As an entrepreneur, you are used to taking risks. You’ve rejected the steady paycheck of an employer to become the employer. You’ve turned personal finances into company finances. You’re even prepared to go down with the ship, although you would really like to make sure that doesn’t happen.
Not everything has to be a risk, though. Some investments offer more security than others.
With the right planning, you can secure earnings and sleep easy, knowing that a portion of your money is safe and growing. In order to offset the inherent risks of entrepreneurship, here are four of the best financial investments you can make for yourself, while you risk other assets in your business.
- Equity Investment with Friends, Family, or Regulation A+
An equity investment is a good way to include friends, family, and interested individuals without demanding too much of them. In fact, according to Fundable, friends and family make up the majority of investors, and 38% of startup founders raise money from their friends and family.
Last year, the SEC published groundbreaking new rules called “Regulation A+”, which allows startups to raise between $4M and $50M from main street investors. Sites like SeedInvest.com and ManhattanStreetCapital.com allow unaccredited investors (individuals with less than $1M net worth) to invest up to 10% of their self-reported net worth, not including their homes. “This is an unprecedented opportunity for mature startups and mid-stage companies, which we call scaleups,” said Rod Turner, CEO of Manhattan Street Capital. “Regulation A+ is still in its infancy and promises to be a major source of investment dollars in years to come.”
A big part of personal risk management is insurance, in all its forms. Whether protecting your home, health, assets, ability to work, or any other valuable part of your life. Speaking of your life, you may want to start there.
Life insurance does more than protect your loved ones; it can protect your business as well. Whole life policies, unlike term insurance, builds cash value over time. Upon your death, your beneficiaries can receive the death benefit as well as the money you’ve accumulated, if structured properly. Before your death, you can take out cash and/or loans using your policy’s cash value as collateral.
“Cash-based policies build value that is guaranteed, protected and liquid. They provide a high level of protection, and at the same time produce a decent rate of return,” explains Michael Isom, CEO of Vault AIS, a wealth-protection strategies company.
It’s also possible to take out life insurance policies on key employees or principals, which helps guard against the costs associated with losing them. In case of death, life insurance can provide a portion of the income that person would have generated for the business, and comfortably extend the window of time to fill the position with a qualified replacement.
However, whole life insurance isn’t something to blindly purchase. Make sure to speak with a wealth strategist and set the policy up correctly, as not all insurance is created equal. “You will want to coordinate this money decision with every other money decision that you are making,” says Isom. “This is a financial tool that should help maximize other parts of your financial plan.”
- Your Home
The phrase, “home is where you hang your hat,” may be out of date, but it’s catchier than “home is a structure that, when privately owned, appreciates in value and can be used as collateral in securing loans.” Home equity is a common source of funding for entrepreneurs, especially in the early stages of a new venture. The longer you build equity in your home and the higher its value rises (adding still more equity), the happier bankers and mortgage brokers will be to loan you money in the form of a line of credit. Interest on these loans has the added bonus of being tax deductible in some cases (talk to an advisor).
One caveat of home equity is that it relies heavily on conditions outside of your control. Interest rates need to be stable, and it helps if home values are increasing. If the economy takes a hit you might, too. In 2015, many homeowners interpreted the state of the economy favorably enough to drive up home equity credit lines by 20%. Andrew Van Buren, partner at The Norden Group advises, “You may want to hold onto your home equity until you really need it. It can help you in your financial goals, but the rewards have to outweigh the risks. Jumping the gun is a good way to get shot.”
- Invest in a Trusted Relationship
Whether you decide to make any or none of the previous investments, the best investment you can make is in a financial advisor. An experienced advisor is like a mountain guide: they know the terrain and the trails. When a bridge is broken or the way is blocked, they know alternate routes and put the decision in your hands. “The best thing about a financial advisor is that they free you to focus on what interests you the most: your business,” says Clint Brown, author of Financially Sound. “When you hire an advisor that you can trust, you can lean on that advisor to give you advice and guidance on which business loans would be best for you.” A thorough advisor should know all about your financial situation, and know when it is best to apply for and obtain a loan from a banking institution. That financial advisor can help you determine which loan would best fit your needs. Investing in a high-quality financial advisor can potentially guide you to greener (and less risky) pastures.
As entrepreneurs we want to eliminate risk whenever we can, and establish a strong foundation for ourselves. That is the foundation upon which we can execute our business vision.