Money Management

Invest in your business, but don’t make it your only investment. 

Building a successful business takes a lot of time, energy, and at a certain point, money. Although you can certainly start a business with little or no money, it’s far more likely to grow if you’re able to invest in it.

It makes perfect sense to invest in your business, but unfortunately, some entrepreneurs take this to an extreme. They don’t invest in the stock market because they believe they could make more by putting that money in their own businesses.

In fact, financial advisor (and entrepreneur himself) Ramit Sethi recently shared that over half of the successful entrepreneurs he knows don’t regularly invest in the stock market. He says that “for most, this is a grave mistake.” Sethi’s correct here. While it might seem logical to invest in your own ventures, you’re taking a big risk if you overdo it.

Why entrepreneurs should invest in the stock market

Stock market investing has proven to be one of safest and most effective ways to build long-term wealth. Although the market has its good years and its rough patches, when you look at it over long periods of time, it’s extremely resilient. The average stock market return has been about 10% per year over the last 50 years.

That makes it pretty clear why a regular person should invest in stocks. Your money will grow much more this way than it would in a bank account, because of higher returns and compound interest (earning interest on top of the interest you’ve already earned). Over time, that adds up and helps you build a much larger nest egg for retirement.

The key difference between the average investor and entrepreneurs is that entrepreneurs have their own businesses to invest in. Instead of putting $500 into the stock market, they could put $500 into a business expense, like inventory, and potentially make a much greater return.

However, that doesn’t mean you should ignore stock market investing as an entrepreneur. If you do, you’re putting all your eggs in one basket, which is a common investing mistake. Most reputable sources of investing advice recommend building a diversified portfolio. If your own company is your only investment, and it fails, you need to start over from zero.

As a business owner, you’ll be naturally biased about its odds of success. Hopefully, your business succeeds. But it’s important to take a realistic, big picture view. Fortunately, there’s hard data available on this. Here’s info on the portion of businesses that fail according to the Bureau of Labor Statistics:

20% of businesses fail during the first two years45% fail during the first six years65% fail during the first 10 years

Look at it like this — would you invest all your money in a new, unproven business? This is a very high-risk strategy, whether you’re investing in someone else’s business or your own.

How to balance entrepreneurship and investing

There’s nothing wrong with investing, and even investing heavily, in your business ventures. Most successful entrepreneurs start out bootstrapping and using their own money. Just don’t commit so much money to your business that you neglect other important parts of your financial health.

Put a portion of every paycheck in an investment portfolio so you’re building a nest egg for retirement. You can do this through a 401(k), if you have one available through an employer, or through any of the top online stock brokers. Most of those brokers give you the option of opening an individual brokerage account, an individual retirement account (IRA), or both.

Because you’re already investing money in your business, which is a high-risk venture, be more conservative with your other investments. A couple of good options are:

Target-date funds that are optimized for a specific retirement yearIndex funds that invest in a large number of stocks and charge low fees

The amount you invest is up to you. You could put 10% of your income towards your retirement, and 10% or 20% toward your business. Consistency is what’s important so that investing for retirement becomes a habit.

Entrepreneurship doesn’t need to be an all-or-nothing commitment. You can, and should, balance putting money into your business and investing money safely for retirement.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Lyle Daly has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.

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Give yourself the best chance of saving money on a home purchase. 

If there’s one thing I’ve learned in my time working as a personal finance writer and editor, it’s that many people’s eyes absolutely glaze over when you introduce the topic of credit scores into the conversation. This really isn’t so surprising, as in many cases, people would rather not think about that three-digit number any more than they have to.

But it is worth thinking about your credit score if you’re dreaming of becoming a homeowner. Why is that? Because having a good credit score can save you a ton of money on your mortgage loan. Let’s take a look at two credit score scenarios and see how much you could save on your home purchase by boosting your credit score.

An astonishing difference

A number you’ll hear often in connection to credit scores and mortgages is 620. That’s because 620 is the minimum score to qualify for a conventional mortgage loan. There are many types of mortgages, but a conventional loan is one not guaranteed by a government agency like the Federal Housing Administration.

