Up Your Business is an exclusive GEARS Magazine feature in which I share stories, insights, and reflections about business and life. How did I become a millionaire? Well, on my 30th birthday, my dad gave me a million dollars and said, “Don’t blow it?”
Of course, I’m kidding, and most of us don’t get a million dollars handed to us – we’ve got to earn it. But, what does it take to accumulate $1,000,000, and once you have it, how do you keep it?
Now that our lives and the economy seem to be returning to normal, or at least to a new normal, it’s probably a good time to start thinking about planning your financial future. After all, financial experts are indicating that we’re on the verge of a big comeback – even a boom.
If you’re like me when I was running my transmission business, I didn’t take the time to evaluate the performance of my investments or, for that matter, my investment advisor. I felt so overwhelmed with the rigors of the business that I just glanced at my monthly investment statements. I’d look them over in more detail when I had more time. In other words, I was so busy with the day-to-day aspects of my business that I neglected my long-term financial future – an expensive mistake.
Now that I’ve retired and have more time to evaluate my portfolio’s performance, I’ve come to realize some principles that I wish somebody had told me years ago – when I had more time ahead of me than behind me.
I’m writing this article because I want to save you from learning these principles from the cruelest teacher of all – Experience is her name. Why do I say she’s a cruel teacher? It’s because she gives you the test first, and then you get the lesson.
Here are some financial principles to consider. I hope you find them helpful in making a better financial future for yourself, your family, and your company’s employees.
THE MIRACLE OF COMPOUND INTEREST
This principle demonstrates that over time your money grows faster and faster as you earn interest on top of interest. When it comes to investing, time is your biggest ally. The younger you are when you start, the smaller the amount you’ll need to regularly invest to accumulate a large estate by your predetermined target date. On the other hand, the older you are when you start, you’ll have to invest larger installments to achieve the same goal by your target date.
Also, when you start later, it’s more challenging to overcome market downturns or tactical mistakes. Worst of all, there’s a point at which you simply can’t afford to make a financial mistake because you don’t have time to recover.
HOW TO BECOME A MILLIONAIRE
Here are four examples of what you’d need to invest every month in amassing $1,000,000 by age 65 – depending on your starting age. These examples assume starting from zero dollars and an annual investment return of 10%. The difference is astounding due to the miracle of compound interest.
- At age 25, to become a millionaire, you only need to invest $190 per month. Your total investment is only $91,200 over the 40 years!
- If you delay just five years to age 30, $190 per month will grow to only a little over $650,000. You’d need to invest $300 per month to reach $1,000,000. Your total investment is $126,000 over the 35 years.
- If you wait ten more years until age 40, the same $190 will only accumulate to $236,200, and $300 per month would only accrue to a little over $375,000. To amass $1,000,000, you’d need to invest $870 per month. Your total investment is $261,000 over the 25 years.
- By waiting until age 50 to get started, $190 per month only gets you about $76,000 and $300 per month will only grow to a little over $120,000. Even $870 per month only gets you to $350,000. It will require a $2,700 monthly investment to reach $1,000,000! Your total investment is a whopping $486,000 over the remaining 15 years!
But even if you’ve waited to get started, don’t throw in the towel yet. As you’ll see below, choosing the right investment advisor can help you still get there.
FIRST A QUICK RECRUITING TIP
What if you advertised, “Come to work for us, and we’ll help you become a millionaire!” As you see above, it wouldn’t be much of a stretch to put a plan in place for your younger employees. Some investment advisors can help you set up something called a Section 125 or Cafeteria Plan that saves you and your employees on payroll taxes. 401Ks, Roth and traditional IRAs, and HSAs also benefit employees as well as business owners.
CHOOSING THE RIGHT ADVISOR
While at today’s low interest rates, 10% is a significant return on investment, in the hands of a knowledgeable financial advisor, over the long haul, this should be within reach. The next hurdle is how to choose a financial advisor.
When time was my ally, if I’d been less neglectful and avoided the bad advice that I received from my so-called investment professionals, my portfolio would have been much larger than it is today. There are significant differences between types of financial professionals in terms of how they function and what influences them to do what they do. However, each type of advisor serves a purpose in helping you through the progressive stages of growing your estate.
