Business Owner’s Guide to Financial Freedom
4 months ago JCprojectfreedom 0
An entrepreneur is someone with a burning desire to work for yourself and create something. There is difference between freedom and flexibility. Entrepreneur has flexibility, it can be the greatest strength, agility and ability to make quick decisions, and cultivate better financial habits.
Don’t depend 100 percent on your business for your retirement income. Remember the significance of cash flow. Know the value of your business. As you embrace this entrepreneurial mindset, you will find financial freedom, independence and flexibility. Independence to work when you want, flexibility to choose what you love to do, and have multiple buckets to help you save for retirement will let you choose when to retire.
Understanding True Value of Your Business
Understand the value of the business to a third party so that you can plan to retire on your business, or at the very least have your business help you reach some degree of financial freedom. I will like to present to you an interesting concept: Your business is probably not worth as much as you think it is. By understanding the market or what a third party will pay for your business, you can hopefully make modifications and changes in your business NOW so that is will be worth more in the future.
Passion, dedication and sacrifice create an emotional attachment to your business, and this will usually result in a perceived or unrealistic value.
The second reason why you think your business is worth more money is because you know your business has great potential! We need to implement better strategic planning for the future sale of our business by realizing more that potential. It is difficult to focus on the potential when we are knee-deep working “in” the business.
Think about the organization of the business – not just how it is structured but how it is organized. Could it run without you at the helm and make a profit? Why would I buy the business if it is not organized and cannot succeed without you? The business has to have systems or processes!
You owe more to your business, and to yourself, than having the pressure of paying all the bills and providing a retirement without diversifying. Do your business and yourself a favor by creating some cash flow somewhere else so your business does not have the main channel for financial freedom.
What Wall Street is not telling you
Most mutual funds or unit trusts charge a lot of fees and delivery very little value when compared to ETFs where fees are very small. There is no free lunches. Not all mutual funds or unit trusts can exceed the market returns of an index fund.
3 Strategies your advisor is not telling you
- Invest in your own business more aggressively – we believe it will become the vehicle that drives you to your financial freedom. Why not maximize its value cautiously and carefully?
- Buying and managing rental real estate – even passively
- Self direct your retirement accounts and investing in what you know best
4 Sequential Steps
- Optimize what you have – maximize your business’ profitability, continuing your education, cutting costs and saving taxes
- Eliminate all reductive debt – reductive debt is generally debt used to acquire “stuff”, things that are consumed, depreciate in value and does not provide income. Eliminate all reductive debt, build your credit and utilize productive debt.
- Establish Significant Liquid Cash Reserves – you need liquid cash when things go wrong and need cash to weather the storm and access to cash to take advantage of opportunities when they present themselves.
- Start investing and building different buckets of wealth
4 Essential Elements
- Independence Planning – as one’s income grows, the goals evolve into saving and investing enough money to finance a lifestyle today and ultimately accumulate enough assets to finance a lifestyle that can be sustained in the future. When your assets are sufficient to provide you with an income so that work is no longer a requirement. Work is an option. Income planning is the process of taking you from where you are today to the financial freedom you want tomorrow.
- Asset Protection – the goal is simply to create barriers and boundaries that prevent and/or deter others from taking what you have earned.
- Estate Planning – Life and legacy. Think of it as asset protection once you are no longer here to physically protect your assets. The goal of estate planning is to ensure that what you have accomplished in your life will be passed on to your future legacy in a manner you choose.
- Tax Planning – Taxes are life’s single biggest expense. It is about making tax efficient financial decisions.
A Lifetime Paradigm
Today, almost everything is different. Most retirees do not have pension to provide a guaranteed income. Social Security is under tremendous financial stress. Medical care system is also under financial stress. Volatility in the stock, bond, real estate, huge mortgages, credit card debt and low interest serve as serious problems for today’s retirees. Today’s retirees need a new paradigm, a new perspective and a new point of view to address the issues they face. Replace the word “retirement” with concept of financial freedom. We want to focus on financial independence and developing and implementing a plan to achieve it. While there are many ways to go about this, I believe “secret is the sequence”. Doing them in the right sequence is more important as this increases the likelihood of achieving the desired outcome which is your financial freedom and security.
