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A Safety Net for Entrepreneurs

A Safety Net for Entrepreneurs

It goes without saying that one of the reasons entrepreneurs are successful at growing wealth is that they are risk takers. Some entrepreneurs argue that in fact there is little risk in what they do, because they fully analyse the financial implications of their wealth-building strategies before they part with their money. Even so, they are betting on their own ability to predict future outcomes accurately. It’s not hard to think of entrepreneurs who have made and lost several fortunes in their lifetime, or who have a list of failed projects alongside those that were successful.

Being on a high growth path to wealth creation can be addictive. When money comes easily, why not keep making more? Cash flow is the life blood of any business and strong cash flow creates the opportunity for expansion. In the extreme, entrepreneurs who rely on cash flow for growth in effect create their own Ponzi scheme. It works well as long as the cash keeps rolling in, but if for any reason the cash dries up, the business quickly collapses like a house of cards.

There is a simple solution for avoiding complete devastation. Every entrepreneur needs a financial safety net – a store of wealth that is ideally unencumbered, and kept separate from the business. Instead of using all the business cash flow to fund expansion, some is diverted into other investments that have a lower risk profile, such as property. This store of wealth can provide a minimum standard of living or a foundation on which to rebuild a business in the event of a failure. For this strategy to be successful, the safe assets need to be protected via legal structures from business creditors and any temptation or pressure to use them to rescue a failing business must be resisted.

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Get Rich Fast or Slow

get-rich-fast-or-slowGet Rich Fast or Slow

The rate at which wealth grows is determined by three things: the difference between your income and your outgoings (that is, how much you save), the nature of your assets and the nature of your liabilities.

 

Saving

Income is a flow of money which can be either spent or saved. Wealth is like a store of money where savings are accumulated. The more you save, the more your wealth should grow.

The nature of your assets

Assets are things of value that you own. Lifestyle assets are those which decrease in value over time, such as your house contents, your car and many other possessions which add to your lifestyle but not your wealth. Investment assets which produce the greatest wealth are those which grow in value and provide income such as bank deposits, shares, rental properties and businesses. By reducing your holdings of lifestyle assets and increasing your holdings of investment assets you should build wealth more quickly. Your family home falls into a third category called lifestyle property. It will add to your wealth less quickly than investment property as it does not produce income.

The nature of your liabilities

Your debts can be categorised along the same lines as your assets according to the purpose of the borrowing, that is, lifestyle debt (for living expenses and lifestyle assets), investment debt (for rental properties or businesses) and lifestyle property debt (the mortgage on your family home). Lifestyle debt is known as bad debt because it is money borrowed to buy things which go down in value or have no lasting value. Investment debt is good debt as long as the net return from the investments purchased is greater than the cost of borrowing.

Building wealth is about saving more, increasing investment assets, reducing lifestyle debt and borrowing to invest.

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A Business or a Job?

A business or a jobA Business or a Job?

Owning a business is often touted as a great way to increase wealth. Wealth coaches urge employees to give their jobs and start a business to get themselves on the path to riches. So, is owning a business the path to riches? It depends.

There are several ways to get into business and they each have potentially different outcomes. If you have a great idea and plenty of enthusiasm, you can start your own business. You don’t have the upfront cost of buying an established business, and if you get it right, you may be able sell it for a lot more than what it cost you to establish. However, start-ups are notoriously risky and most fail within the first five years through lack of money.

A safer option is to buy an established business with a proven track record. The trick here is to do your homework and make sure that the information presented by the seller is accurate, and there are no hidden problems with the business, such as falling sales or a change in technology that will make the products or services obsolete.

If you have lots of enthusiasm but need help with ideas or business skills, buying a franchise is another option, however this comes with the added cost of franchise fees.

With any business proposition, ask yourself what you want from it. If you are looking at as a way to increase your income or build wealth, the business has to have growth potential and you have to be prepared to put in the effort to make it grow. With all the risks and hard work involved, you need to be sure you will be better off financially in the long term. Buying a business needs to be more than just buying a job for yourself.

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Your Financial Safety Net

Safety NetYour Financial Safety Net

Life is not meant to be boring. It is for living to the full, making the most of opportunities and taking a few risks along the way. A financial safety net to protect you when things go wrong is a key part of creating and preserving wealth.

The degree of risk you can take changes with age and accordingly the size of the safety net you need increases. Young people have little accumulated and not much to lose, but they also have the potential to make big gains through taking risk. Those near the end of their working life have a lot to lose and little to gain from risky ventures and so their safety net needs to be bigger.

