The best way to invest your money…nobody will tell you this.
Summary
- As an entrepreneur, it's crucial to regularly take dividends out of your business to decrease downside risk, given the high likelihood that the business may not succeed long-term.
- The vast majority of businesses fail within five years and only 1% ever sell, reinforcing the need to periodically secure earnings rather than betting on a future sale.
- When considering what to do with saved money, assess the opportunity cost of time spent on active versus passive investing.
- Passive investing in indexes like the S&P 500 can yield around 10% annually without consuming significant time, which could detract from business growth.
- Diverting attention to active investing can lead to a disproportionate decrease in active income from the business, which is often a greater opportunity for wealth increase than investment returns.
- Entrepreneurs should focus on income growth and allocate surplus cash into passive investments that require minimal thought or effort.
- Maintaining 6 months to 2 years of living expenses in cash is advisable for peace of mind.
- Assets like index funds can serve as collateral for loans, providing liquidity when needed for new ventures.
- Investing in oneself to enhance skills is the greatest investment, with the potential to significantly increase income.
- Prioritize personal development and skill acquisition to raise your value and income in the marketplace.
- For employees, increasing your skill set and tying yourself to company revenue streams can boost your income since your earning potential is tied to the value you provide.
- Keep living expenses low while investing in highly liquid assets until your net worth growth from assets could potentially outpace your income growth.
- The primary goal should be to increase net worth quickly, focusing on income growth first and then shifting focus to wealth management once investable assets have grown significantly.
Video
How To Take Action
A good way of securing your future when running a business is to regularly take out money from your profits. Since a lot of businesses don't make it past five years, it's safer to take cash out regularly than to wait for a big sale that may never happen.
Here's what I would suggest doing with the money you save:
-
Invest passively: Put money in index funds like the S&P 500. They give about a 10% return each year, and you don't need to spend lots of time on them. Time is valuable, and your business needs most of it to grow.
-
Keep emergency savings: Make sure you have six months to two years worth of living costs saved in cash. This way, you can sleep well knowing you're secure if something unexpected happens.
-
Collateral for loans: Money in index funds can be used as a backup plan. If you need cash for a new business idea, you can take a loan against your investments.
-
Grow your skills: The best way to up your value and income is to get better at what you do. Improve your skills because that's what increases your income in the long run. Spend on learning and mentorship. You are your biggest asset, and making yourself more skilled can boost your income a lot.
-
Save when you earn more: Once you have a good amount of skills, start to save more from what you earn. Put this into passive investments until your wealth starts to grow faster than your income.
For people with jobs, tie your work directly to the company's income. Find ways to make the company more money so that you become more valuable. And, keep living costs low while saving and investing in things you can quickly get cash from.
The main thing is to focus on growing your net worth fast by increasing your income. Later on, when your wealth has grown, you can switch to managing that wealth. But until then, keep working hard on making more money and investing it wisely.
Quotes
"I'm a big believer in continuing to take dividends out of a business as it continues to grow"
– Alex Hormozi
<<<
"Your ability to earn is one of the greatest investments"
– Alex Hormozi
<<<
"Increase your skill basis so that you can generate more income"
– Alex Hormozi
<<<
"Invest in you, increase your skill basis"
– Alex Hormozi
<<<
"Spend the majority of your time on the vehicle that will increase your net worth the fastest"
– Alex Hormozi
