn’t that sound great? An investment that has no risk. One that is liquid so you can turn it into cash at any time without any fees or penalties. An investment that provides awesome earnings that are all income tax-free. In fact, while we are at it, you should even get a tax deduction just for investing in such a wonderful vehicle. Why not, right? Then, you don’t have to do anything. You can just invest your money and passively watch it grow!
RANDY LUEBKE
Unfortunately, no investment is perfect. In fact, every investment is a compromise. You must be willing to give up something to get something else. If you want safety and liquidity and are unwilling to take any risks, then you may be best putting your money in a checking or savings account. You can run any investment you are considering through all the characteristics and find that you are always giving up one thing to get something else. A safe investment usually means you are sacrificing your ROI, a tax-free investment may mean that it is not liquid. A risky investment usually comes with a greater upside, but you may not sleep as well at night.
Regrettably, this perfect investment doesn’t exist. This is important to keep in mind as you read the rest of this book and consider your other investments, assets, and streams of income to choose from. Thus, what better reason to have a bunch of assets and different types of investments, each with their own purpose, including your business? When we can bring them all into concert and coordinate them together, that is when we start to experience more and more financial freedom!
TIP FOR FINANCIAL FREEDOM
Search for the proper mix of investments, not the “perfect” investment.
TAKEAWAY 1—Entering the Financial Landscape and investing does not take place until after you are fully optimizing your business with a new strategic plan, all reductive debt is paid off, and your emergency funds are in place.
TAKEAWAY 2—As an entrepreneur, you don’t want to reinvest all your profits back into your business; instead, you need to redeploy profits when possible into other assets and strategies for streams of income. Once you are making more money, you can then expand upon your buckets and strategies into additional phases that involve investing for your additional needs.
TAKEAWAY 3—Unfortunately, you will never find the perfect investment, and even your business isn’t a perfect solution for your financial success and freedom. Hence, it’s important to stay diversified with multiple assets and strategies in place to supplement your income and build wealth.