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Francisco Salvador
By: fsalvador
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Everything You Need to Know About Investment Accounts for Small Business Owners

When I started my first business, I remember I read the word “investor” somewhere. Immediately, the image that came to my mind was a person wearing a fancy suit and tie, briefcase in hand, and The Wall Street Journal under his arm. 

That image was not at all accurate. I imagined that type of professional investing large sums in investment accounts. I associated investors with sophisticated financial knowledge that allowed them to invest successfully. It seemed like something I wouldn’t be able to achieve.

Maybe something similar happens to you, and you think investors are a completely different species that is not compatible with your small business environment. Well, let me tell you, there is an investor very close to you. Look in the mirror, and you will see this investor. And, even if you don’t believe it, that mirror investor can manage investment accounts. 

Let me tell you how.

Why should I invest?

If you have investment accounts, you can reinvest your earnings and meet some of your company’s financial needs. 

Having an investment account will allow you to increase your company’s assets. Why? Because an investment is a parallel source of income. Besides, it can help your business’ long-term sustainability.

Shop keeper counting money in shop. concept: investment accounts

It is always better to ask for help. I insist a lot on the
value of a financial plan

Aspects to consider before investing

Analyze thoroughly what your risk profile is and design, alongside your financial advisor, a portfolio as diverse as possible (this increases security).

Be honest and give all the information your advisor needs (purpose of the long-term investment and how much risk you are willing to take). 

In my entrepreneurial experience, the most significant financial mistakes I’ve made, regarding investment accounts, have been:

  1. Thinking that, by having limited cash and business knowledge, I could not invest. 
  2. Not setting accurate financial objectives for my small business and asking an expert financial advisor if they would change anything.
  3. Making investment decisions that negatively affected me in the medium and long term (such as ignoring cash flow) because I was only thinking in the short term. The result was that I put my business’ sustainability at risk.
  4. Investing without consulting expert financial advisors to test the reliability of my decisions.
  5. Not comparing my present and future financial objectives (such as planning for my retirement) with the financial capacity of my business. For example, sometimes, these objectives are challenging to achieve just with the profits of a company. But by realizing that you cannot reach your goals unless you change something, you can more easily assume the risk that comes with an investment.
  6. To think that, even with an expert advisor by my side, I would not understand how to invest. Now I know that even the best professionals understand all the complexities by communicating and asking. Even without being a financial expert, you can understand what investments you are making if you ask and research.

What are brokerage accounts? Are they different from investment accounts?

Brokerage accounts are just taxable investment accounts that are opened (individually or jointly) at a brokerage agency (in person or online).

You can transfer funds to a brokerage account and use them to purchase, sell, and maintain investments (e.g., Shares or Mutual Funds). Of course, you have to pay the corresponding commissions to the brokerage agency. These agency brokers can also make somewhat more complex investments (e.g., Options). Make sure to check the professional trajectory, professionalism, and honesty of the broker you work with.

Although it might be obvious, I want to remind you that you will pay taxes on the profits obtained in a brokerage account. Keep this in mind when planning your desired return on investment.

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Without a purpose, path, nor objectives, I advise against investing. Before starting an investment, sit down and decide what your goals are and how you want to achieve them.

Invest in the short term or long term?

Once you have defined how much and why, the next thing is to think about how long

Let’s think about your time horizon: when do you need your investment money? 

Short-term (less than two years)

Short-term investments can be used to pay for a trip, a car, a family event, a small home renovation, Christmas gifts, etc.

Investing is very important, even if it is a short-term investment. If you decide NOT to invest and you don’t move your money, you will lose purchasing power.

I’ll give you an example so that you can understand it in a very graphic way with real data. 

The US has an inflation period from April 2018 to April 2019 that amounted to 2%. Imagine that, in April 2018, you have two dollars in your pocket. With one of them, you buy a milk carton, and you put the other in your bank investment, and you don’t touch it at all. 

A year later, you take that same dollar out of your account and go to the supermarket. In April 2019, the milk carton now costs $1.02. You cannot buy it. This means you have lost purchasing power as a result of inflation. 

Your savings will grow because the banks offer an interest rate. Of course, but the interest rate offered in a savings account will be minimal (it’s always lower than inflation). It will always be more profitable to invest your money since it will lead to more profits.

I insist: if you do nothing, you lose purchasing power. Your money loses value.

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Long-term investments can be used to pay for your children’s university, buy a new house, saving for retirement, etc.

Sometimes we want to save for a specific purpose (for example, saving for retirement), but our saving capacity is not enough to achieve that goal ourselves. 

That’s when a stock market investment comes into play. You assume a risk, of course, but you can achieve a higher return, which can help you achieve your goals.

Some of the best investment accounts for entrepreneurs

Here are some types of investment accounts:

1. Individual Retirement Account (IRA)

There are several types, all with tax benefits:

  • Traditional: Individual account. Your annual contributions will lower the income tax for that year, but when you withdraw the money, that money will be subject to taxes.
  • Roth: individual account. Tax-free money withdrawals can be made at retirement. Annual contributions are not deductible, but you do not owe taxes on investment earnings in the account. 
  • SEP (Self Employee Pension): allows the employer a maximum annual contribution of nearly ten times the permitted traditional.
  • SIMPLE (Savings Incentive Match Plan for Employees): it’s for companies with fewer than 100 employees.

2. 401(k)

Ideal for an employer with no employees (except the spouse, if necessary) who wants to save substantial amounts of money in a few years. Although you cannot contribute if you have employees, you can hire your spouse so that he or she can also contribute to the plan. 

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Are you ready to invest?

Another critical question is, “how much money will you not earn if you don’t invest your money?”

If your not adverse to risk allows it, the answer to the previous question will probably move you to maximize the return on your investment account funds.

In another article, I explained what types of investment you can make as a small business owner. There you will find relevant information related to how much risk you want to assume.

And now that?

As an entrepreneur, whenever I face a challenge that I cannot do by myself (because I lack the knowledge or time to learn it), I ask for the help of professionals.

As a small business owner, you have a road map that reads, “make my money profitable.” That’s where you ganna go, but… what road will you take? 

My recommendation is to invest. But of course, you should consult a specialist to help you make as much profit as possible.

If you want to learn a bit more about business, I suggest reading:

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Emergency Loans: The Best 12 Options to Finance Unexpected Expenses

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