Here’s what happened: Millions of people invested in Gamestop causing the stock price to soar 400%. The plan, which began on Reddit, was to deliberately foil billion-dollar hedge funds that had “shorted” the stock (or placed a financial bet that the stock price would drop). To say they lost that bet is an understatement. Chaos ensued.
But what stood out to me: Millions of everyday people are investing.
Growing up, I didn’t learn much about investing (or credit, loans, taxes or anything personal finance!). I didn’t “pick that up” in a family struggling to make ends meet. They certainly didn’t teach it in public school (in 45/50 states) or even in my college curriculum.
I fell into a 12-year career in the financial industry and learned how people use knowledge + money to make more money.
Having this knowledge is called financial literacy.
Financial Literacy Is a Tool For Equality
Financial literacy is a privilege that reinforces existing economic inequality. It’s a vicious cycle. People who don’t know this stuff have a helluva time trying to get in the club. People in the club use this knowledge to not only create more wealth, but more opportunities for themselves and their communities.
Wealthy people are more likely to know how to earn and keep wealth.
Wealthy people are more likely to have access to the most powerful wealth-building tools.
This knowledge gap affects everyone. And it disproportionately affects women, people of color and especially women of color*.
In our country, white people (and especially men) are more likely to acquire, keep and grow wealth than anyone else. In fact, in 2016, the typical white family had about 10 times the wealth of the typical black family and about 7.5 times the wealth of the typical Hispanic family.
*This is not to say knowledge is the only obstacle in achieving economic equality. Far from it! There are systemic forces like the wage gap, housing discrimination and a generational cycle of economic oppression. But financial literacy, on an individual level, is one powerful tool.
My Money Tips for Small Business Owners
Just so we’re speaking the same language, money matters. Not just for designer shoes, fine dining or luxury hotels. I don’t care about that. But because money means safety, security and prosperity. Things like safe housing, access to healthy food, affordable healthcare, good schools for your children, the opportunity to get out of survival mode or the option to retire instead of working until you die.
Now, I’m not a financial advisor by any means… But I’m passionate about financial literacy: for every single human AND as a means to fight inequality. So here are a few things I’ve learned.
Consider each of these items a jumping off point to learn more and see if these are a good fit for you. Because we have the Internet. We can find information about literally anything. But we don’t know what we don’t know.
1. Businesses build wealth
If you’ve found your way here, there’s a good chance that you’re a business owner. Congrats! You’re already knee-deep in a powerful wealth-building tool. Building a business is a huge investment in yourself, giving YOU the power to determine how much you earn.
As an employee, you may feel like you’re stuck in a rat-race where you’re trading time for money and all your energy, skills and knowledge just go to boosting the wealth of the business owner. With your own business, you bet on yourself. But warning, it’s not for the faint of heart!
2. Diversify your income
Whether you’re an employee or an entrepreneur, having multiple sources of income is a great way to build wealth and safeguard you and your family in times of economic uncertainty. The goal is to never be fully reliant on one thing for your financial security. Options to diversify might be real estate or rental income, side hustles, multiple businesses or multiple product or service lines or investment income.
3. Invest early and often.
There are countless whole books written on investing. Here are a few key points:
Investing is inherently risky.
But there are so many types of investments that you can absolutely find something that suits your level of riskiness. If you’re investing money you don’t need for a long time (like for retirement), you can take more risk because you have more time to make back any losses. If you are investing for a big vacation next year, you might want to play it more safe.
If you’re not sure where to start, here are some options:
- Employer-sponsored 401k
- Use a roboadvisor like Wealthfront that will manage your money for you
- Open a free Robinhood or TD Ameritrade account and dip your toe in with a few stocks.
When in doubt, buy-and-hold.
Stocks are volatile. But on average, they course correct eventually. Very few investors actually excel at buying and trading quickly. A good practice is to buy some trusted stocks and hold on to them for years, if not decades.
Compound interest is your BFF
Compound interest means that as your money grows, you’re making money on your original money AND on the money you just made. Which gives you more power to make even more money. It’s called exponential growth and it is a big deal. This is why investing early matters. When interest on your investments starts to compound, the difference between 30 years and 35 years of retirement investments could be millions of dollars. It also means that even investing small bits of money whenever you can (like $20 every paycheck) is better than waiting until you have a lot of it to invest.
If you’re starting to make significant $$$, financial advisors are worth it.
If you’re going this route, Registered Investment Advisors (RIAs) are a specific type of financial advisor that are legally obligated to act in your best interest (not all financial advisors are).