Creating Your Strategic Plan
A strategic plan can help you get from where you are to where you want to be. You will put your best ideas in it and then fine tune it on a regular basis to coincide with carefully, well thought out plans. It takes your business to the next level when you are trying to decide where it is most effective to spend your time.
- Put your vision in writing – a strategic plan works in reverse. For example, let’s determine what that realistic picture for your business three years from now looks like. Now, where do you have to be at least 1.5 years from now, and even one year or six months from now?
- Creating the necessary sections for your strategic plan – personal training and education, organizational issue, legal and tax planning, product or service development, systemization, marketing tasks, etc.
- Create a timeline for all of the action items to occur
- Share it with your board
- Revisit your strategic plan regularly
- Manage by statistics – Being a business owner means constant change
Building a Wealth Management Team
This team will help you to succeed and optimize and grow and build that financial freedom you are seeking. They all need to give you honest, unbiased advice that can help you make proactive, decisive decisions. In the inner circle, there are the advisors that you pay for technical advice and direction on major decisions that truly require skilled expertise. The board of advisors is your team that you will meet with at least annually and hopefully twice a year to repeat on your progress and get big picture advice and direction. The specialists are who you call in and meet with as necessary to accomplish specific tasks.
Dealing with Debt as an Entrepreneur
Debt can be an amazingly useful tool when we grasp the concept of proper leverage. There are good debt and bad debt. We can accomplish amazing things with the bank’s money and leverage. Good debt is working for you! Leverage is not a bad thing if it creates wealth for you without too much risk. Bad debt is debt that you cannot leverage when growing your business, this is referred as reductive debt and is simply used to buy stuff. Consider it the same thing as personal consumer debt.
Why Entrepreneurs Get into Debt
- Soothe Cash flow issue
- Putting too much pressure on business – many times an entrepreneur will start trying to live on the income from their business before their business is able to sustain them. They quit their day jobs and work hard to build the business but don’t realize that they are not ready to pay the monthly salary that the entrepreneur needs to live on. The business needs reinvestment and time to mature. It needs reserve and time to create consistent cash flow
- Being overconfident – sometimes a slower more pragmatic approach to growth and a conservative level of productive debt could have kept them out of harm’s way.
Getting Out of Bad Debt
It is absolutely critical to your long-term success and plan for financial freedom to eliminate all bad debt out of your life as quickly as possible.
- Create a simple plan
- Stick with it
- Celebrate your success
First determine one’s monthly income that can be consistently committed to eliminate reductive debt. Use excess money to eliminate the smallest debt first. This will allow the payment to roll up to the next payment and so on. As you save money and eliminate debt, the lifting psychological weight off your shoulders will feel amazing!
With your debts gone and habit you developed of making these payments, you can now pay that once giant snowball amount into your retirement savings.
Cash Reserves means CASH Reserves
The idea of cash reserves is to have actual available cash. Having cash in a very safe place that you can go to when needed can buy a lot of peace of mind. Many people rely on credit when times are good, only to find it unavailable when things turn bad. The amount of credit can be reduced or frozen by the lender at their discretion and often worst possible time.
Significant reserves mean that you have a substantial amount of money in reserve, not just a few dollars to get you by. Remember cash reserves are not only for emergencies, they are equally important for your potential opportunity. That’s why some people call their cash reserve an emergency fund, while others call it an opportunity fund.
Three Bucket Cash Reserve System
- One Month’s Personal Living Expenses
- Two Month’s Living Expenses -> Now you have 3 months of living expenses in reserve
- Six to Nine months of Living Expenses -> May vary widely for family to family
Investing Your Profits and Building Buckets
Stop having tunnel vision in regards to wealth building and rely wholly on your business only. 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. Diversify all of your assets and possible streams of income.
- Buying a home
- Social Security – CPF strategy
- Using your CPF to invest
- Review insurance strategies
- Investing stock market
- Purchase rental property