Your Best Investments

July 2, 2017




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Why Small Amounts of Money Are Your Best Investments

 

How much money will your business venture require?

Here are the facts. The U.S. Small Business Administration reports that 66% of businesses with employees remain open at least two years after they start. Only 49.6% are open for four years, and a mere 39.5% are open after six years. That means that over 60% of all businesses with employees fail by the six-year mark!

But the SBA’s statistics are artificially optimistic… The caveat? “Businesses with employees.” They aren’t even counting businesses that start without employees!

A number of web sites and publications indicate that total business failure rates are steeper than the SBA reports in their limited studies. For instance, David A. Bolick, in his 2002 article “Why So Many Businesses Fail,” says,

“Within the last month alone, I have read that small businesses fail at a rate of anywhere between 65% and 80% in their first five years of operation! I personally have knocked around the retail business for more than 30 years. My educated guess would be that retail business failures fall into the upper end of the industry estimates (the eighty percentile), and service oriented businesses into the lower sixty-five percentile. I’m sure industry studies vary, but these numbers are troubling to me and should be to you too.”

I agree with David–these numbers are troubling!

Please know I’m not trying to discourage you from starting a business. Consider this: Most millionaires became millionaires by starting a business.

Thomas J. Stanley, Ph.D. reports in his book The Millionaire Mind that over half of the millionaires he interviewed (a total of 733) created their wealth from owning a business or self-employment. He writes, “Business owners overall are the richest of the group [of millionaires].” (pg. 9)

For the reasons above I strongly encourage anyone interested in business to start one. But, if you have a strong desire to start a business, proceed with caution. You can’t change the failure-rate statistics …

I realize your first business might defy all the odds and generate hundreds of thousands of dollars in profit right from the start. Then again, you might not generate that kind of profit until your second or third or fourth or even your fifth business venture.

Because the odds are stacked so much against your success, I strongly recommend that you limit how much you invest in any business idea. Let me illustrate why…

If you invest $2000 in a business and the business fails, that’s not so bad. You’ll probably feel discouraged, but you’ll pick yourself back up again, survey the damage, and say to yourself, “Well, that’s not so bad.” Then it will only be a matter of time before you save another $2000 to start another business.

But imagine investing $10,000 or $20,000 and losing it all in a failed business. That hurts. When you lose that kind of money, you’ll be far more discouraged than if you only lost $2000. And chances are you might never pick yourself back up again. You might decide that business isn’t for you, that you’re a total failure, and that you lack the business acumen necessary to make your business ideas succeed.

Now imagine that you took out a $28,000 loan to fund a business that failed. That’s what I did. I funded nearly 100% of my short-lived vending business through a second mortgage. When the business failed, the mortgage payments didn’t stop. I still had to pay $296 a month to fund my business… a business that no longer existed. I was barely able to meet my obligation without the profits I had been making from my vending machines.

Would you want to borrow large sums of money to start a business that you knew would fail within the first year? I didn’t think so. Take my advice: Invest only small sums of cash that you can afford to lose and you’ll have a much higher chance of success in the long run.

Need further convincing? Ric Edelman surveyed 5000 high net worth investors to write his book, Ordinary People, Extraordinary Wealth. Of this group he reports that “most of their wealth came from investments that were purchased for less than $1000.” (pg. 87)

Here are some related questions you should ask yourself when you consider the amount of money you invest in your business:

If you were to go out of business during the first year, how much money would you be liable for?

If you plan to take out a loan to fund your business, will you still be able to meet that obligation without the profits from the business?

Or, put a third way, what’s the worst that could happen if your business failed? Would you have to foreclose on your house? Or would you have to file bankruptcy?

These questions deserve careful consideration. Don’t do anything that will ruin your future or discourage you so much that you’ll never take a risk again.

Here’s a good rule of thumb: If your business idea requires more than $5000, then you’re probably risking too much. Rather, make small, reasonable investments and eventually one of those business ideas you have will pay off–big time.

Next up: What My Vending Business Taught Me About the Dangers of Investing Money in Physical Equipment




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