As I was driving my usual route to the grocery store not too long ago, I noticed another empty building downtown that only the week before had been selling pastries and baked goods. Within the first couple of months of opening it became just one more business that couldn’t make it in today’s tough economy. The cold hard facts are that roughly 50% of small businesses fail within the first five years, according to the Bureau of Labor Statistics.
But what can small business owners do to help keep their doors open? There are multiple answers to this question, some of which depend on the kind of business you have. But no matter what answer is given, in the end it all boils down to money. How can a business keep as much profit as possible to boost its bottom line? Investing could be one answer. In this article we are going to give you some ideas on how small business owners can get started investing.
Get Your House in Order
The eventual success of any business depends not only on the amount of money that can be made, but also on the amount of money that can be saved and set aside. If there are slow months, for example, you still need to be able to cover your business expenses despite having a reduced cash flow. Before considering any investment strategy, create an emergency fund to cover at least six months of bills should an emergency occur. It would also be wise to have no large outstanding debts. You do not want to get caught down the road with expenses you can’t pay because all of your money is tied up in long term investments. This mistake has caused more than a few small businesses to close their doors. Once you have been able to set aside some funds specifically for investing, it’s time to put your investment plan into effect.
To invest successfully in an individual retirement account, or IRA, it is crucial that you have a mix of funds rather than simply investing everything into only one or two funds that generate the highest returns. Usually, the higher the return is on funds in any portfolio, the higher the risk of loss. By choosing some funds that are of medium risk and some that are at lower risk, you considerably reduce your chances of losing on all of your funds simultaneously.
How much should you invest in each area? Generally speaking, the younger you are, the more money you can comfortably invest in higher risk funds and stocks giving you the greatest return on investment. As you get older, you don’t want to invest as much money there because your remaining investment years before retirement may not be enough to recoup a large loss should you experience one.
Examine the growth rates over the long term before making decisions about which funds to invest in. Remember, you are not going to move your money often. Leaving it alone is most often the best way to let it grow, even if there is a downturn over a couple of months. However, if you see a downturn that starts to grow instead of coming back after a few months, it might be time to consider dumping that fund and transferring your investment dollars to a different one.
If you are investing through a firm, ask ahead of time what fees they charge for trading, selling, and accepting retirement distributions. You don’t want your hard earned money being sucked up by huge fees and administrative expenses.
Find out how much and how often you can add to your investment fund. Then, make sure you add the maximum deposit, if possible, each year to ensure that your retirement funds continue to grow.
Go over the reports you receive no more than every other month or so. If you review them too often you may be tempted to move money prematurely. Once a year, check to see if you need to reduce the amount of money invested in stocks and increase the amount in bonds to “rebalance” your investment account.
Business ownership has many challenges on its own without the added stress investing could bring into the equation. But now that you have some ideas of how small business owners can get started investing, I hope it helps you to keep your business running smoothly long into the future.
Do you have other ideas how small business owners can get started investing?
Kayla is a personal finance blogger in her mid-20s who loves to write about money topics of all kinds.
James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.