July 6, 2009, 5:00 am

Can We Still Make Money Out of Your Own Business?

by: The Financial Blogger    Category: Alternative Income,Investment, Market and Risk
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small-houseAbout 2 weeks ago, I asked if we could still make money out of the stock market. Then, I wrote a second post about making money with real estate properties. The key behind those two posts is to find a way to make enough money so we can retire early, happy and wealthy!

50 years ago, this wasn’t a dilemma: you simply had to work 60 hours a week for your whole life, stop working when you are too sick and take the money you had hidden under your bed to pay the bills. The more fortunate had a pension plan fully paid by the company. In any cases, you had about 5 years (10 maximum) in front of you before you pass away. Financing your retirement wasn’t a big issue.

However, our generation doesn’t necessarily want to retire early, but they want the financial independence of doing what they really want… especially at the age of retirement. According to me, retiring means quitting the 9 to 5, 5 days a week job. It doesn’t mean stop working at all (life would be quite boring!).

In order to reach financial independence, we have seen that we can invest in the stock market (and live with market fluctuations!) or we can buy rental properties (then again, lack of liquidity and non-payment are part of the risks). There is a third option: creating your own company.

Why creating a company is so great to make money?

There is only one word to answer this question: TAX! They key point of having a company is that it spends money before paying the government. As the opposite, as a salaried, we pay the government first, and then, we pay our expenses. So imagine if you could pay yourself first, and then pay the rest? This is what a company is about 😉

Several young professionals are wondering if they would be better of putting all their money and effort into their company in order to make it grow. Some people say that most companies don’t survive the first 5 years (actually 9 out of 10) and then, most of the survivors die in the following 5 years (another 9 out of 10). However, if you are part of that small amount of survivor… you will probably be making a lot more money than with any regular job.

I would say that the biggest risk is not really to succeed or not (you can lose your day job anytime due to economic crunches and you can have foundation problem or renters problems with a rental property). The biggest risk is to forget that you will stop working one day and you will need money to live on.

The thing is that most company owners inject all their cash flow into the company and don’t put money aside to assure their retirement. Companies are often illiquid and their main asset is their owner. Therefore, if you want to quit, it becomes harder to sell and get money out of your company (on top of the fact that you will be paying taxes on the money withdrawn!).

So it is really important to have a financial plan that will cover the cash flow at retirement. If you plan it at a young age (as if you plan a systematic investment in index funds or if you systematically pay down your debts on rental properties), you should be able to build a nice golden retirement!

What I noticed is that there is no unique way to make money for retirement. The best way will be the one you like the most. If you like real estate, you will probably be able to become richer with rental properties than with the stock market. On the other hand, if you have the opportunity to create a company (even if it’s as a sideline), you will benefit from the fastest growing cash flow in your life 😀

What are your thoughts about making money for retirement, what is your plan?

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There’s a huge difference between creating your own job and creating a business. If you create the former, you may not have enough to retire. If you create the latter, you can sell your business (mostly tax free) and retire on the proceeds (although entrepreneurs are like athletes; they don’t like to retire!).

The point you also allude to is that most people that run businesses they love, don’t feel like they are working.

As you pointed out, I am not sure that most people realize that the tax system is actually structured to help the self-employed from lower tax rates, better deductions, self-funded pension plans, favorable loan programs etc. If you have the acumen to do it, it is a life-style and business choice that has as much upside as downside.

you are bringing a good point. Several people become self employed but do not create a business. The main point of having a business is that it can generate money even when you are not there. Being self employed requires your time and work in order to make money. If you leave 3 weeks on vacation, nothing will happen!

Unfortunately, several individuals start with the idea of a business but end up being self employed because of lack of money to pay employees or lack of confidence in them 😉