There are a number of ways you can create a safety net. Start by building up a slush fund, preferably tucked away in an account that is not visible on your internet banking so you are not tempted to spend it.Insurance also forms part of your safety net. In addition to insuring your property and your life, consider whether you should insure your income. Your future earnings are possibly your biggest financial asset and need protection. Don’t put all your available funds into risky business ventures; have some of your wealth in safe investments as a fall-back. If you are borrowing money or taking any kind of financial risk, make sure your wealth is protected with all the necessary legal structures and documentation relevant to your situation, such as a limited liability company, a trust or a contracting out agreement.

Along with risk comes the possibility of increased wealth and enjoyment of life. A financial safety net allows you to make the most of possibilities without the fear of a hard landing if things don’t go according to plan.

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Magnify Your Wealth

Magnify Your WealthMagnify Your Wealth

One of the most powerful and fastest ways to build wealth is to use the principle of leverage. Leverage simply means to borrow money to invest in the expectation that the net returns from the investment will be greater than the interest payable on the loan. Leverage can be thought of as using other people’s money as well as you own to increase your investing power.

A common way of using leverage is to purchase an investment property. Here is how it works. You have $80,000 to invest. You use the $80,000 as a deposit on a house worth $400,000 and borrow the remaining $320,000 at an interest rate of, say 4%. Let’s say your investment property produces a gross rental income of $20,000 in the first year (5% of the value of the property). Interest is $12,800 and you have other expenses such as rates and insurance which use up the remainder of your rental income. However, the property grows in value by 10% ($40,000). You have invested $80,000 for a return of $40,000; that’s a 50% return on the money invested!

The reason this works is that the return you achieve on your investment asset is higher than the cost of borrowing. However, leverage should be used with caution. While it is capable of magnifying your profits, it can also magnify your losses. It is very important to establish from the outset that your intended investment will make a profit. Going back to our property example, if the rental income is not sufficient to cover the interest and other expenses and property falls in value, you will make a huge loss.

Leveraging offers potentially high returns but with high risk. Whether it is an appropriate strategy for you depends on your risk tolerance and your overall financial situation.

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The Win-Win Strategy for Creating Wealth

WinThe Win-Win Strategy for Creating Wealth

Jay Abraham, a well known American business consultant, once said “The key of life is value. Value is not what you get, it’s what you give. It’s figuring out what’s important to other people not just you. The real fast track for getting everything and more than everything you want is putting others ahead of what you want and focussing on their needs, their wants, their desires and fulfilling them. In order to be successful, you have to first want to make others successful.”

People who aim to selfishly grow their personal wealth with little consideration for others don’t understand the power of communities and working with others. At the simplest level, to sell products, you need to have customers. Customers will only buy from you if your products meet their needs. The best product marketers know their customers intimately and develop products based on what customers want. It really is impossible to create wealth without other people.

The most successful people follow a win-win strategy. When communities are successful, the individuals within that community succeed. In weak communities, it is difficult for individuals to succeed. By helping the community in which you live, you improve your own chances of success. The richness of a community lies not just in average incomes but in the support that members of the community provide each other.

Highly successful business people are leaders who empower and inspire others within their organisations. As Richard Branson says “train people well enough so they can leave, treat them well enough so they don’t want to”. Without good people, an organisation is nothing.

In order to create wealth, you need other people; professional advisers, customers, employees, tenants, business partners… the list goes on. By understanding the needs of these people and supporting them your wealth will grow faster.

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The Three Most Important Financial Concepts

??????????????????????The Three Most Important Financial Concepts

According to wealth guru Robert Kyosaki, there are three important financial concepts which, if you understand them, will greatly increase your prospects for building wealth. These three concepts are assets, liabilities and cashflow. They are inter-related and the trick is to get them working together to maximise your wealth.

Assets are things that have a value, can be readily sold, and either increase in value over time or produce an income. Examples of assets are property, a business or ‘paper’ assets such as shares and bonds. The investment return you receive from an asset comprises the change in value plus the income. For example, if a property worth $500,000 increases in value by 5% in a year as well as producing a net rental income of $20,000 (4% of the value), the total return from the asset is 9%. Compare this to a car which drops in value every year and costs money to run.