I’ve used four different types of investment advisors. Here’s a nutshell description of each type. There are great advisors within each category, but it’s essential to understand the differences before you choose your advisor. And as your estate grows, you should progress from one to the next.
- Financial Planners are usually paid commissions for selling products to you like life insurance, annuities, and mutual funds. They’re typically life insurance agents with a securities license, and they usually recommend products like variable annuities and index annuities along with life insurance. This is where most people start because it’s safe, simple, and while your portfolio is under $50,000, it’s less costly than other fee-based choices. Life insurance protects your family if you die too soon, and the investments protect you if you live too long.
- Stockbrokers generally sell the above products, but they also sell individual stocks. On the downside, they’re often directed and incentivized with bonuses to push their firm’s hottest new offerings. Because they don’t charge fees for their services, they receive commissions every time you buy or sell stocks. Several online firms charge low or no commissions, but you’re pretty much on your own. Most beginning investors engage a stockbroker when they feel they have a little extra money to risk. This is perhaps the riskiest type of investing, but it potentially provides higher returns.
- Financial Advisors work with larger investment firms and banks, and they are a blend of the first two types. They often have more discretion and flexibility with their clients. However, they’re still paid on commission, and they may also charge additional fees for managing your portfolio. Some financial advisors claim to have a fiduciary relationship with you, but you should ask if that’s binding with regards to 100% of their services. Many investors never advance beyond this type of financial advisor because they feel safe with a large institution. However, the fees and commissions, many of which are hidden, are a performance burden – especially once you have a significant portfolio.
- Registered Investment Advisors (RIA) are a growing class of investment professionals. Because RIAs generally require portfolios of $100,000 or more, most of their clients have already used one or more of the above types of advisors to build a substantial portfolio before hiring them to manage their investments.
To keep their fees low, RIAs often work independently with a small staff. Many have worked in one or more of the above categories but left to start their own firms. Usually, an RIA will involve CPAs and Tax Attorneys when making recommendations to their clients.
RIAs are legally bound to act as your fiduciary, putting your interest first – they’re your Private Fiduciary Portfolio Manager. Your funds are still under your control and held in trust by major financial companies. RIAs don’t sell things to you; they make investments for you that are consistent with your goals and risk tolerance. Because they don’t receive commissions, the relative cost for their services is much less. In fact, by eliminating commissions, fees, and other charges, they usually save you more than their advisory fee, which is based on the size of your portfolio – typically between 0.25% and 2.0% of its value. So, their incentive is to grow your portfolio value while saving you commissions, expenses, and taxes.
Today, I have an RIA to manage my investments and feel more secure than ever before. I’ve recovered from my past mistakes in the short time he’s been my advisor. Additionally, by early May, my investments increased to more than their pre-pandemic value. I wish I’d moved to an RIA – as soon as my portfolio was eligible. Many RIAs are willing to work with clients with as little as $50,000 in combined investments. You should, at least, have an interview with an RIA to see the difference.
YOUR HOME IS NOT YOUR RETIREMENT
Don’t fall for the trap that your home or even your business is your retirement plan. I know you expect to have considerable equity in your home, but you’ll still need a house when you retire. You’ll either stay in your home or need to use the equity to put another roof over your head. And, there’s no guarantee that you’ll be able to find a cash buyer for your business. Many business owners end up carrying a promissory note for all or part of the sale. So, it’s a good idea to plan for a totally separate pile of liquid assets.
Finally, don’t wait to learn your lesson from Experience. As I said, “She’s a cruel teacher.”
Feel free to call me or send an email if you have any questions about anything in this article. This is too serious to leave to chance.
About the Author
Thom Tschetter has served our industry for nearly four decades as a management and sales educator. He owned a chain of award-winning transmission centers in Washington State for over 25 years.
He calls on over 30 years of experience as a speaker, writer, business consultant, and certified arbitrator for topics for this feature column.
Thom is always eager to help you improve your business and your life. You can contact him by phone at (480) 773-3131 or e-mail to firstname.lastname@example.org.