4. Diversify your investments
Just like diversifying your income, you want to diversify your investments. This helps you manage risk so that if stocks go down, for example, you don’t lose everything. This means owning a wide variety of stocks (large and small companies, US and global, in different industries) plus bonds and “alternative investments” like real estate, commodities or private equity (investing directly in companies).
5. 10% Adds Up
On average throughout history, the stock market (the S&P 500) grows about 10% a year. That’s considered a baseline for good investing in traditional stocks. But I also like to apply it to life. Because 10% doesn’t always seem like a lot. If I’m investing (and risking) my money with the hope of hitting that 10% benchmark each year, why wouldn’t I jump at a coupon for 10% off on a product? Why am I willing to pay 18% interest on a credit card? Should I pay 10% more for the brand name vs the generic version? Over time, these decisions (and this mindset) add up.
6. Taxes matter
We’ve talked about compound interest and how even 10% adds up. That’s why taxes matter so much. Every dollar you lose on taxes could have been many potential dollars if you had invested them. So it’s worth your while to take advantage of all the LEGAL tax advantages you can.
- As a business owner, that often means having the right business structure for you and having a good accountant.
- As an investor, certain investment accounts, like a Roth IRA or Roth 401k, will save you money on taxes in the long run.
- As your wealth grows, there are even more tax-advantaged investments that are available to you (especially in the real estate industry), so you can keep and reinvest even more of your money.
7. Real estate is a game changer.
I worked in real estate for years. I believe it’s the best wealth-generating tool out there. Whether you’re buying your own home, an investment property, starting an AirBnB or pooling money into an investment fund, these can be great ways to grow your money–that has nothing to do with the stock market.
8. Get a good accountant.
I mentioned this in the tax section, but it’s true. A good accountant can save you money. Money that you can invest and grow. My accountant has saved me thousands of dollars and been a huge resource for my business strategy.
9. But also learn basic accounting skills yourself.
I like to be hands-on with my money, but even if that’s not your style, it’s important to know the basics.
When I first started with my accountant, I paid her for an hour-long session to teach me how to use Quickbooks. It was huge! As a business owner, you may want to delegate the day-to-day management, but understanding cashflow, balances sheets and profit-loss statements can literally be the difference between being profitable and not.
I track all my personal spending on an app called You Need A Budget. It changed my life. I used it to pay off $40k in debt and save a 2 year emergency fund before I quit my job. It gives every single dollar a job, so I know EXACTLY what I’m spending and have to get real real with myself on every purchase.
10. Get life insurance
Life insurance is a generational wealth-building tool. You pay money each month or year to ensure that your partner/kids/beneficiaries will get even more money once you die. It’s so simple!
Here’s a real life example:
One of my life insurance policies has a $150k death benefit. I pay $50 a month for it. Let’s say I pay for this policy for 40 years before I die. Assuming I don’t let it lapse (this is THE KEY), my beneficiary will receive $150,000. And I will only have paid $24,000 in insurance premiums.
A few things to keep in mind:
- There are different types of policies with different advantages.
- The sooner you start, the lower your premium will be. If you try to get a policy at 65, it will be difficult and expensive.
- Unless you have a term life policy that only lasts a set number of years, consistency is key. If you let your policy lapse, you can lose all the benefits you’ve earned (that’s how they make their money!)
11. Debt wisely.
Debt is useful and dangerous. Some financial gurus like Dave Ramsey are anti-debt. And they’re not necessarily wrong. Having been debt-free for a few years, it has been a huge weight off my shoulders that has enabled me to take a leap into business. But that’s not everyone’s path.
And not all debt is created equal. If we’re using our 10% rule as a guide, using a credit card that charges double digit interest is like working backwards. But what about the 2.5% APR home loans we’re seeing? I’m ready to jump on that!
Like anything, the key is to know what you’re getting into. How much is that student loan actually going to cost you? Do you really need that brand new car that will depreciate as soon as you step off the lot?
12. Credit wisely.
I grew up afraid of credit. So I didn’t have any. And when life happened, my car got totaled and I needed a new one, I got stuck with a 16% interest rate on a car that I needed but didn’t want. So yeah, credit is important, but it’s also not everything. I believe in starting to build it early, and doing your best. Period. And if your credit is a mess, there are credit repairers who can help.
Oh, and if you didn’t know, businesses need credit too and it’s a whole different score–so if you want to use debt in your business, start now!
If you’ve made it this far, you’re a badass! Thank you for investing your time in your long-term financial future. Hopefully you’ve learned something that will help you better tackle your finances–or at the very least feel invigorated for the journey. And if you have any questions, don’t hesitate to reach out to me. I don’t have all the answers, but I’d be happy to help!