Learn about business investment
The power of putting the money you make back in your business
Why did you first decide to start your own business? There could be a few reasons: You want to have a major say in what your schedule looks like day in and day out, you want to provide for the people you love or maybe you’re simply passionate about your industry.
One or all of these reasons might hold true for you. But above all else, you started your own company because you want to ensure that one day you create true financial freedom for yourself. You want to be able to do what you want, when you want to, without your life being dictated by the number in your bank account.
How to invest in a business
Investing in a business is a huge step: There’s plenty of reward if the company takes off, but also great potential for loss if the idea or product falls flat.
You should only invest in businesses you are comfortable losing money on. This mitigates your risk while encouraging you to research and seek out business investment opportunities that are worth your time and finances. Investing money into businesses or industries you have prior experience with is a sound strategy to make sure you know what you’re getting into, and will even give you the opportunity to offer actionable advice to the company that will help your investment bear fruit.
When investing in smaller startups, try to negotiate a controllable interest – an ownership of over 50% of the business – whenever possible. Controllable interests give you the chance to step in and take over the company if things start to go south.
Before actually sitting down to make an investment official, make sure to ask for as much financial information about the company as possible. Documents like bank statements or accounting balance sheets give a good overview of how a business is doing financially and whether the company has a sustainable plan in place or if it is merely hoping to function as a cash grab.
Be sure to ask if current business plans will require additional money down the road, and if you, as an investor, will be expected to contribute to initiatives prior to your onboarding. Uncertainty will lead to problems down the road, especially if other investors are sporadic or are only contributing small amounts.
Finally, make sure to speak with the owners and business executives before making an investment. Interviews give you a chance to see the senior staff’s background and gain a sense of their expertise. This will also be a good time to determine how much of the owner’s money is placed into the business. If owners are reluctant to invest in their own company, you should take this as a major warning sign to stay away from contributing your money. Owners who are not invested in their work will not have as much drive, especially if company prospects start to trend down.
The main point: Diversify
No matter your business investment amount, diversification of your money is paramount to keep you on the path to financial success. Diversified investments will help you maximize opportunities to reap rewards on your investments while mitigating risk. Diversification will also help you maintain a tax-efficient investment portfolio if you’re smart about where the money is going.
Understanding the difference between long- and short-term capital gains tax, along with income tax, will help you maximize your opportunities and know when to cash out on your investment. Generally, it’s smarter to hold onto your investments, especially if you’ve diversified your assets into stocks, for as long as possible. If you do want to spread out your business investments alongside the stock market, consider investing in index funds to defer taxes year to year until you decide to liquidate the fund.
Strategies to maximize your business investment ideas
You’re on the right track if you’ve launched a sustainable business that’s generating revenue, but how will you keep growing your money? The only reasonable solution is to make solid business investments that allow your company to continue growing, even when you’re not there managing your company’s operations. Here’s how you can make your business’ profits work for you.
1. Use the power of compounding
One of the most powerful but overlooked tools in the investment world is compounding. When you put your money into an account that offers compound interest, you don’t only earn simple interest on your funds – your interest begins to earn interest as well. For this reason, compounding is one of the most effective ways to grow your wealth. The more money you put into your savings account, the faster your wealth grows. Compounding puts time on your side.
2. Diversify and automate your interests
Whether you’re running your own company or looking to become a small business investor, diversifying and automating your finances is essential. Diversifying helps you to smartly allocate your assets. Tony recommends creating three buckets for your money: the security bucket, the growth/risk bucket and the dream bucket. Each accounts for different financial needs in your life – the necessities, the major growth and the future payoff – but all are necessary for a well-rounded financial portfolio.
Next, make sure your investments are automated. If you have to manually move money around each week, you’ll probably forget to move it somewhere secure. Work with a financial advisor or independently set up automatic transfers. By ensuring that your money is going to the places where it can work best for you, you’re protecting your financial future to the fullest.
3. Start investing as soon as possible
Many people feel intimidated by finances if money’s not their specialty. They wait on investing because they’re afraid to make the wrong choice. Investments always come with a certain degree of risk, but there’s no reason to hold off on making your money work for you. The greatest secret to growing your wealth is to start investing today. There are strategies that can help you along the way, but you’ll never begin reaping the rewards of your investments unless you invest them in the first place. Even with a small investment, your money can take off. This allows you to take advantage of the power of compounding and be able to take greater financial risks.
4. Know best tax practices
When you’re running your own business, it can be tempting to see everything as a gain, but you have to factor in taxes. How much is your business paying in taxes? How can you invest at the right time to avoid getting hit with tax that was avoidable? Hire an accountant that you trust or learn about the tax laws that pertain to your region and business. Do whatever it takes to keep as much money as you possibly can while still paying your taxes correctly. You know that your interest can compound and grow over time, but so can related taxes and fees if you’re not diligent.
There are many challenges that come with running your own business. It’s difficult to not only run a company, but to make a profit doing so. Begin working toward smarter business investments today by creating a money-making machine that generates more funds and will lead you to a brighter financial future.
Make every investment count towards your success
Tony Robbins’ complimentary Seven Forces content series fortifies you with the knowledge necessary to make the most tactical investments.