I’ve heard a lot of talk in the lifestyle business blog and podcast circles about how it is better to have your money available to you in cash rather than tied up in investments. They often refer to Mark Cuban (entrepreneur, blogger, owner of the Dallas Mavericks) saying that he keeps all of his money in cash so that he is positioned to make a play when an opportunity comes his way. But we all aren’t Mark Cuban who will be able to comfortably care for himself in retirement without a single one of his dollars returning even a penny from investments.
Those of us that don’t own professional sports franchises will be losing money to inflation for every dollar we keep uninvested while we wait for that big opportunity.
To be an entrepreneur you have to be optimistic and have the expectation that you will succeed. Any other mindset will be self-defeating. But I’ve heard it said that building a business is about minimizing risk. Having a personal financial plan is a necessary part of that. And you might already be taking advantage of certain tax breaks (mortgage interest, foreign earned income exclusion, etc.) so why not take it to the max? Every dollar you save in taxes is a dollar that can be better utilized elsewhere.
If you’re still working a day job while burning the midnight oil on your dream business then the 401(k) is generally a good idea to look at. If you’re getting a match on your contributions then you’re getting an automatic return on your money. If that match is 50% of the first 6% then every dollar you’re putting in is effectively giving you a 50% return (up to 6% of your salary). Nowhere else in the world do you get a guaranteed return like that. You can even just put it in the Money Market or Stable Value fund on your 401(k) lineup and still reap the benefits with very, very low risk. And those 401(k) contributions are pretax so when you contribute to your 401(k) you’re lowering the amount of money you’re paying to the IRS.
Another blessing of the tax gods is the Roth IRA. There you invest your money (after you’ve paid taxes on it out of your paycheck or profits from your business) into an account now but pay no taxes when you take it out at retirement. This is a popular option for people that believe taxes are going to be higher when they retire than they are now. The investment options are also much broader than you will get in a 401(k) plan.
Look out for mutual funds with too high of fees in both your 401(k) and IRA. And remember that if the once-in-a-lifetime opportunity, or an emergency, comes along you can get your money out of those accounts in just a few days as long as you pay a 10% early-withdrawal penalty.
So, the case against keeping all of your money in cash, is that you don’t want something to go wrong and end up trying to make ends meet with just Social Security income later on in life. And, yes, you might spot a lot of business opportunities around the retirement home but you might not have the energy to act on them even if you have the cash.
The other end of the spectrum is that if all of your assets are tied up in your business then you have a lot of exposure to the market and to lawsuits. Make sure you keep enough money for your operating expenses, and any capital investments you have planned, in your business accounts but take out the profits (you’re taxed on them anyway if you’re set up as a pass-through LLC).
Getting out of debt is another step in reducing the risk of starting a business. Dave Ramsey is a good place to turn for some no-nonsense advice on how to do that. Our views might differ a bit but I don’t know if I’ve heard anybody else state so plainly the case for getting out of debt as well as helping provide the motivation to actually do so. One hour of his daily radio show is available as a podcast in iTunes.
Obviously an accountant or certified financial planner will be able to help you create a plan that is tailored to your needs but I wanted to point out that “Cash is King” should be should be carefully considered rather than taken as gospel.
Your grandma probably told you once that a penny saved is a penny earned. That gives you runway for your business and the cash to seize opportunities. But don’t think just about your business. Make sure that you take care of yourself as well.