Liabilities are things which drain your financial resources rather than adding to your wealth. Mortgages and credit card debts are two examples. Keeping your liabilities to a minimum helps stop the drain on your finances. The exception, of course, is debt which is incurred in order to buy assets that produce a good return. Borrowing will add to your wealth if the net cost of debt (that is, the interest) is less than the net return on the asset.

Cashflow is the amount of money coming in and going out. The net cashflow is the difference between money coming in and money going out. For your wealth to increase, your net cashflow has to be a positive number. If it is negative, your wealth is decreasing.

Smart investors are those who know how to use cashflow to buy assets and to keep liabilities low.

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Become Richer Through Contentment

Smileyface2Become Richer Through Contentment

The famous 18th century philosopher Jean-Jacques Rousseau once said “There are two ways to make a man richer: Give him money or curb his desires”. The more money we want, the poorer we feel. The perception of wealth is relative and whether we feel rich or poor is determined not by how much money we have but by how contented we are with how much money we have. It follows that two people with exactly the same amount of money will have different perceptions of how wealthy they are depending on how much wealth they desire to have. Feeling wealthy comes from feeling contented and this in turn paves the way for greater happiness. A continual desire for more, on the other hand, leads to continual dissatisfaction and a feeling of lack or poverty.

Rousseau is not alone in his thinking. Similar beliefs can be found in Buddhist philosophy which has found popularity through concepts such as mindfulness – the practice of focussing one’s attention on the thoughts, sensations and emotions occurring in the present moment rather than worrying about the past or the future. Eckhart Tolle, in his book The Power of Now (New World Library, 1999). says ‘tomorrow’s bills are not the problem’ and can be a ‘core delusion’ that changes a ‘mere situation, event or emotion’ into a reason for suffering and unhappiness.

The beginning of the year is a good time to reflect on the present. There is little point in worrying about the financial impact of last year’s events. Start the year with gratitude for all the good things you have in life, such as friends and family and good health. Deal with any financial issues in the present moment, without worrying about the future. Be content with what you have and you will feel rich.

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Habits of Financially Successful People

SuccessRockHabits of Financially Successful People

Achieving financial success in life has little to do with academic qualifications and everything to do with habits and mindset. Observing, reading about and mixing with financially successful people are good ways to understand what makes them successful. Financially successful people are generally not motivated by the trappings that money can buy. Their focus is on what they can achieve in the long term rather than what they can enjoy in the present. They have clear financial goals, they think big and they set challenges for themselves. They are not particularly interested in what people think of them or their lifestyle. They strive to make more and spend less.

Financially successful people are optimistic. They look for opportunities and they are not afraid to take them. They see the benefit in taking calculated risks for a better return. Obstacles do not deter them. Whereas others are driven by fear and greed, financially successful people keep their cool, do their sums and take an objective view. They work hard and are always looking at ways to get ahead. They take an active approach to building wealth rather passively waiting for a lottery win.

It is sometimes said that you need money to make money. Financially successful people use the principle that you need other people’s money to make money. They understand the principle of leverage. They take on debt, but the purpose of their borrowing is not to spend; it is to invest. They have a good awareness of their own strengths and weaknesses and are not afraid to call upon experts to advise them. Education is not essential – just the ability to know who to ask and how to acquire specific information.

That said, knowing the habits of financially successful people is one thing, putting them into practice is another!

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Balancing your Assets

BalanceBalancing your Assets

The measure of your wealth is the difference between the value of your assets and the amount of money you owe to others. Wealth is generally accumulated over your working life, reaching a peak around the time you retire, and then diminishing through retirement. Of course, for some people, it is not quite as simple as this and life events such as divorce, redundancy, illness, or windfalls such as lottery wins or inheritances can create sudden changes in wealth in a positive or negative way.

During your working life, the focus is on building wealth and it helps to have a clear target of where you want to be by retirement age. The target you set will help determine the strategy for achieving it. It is important not to leave it too late to set your target. Building wealth takes time, and the danger is that if you wait until near the end of your working life to decide what your target is, you may not have enough time to get there.

Your target level of wealth will have three broad categories: your house, the possessions you own in order to enjoy life (such as your car and the contents of your house) and your investments. These three categories need to be in balance. Reaching retirement with all your wealth in your house and possessions and with few investments implies a lifestyle where you will be living in physical comfort but too poor to go anywhere! The house you live in is unlikely to produce as great a return on your money as other investments. This means that during your working life, as a general rule, the less wealth you have in your house and possessions and the more wealth you have in investments, the faster your wealth will grow.

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