Let’s say you have a 620 credit score, and you’re hoping to be approved for a 30-year fixed-rate mortgage loan of $300,000. For your mortgage payment (bear in mind that this is just principal and interest; homeowners insurance, mortgage insurance, taxes, and beyond are not included), how much are you looking at? Your mortgage interest rate is 8.019%, your monthly payment will be $2,205, and you’ll be paying $493,897 in interest over the life of the loan.

But what if you’ve been side-hustling your way to debt payoff and improved your credit score to 800? That same $300,000 mortgage loan over a period of 30 years will cost you $1,882 per month, and you’ll be paying $377,669 in interest over the life of the loan. You qualified for an interest rate of 6.43%. The mortgage rates in our scenarios are a far cry from the 3% rates you might’ve qualified for in early 2022 before rates started to climb, but you can still appreciate how much money you’ll save ($116,228 in interest) with a credit score of 800, versus 620.

It pays to boost your credit score

If you’re hoping to buy a home, you’re already going to be shelling out enough money, so it makes sense to try to save where you can. Take the following steps to improve your credit score before you start talking to lenders or looking at homes for sale:

Knowledge is power: Get a copy of your credit report (free every week through the end of 2023) and see if there’s any weirdness on it. If you see errors, like a delinquent account that isn’t yours, have it removed.The calendar is your friend: If you struggle with paying your creditors on time, now is a great time to get in the habit of it. After all, payment history reflects 35% of your FICO® Score, the scoring model used by many mortgage lenders.High-interest debt is worth getting rid of: If you’re carrying, say, credit card debt, work to pay it down. This will improve your debt-to-income ratio and also free up money you can put aside for your down payment.

It might not be exciting to talk about credit scores, but keeping yours top of mind if it’s time to buy a home is a smart move. Take the time to make your credit score the best it can be and enjoy paying a whole lot less for your new home.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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It pays generously without subjecting you to a lot of risk. 

At this point, many people are deep in the throes of filing their taxes. And if you’re about to submit your return, you may be excited about the refund that’s coming your way.

Now, a lot of people rely on tax refunds to do things like pay off their credit cards or cover upcoming expenses. But maybe you’re in a different situation, and you don’t need that money to dig out of debt or pay for upcoming bills.

If that’s the case, investing your money is a great way to grow it into a larger sum. And there’s one specific investment you may want to consider right now.

Take advantage of inflation

Inflation has been surging for well over a year now, and it’s definitely put a strain on a lot of consumers. That’s the bad news. The good news, though, is that during periods of rampant inflation, I bonds become more attractive.

I bonds are government bonds whose interest rate is pegged to inflation. During periods of high inflation, I bonds pay more. And right now, I bonds are paying 6.89% through April, which is a pretty nice rate of return for an investment that’s virtually risk-free, since it’s backed by the U.S. government.

How to use your tax refund to buy I bonds

You can purchase I bonds by creating a Treasury Direct account and linking it to a checking account. But if you’re getting a tax refund, you don’t even have to take that step. Instead, what you can do is fill out IRS Form 8888, which authorizes the IRS to use some or all of your refund to purchase paper I bonds.

Paper I bonds can be purchased in $50 increments, and you can purchase up to $5,000 using a tax refund. Once the IRS finishes processing your tax return, your I bonds will be sent to you. And you should generally expect to receive them within three weeks of being issued.

So, let’s say you’re getting a $3,000 refund this year, and you decide you want to invest half of it in I bonds. You’d simply indicate that on Form 8888, and then the IRS would deposit the remainder of your refund into your bank account (or send you a check if you don’t sign up for direct deposit).

A good investment right now

I bonds don’t always make sense to buy, because during periods of low inflation, the rate of return on I bonds is much lower. But right now, thanks to rampant inflation, I bonds are paying quite nicely. So you might manage to generate a return on those bonds that’s close to what you might get out of a stock portfolio, only without all the risk.

Now, one thing you should know is that when you buy I bonds, you’re obligated to hold them for at least a year. And there are penalties for cashing them out prior to having held them for five years.

If you’re going to use your tax refund to buy these bonds, make sure you’re willing to make that commitment. But otherwise, it pays to take advantage of inflation by snagging a high return on an investment that comes with minimal risk — especially if you don’t need your tax refund for bill-paying purposes.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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