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How Business Owners Should Think About Diversifying Their Investments

Daniel J. Graff, CFP®, CEPA

Director of Financial Education

Last Updated
December 21, 2021

Finding the Balance Between Protecting Yourself and Investing in Your Business

Successful business owners typically have one thing in common – they significantly reinvest in their businesses. Many of my business owner clients don’t even want to discuss putting aside assets for their own personal savings. “After all,” they reason, “my business is my biggest and most valuable investment. Why would I invest in some generic investment product when I have the potential to make real money right here, while running a business I’m passionate about?”

And, while I understand the argument (trust me, I do!), I always remind my clients that the answer, like the answer to so many other questions in life, is about finding balance. Yes, your business is likely your largest investment and has the potential to pay off exponentially down the road, but there are two important considerations that shouldn’t be overlooked – liquidity and diversity.

The Importance of Liquidity

The sad truth is, if you overlook the importance of having liquid assets on hand, you may risk losing all you have worked so hard to build. It is important to diversify a certain portion of your assets away from the business in order to protect yourself and your company.

We don’t have to look too far into the past to find a very real example of what’s at stake. The 2020 COVID-19 shutdown highlighted a great divide between two types of small businesses owners – those who had liquid assets on hand and those who did not. Owners who had diversified away from their business were better able to cover employee payroll and monthly expenses without access to their normal income stream. They may also have been in a position to take advantage of opportunities that arose because they weren’t as worried about how to keep the lights on.

On the other hand, business owners who had everything wrapped up in their companies likely spent a lot of time and effort figuring out how to pay their employees and keep the business afloat. If you’re worried about your cash flow, you’re not in a position to take advantage of unexpected opportunities, which can be detrimental to the long-term success of your business.

Put simply, diversifying away from your business allows you to build liquidity and put time on your side when unexpected situations arise.

Diversifying to Protect Yourself

What’s one way to protect your personal financial future while running a business? Protecting yourself is about diversification of investments. By making sure you don’t have all your eggs in one basket, you are decreasing the risk that a company challenge or problem will result in a lack of personal flexibility. The following tips can help you create that diversity and flexibility.

  • Create an employer-sponsored retirement plan – Saving to a retirement plan is an important first step in saving for your own future, and it’s important to help your employees do the same. Plus, contributions to the plan can offset your tax liabilities. Various plan options include SEP IRAs, SIMPLE IRAs, SIMPLE 401(k)s and 401(k) profit-sharing plans.
  • Establish a personal investment account – It’s wise to set aside additional assets in a brokerage account to build up a source of savings for future needs. Consider contributing a set amount on a monthly basis. Your wealth manager can help you determine a diversified asset mix that complements your business interests and makes sense given your financial goals, time horizon and level of comfort with risk.

Diversifying to Protect Your Business

Taking a diversified approach to managing your business not only helps protect your company should the unexpected occur, it can also help you take advantage of opportunities as they arise. Protecting your business is more about liquidity and making sure you have cash and flexibility at the proper time.

  • Create a business emergency fund – If you’ve ever worked with a financial advisor, you’re likely aware of the importance of having a personal emergency fund in place to cover three-to-six months of expenses should the unexpected occur. But, have you considered establishing a similar fund for your business? Take some time to document all your required monthly expenses – rent, payroll, debt payments, utilities, etc., and begin building a savings reserve to cover these costs for at least six months. This can help ease your financial worries should an unexpected event interrupt your profits for a period of time.
  • Set aside taxes – If you’re like many business owners, your cash flow can vary greatly from one month to the next. While your CPA likely does their best to estimate the amount of taxes you will owe, it’s always wise to set aside a cushion. Once you’ve built up your business emergency fund, consider setting aside six months of estimated taxes in case you end up owing more than you expected.
  • Create an opportunity fund – The next step is to set aside funds in a diversified investment or brokerage account in order to save for future opportunities. You never know when an opportunity might present itself, but you’ll want to be ready when it does. Having designated “opportunity assets” will allow you to move quickly should the need arise.

At Creative Planning, we understand that business owners face unique challenges when it comes to planning for their financial futures. We’re here to help you find the right balance between saving for your future and reinvesting in your business. If you’d like help establishing a diversification plan, or for any other financial matter, please contact us.

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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