Starting a business is one of the few pillars of wealth that has a low barrier of entry. You don’t need an MBA, you don’t need a million dollars to start, and you don’t need some radical, life-changing idea. Regardless of where you are from, regardless of the education you have—entrepreneurship is for you. Although you may not think of building a business as a form of wealth(compared to saving and investing in a Roth IRA for example), in fact, creating a small business is the primary way that most individuals and families build wealth in the United States. (The definition of wealth is simply the value of all assets of worth owned by a person, community, company, or country.) Owning a business is a main driver of income generation and wealth accumulation among the top 10% and 1%. But what I love about business ownership is its role in wealth generation that’s available for everyone.
Three Wealth Pillars
There are really three main pillars of wealth building—investments, real estate, and owning a business. The first two of these pillars—investments and real estate—have either a high barrier to entry or a long time line to build wealth. And sometimes they have both. Investing in mutual funds, Roth IRAs, a 401(k) has a low barrier to entry and a long time line. Investing in real estate has a higher barrier to entry and the time line varies. Starting a business, however, can be done in a weekend with very little money, and you can start generating income almost immediately.
There has really never been a better time to start a business. Technology has advanced so much that many businesses can be started with a laptop and an Internet connection. The number of businesses that can be started with little to almost zero overhead is endless: consulting, marketing agency, membership communities, online digital products, media and PR company, graphic design, copywriting or editing services, mobile car detailing, photography or videography business, flipping products, recruiting or hiring agencies, pet sitting or dog walking, admin assistance/VA work, lawn care, freelancing on Fiverr or Upwork, financial planning, even software development—the list goes on.
There are three main reasons why owning a business is such a powerful wealth-builder: cash flow, tax reduction, and asset creation. Let’s unpack each of those a little more.
1. Cash Flow
Increasing the amount of money you make, your cash flow, by owning a business (even if you want or need to keep your job) will increase the amount you can invest and will result in you building wealth more quickly. If you feel stuck, underemployed, or frustrated about the control you have over how much money you make, starting a business is a path to break free of this limitation as it has the potential for increased income and freedom. In addition to adding another income stream, a business can also be an asset and one of the strongest ways to generate wealth. But it isn’t just about how much revenue you generate. You can have an eight-figure company and still go bankrupt. It’s all in the way you manage the money. The higher your profit margin in your business, the more profit you will be making. More profit = more money you get to keep.
2. Overall Tax Reduction
Depending on the business you start, it may take some time to turn a profit, but you can and should start taking advantage of tax breaks right off the bat. The government supports entrepreneurship and rewards those efforts with tax incentives such as deductions that reduce your taxable income. When you own a business, it offers opportunities to save on taxes. There are business tax deductions that you can optimize, and you can take advantage of unique retirement options available to you.
When you own a business you:
- EARN MONEY SPEND MONEY PAY TAX
When you work for a business you:
- EARN MONEY PAY TAX SPEND MONEY
Business owners get to use revenue before paying taxes while employees get their earnings taxed and have to live on the rest. This small shift creates a massive impact on your wealth.
3. Asset Creation
Owning a business gives you the ability to increase your equity, assets, and personal net worth. An asset is anything that has current or future value. Essentially, assets include everything owned by the company that’s currently valuable or could provide monetary benefit in the future. A business can have both—current value through profits and future value through profits and potentially an exit.
Equity in your business is all the assets less all the liabilities. If you were to close your business and liquidate, that equity would be what you have leftover for you. When you own your business, that equity also increases your personal net worth. You have created an asset with your business, and that asset holds value. And if you run a successful business or create profitable cash flow, you can get the opportunity to sell your business and generate even more income.
The Safest Route
If you have fear about starting a new business, know you’re not alone. The most common thing that holds people back from becoming an entrepreneur isn’t lack of a plan or lack of an idea—it’s fear. Fear of failure, fear of other people’s opinions, fear of success (yes, it’s a thing)—but you don’t have to take a huge giant leap to start, you just have to take the first step. A huge giant leap would be to quit your job, leverage your entire savings, sell your house, burn the boats, and “go all in”!
You commonly hear that shared on the insta-feeds of social media, but depending on your current situation, and your current responsibilities, that opinion may be reckless. The safest route to starting a business is doing it while keeping the job you already have. The reason that most businesses fail—the nine out of every 10—is because people start businesses in areas they don’t have any expertise or experience in the industry they chose. Or they haven’t done any market research to find out whether their business is needed and people (customers) will buy from them.
The safest route to building a business is to look for the 4-Way Business Intersection.
- What you know (ability to deliver; what you have knowledge, skills, or experience in);
- What people will buy (market need);
- What you can sell (products or services that can generate revenue);
- What you want (the purpose of the business).
Starting a business even if you have no plans on leaving your job could be one of the best decisions you ever make for your financial future. Although the main reason people don’t start a business is because they are afraid to fail. However, did you know that more than 75% of all millionaires in America own their own businesses? So rather than worrying about why you might fail, how about this question: What if you succeed?
Excerpt from Wealth Habits
