Preparing for Your Future (And How Holding Investments Inside Your Company Can Help)May 13, 2022
No matter how well your company is doing right now, you always need to turn one eye toward the future.
You’re a business owner.
That means you’ve probably got a good grasp of your current financial situation. You understand the ins and outs of making money and, hopefully, you’re doing reasonably well for yourself.
However, the present is not the only consideration you need to have when running a business.
You also need to look to the future. Because if you’re not saving or investing some of your business's money, you may set yourself up for a rough time when you retire.
To make sure that doesn’t happen, we’ll share the simple technique you need to know so you can prepare for your future.
The Power of Incremental Investments
Incremental investment is a technique that we introduce to many of our clients.
And here’s how it works:
Every week, you withdraw a small incremental amount from your business account. In most cases, this starts at $100. However, you can start higher or lower, depending on how confident you are in your finances.
Now, that money exits your business account in the form of a pre-authorized credit that goes straight into an investment account. Pre-authorizing the withdrawal automates it, meaning you don’t have to worry about forgetting to do it each week.
Each deposit into your investment account allows you to take advantage of the compounding effect of the market.
What does that mean?
Let’s look at the reverse example.
You probably have a mortgage on your house. We’ll assume you took that mortgage out over 30 years and you pay $1,000 per month on that mortgage.
What happens if you accelerate that repayment by giving the bank $250 per week instead of $1,000 per month?
You pay your 30-year mortgage off in 27 or 28 years.
Instead of monthly, you make a few extra payments each year by paying weekly. Plus, the interest attached to your lower weekly payments is less than the interest attached to the larger monthly ones. So, you’re eliminating the compound effect of the interest allied to your mortgage.
The same applies to the incremental investment strategy. Only now, you’re making interest work in your favour.
Let’s say you put your first $100 into your investment account.
That $100 sits in the account and collects interest until the following week when you add another $100. You now have $200 of your money, plus the small amount of interest you’re initial $100 generated.
Next week, you add another $100. That makes $300, plus a little more interest on top.
Over time, the money in your account keeps building up. And with each week, you’re earning interest on the funds you add and interest on the interest you’ve already generated. Thus, you get a compounding effect where each weekly addition has a slightly more significant impact.
Eventually, you get to a point where the interest generated on your savings earns you almost as much as the money you put into the account.
That’s compound interest in a nutshell.
So, start by putting aside enough money to cover 90 days of expenses. That’s your emergency fund in case something goes completely wrong.
Then, start depositing $100 per week into an investment account. If you can put more into the account, do it. If you can’t afford $100, deposit what you can afford.
Slowly but surely, you’ll build a solid nest egg that you can rely on when it’s time to retire.
Holding Investments Inside Your Corporation
Depositing money into an investment account is a great way to build for your future.
But can you hold investments inside your company that serve the same purpose?
That’s because many professional corporations have to deal with regulations inside their articles of incorporation that prevent this practice.
If you work in a professional service with these regulations, you can’t hold investments inside your corporation.
But if those regulations don’t exist in your corporate structure, you’re free to invest inside your company. Furthermore, investing inside your company is far more tax-efficient than pulling the money out and investing individually.
Let’s say you make $100,000 of net income inside your corporation this year.
If you pull that money out as an individual, you’ll get hit with the higher marginal tax rate of 55%. That means you now only have $45,000 to invest with. And even if you put that money into a strong investment that offers a 10% return, you still land at less than $50,000 for the year.
Compare that to what happens if you invest the money inside your company.
First, this is net income, which means you’ve already paid all of the business taxes related to it. And because you haven’t withdrawn the money for personal use, you don’t have to pay income tax. That means you have the full $100,000 to invest with, rather than $45,000.
Now, you place that money into the same investment that generated 10% as before. Only this time, you end up with $110,000 at the end of the year, rather than just under $50,000.
As you can see, investing inside your corporation is a far more effective way of building wealth. It’s faster, more tax-efficient, and still keeps the money under your control because it’s your company.
Invest for Your Future
By combining these two techniques, you can invest in a future that brings greater value and wealth into your life.
Remember that incremental investment is a slow burner that compounds over time. By putting a little money away each month, you start a snowball rolling down a mountain. And over time, that snowball gets bigger and bigger, eventually turning into an avalanche of wealth thanks to the power of compound interest.
Assuming you don’t have incorporation articles that prevent you from doing it, investing inside your corporation is a tax-efficient way to build wealth. You don’t have to pay income tax because you’re not investing money as an individual. That means more money to invest, resulting in greater returns.
However, you need to know how to accumulate the cash you’ll place into these investments before you can use these techniques.
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