If you are like most small business owners you don’t pay enough attention to saving for the long-term. After all, when you can invest money in your own business and get higher return than saving at a bank why wouldn’t you reinvest in your business instead of saving it. Many business owners do not even keep their personal and business finances separate. Their accounts and expenses are intertwined moving money from personal to business and vice versa all the time.
This could be a big mistake. As much as you would like to invest your money back in the business this can create number of issues potentially not only impacting you, but your family too. First of all, if something goes wrong with the business you could lose it all with no rainy day fund to tap into. The tax authorities will also come down hard in audits if you cannot show how your personal and business finances are kept separate.
In my view, it is advisable, actually imperative, for you to save money and keep it in a separate account that is not affected by ebb and flow of business and can be tapped into during personal emergencies. Experts advise keeping at least 6-12 months of expenses in the saving account to be able to survive without any other income.
A good saving strategy needs to have three different types of funds in the distinct accounts – (1) Emergency fund (2) Long-term saving fund and (3) Retirement saving fund. Each of these funds serves different purpose. As I already mentioned the emergency fund is to be used for true personal emergency. Long-term saving is for your savings plan for the future and retirement fund lets you save money tax free and is to be used after retirement.
Each type of fund should be invested and managed differently. The key word to keep in mind is diversification. You don’t want to put all your eggs in one basket. Your saving funds need to be invested in combination of checking, saving, stocks, bonds and other types of investments. Let’s look at each fund type and understand what type of investments are ideally suited for them.
- Emergency Fund – This fund should be invested in liquid assets – all of it. You cannot afford not to be able to withdraw money when you need it on a moment’s notice. The ideal vehicle for these funds is checking and saving accounts with your local bank.
- Long-term Saving Fund – You can put money from this fund into longer term investments such as Fixed Deposit, stocks, mutual funds and fixed rate bonds. You need to ensure that the money in this fund is diversified properly and no one category of investment takes over a large portion of the fund. Many of the banks offer services to manage these types of savings.
- Retirement Fund –Everyone needs to have retirement plan that you do not want to touch before retirement and that will grow steadily over years. You also get extra benefit of income tax breaks with the retirement investing. In my opinion, the retirement plan is best left with financial advisors on an “auto-pilot”. That means investing set amount on a regular, periodic basis and automatically investing them in the appropriate mix of aggressive and safe mutual funds that include stocks as well as bonds. You do not want to take too much risk with the retirement money. Again, many of the banks offer services to manage your retirement portfolio.
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