Deep in the heart of most of us beats a tiny imitation Donald Trump.We would love to see our name in neon on the side of a hotel or office tower that we own.
We would love to command attention and respect for our business acumen, to raise enough money to gild our world with gold, and to “dabble” in the business world even as we retire. We tell ourselves it would be something we could just keep our hand in enough to keep the revenue rolling in our direction.
The question comes down at some point to how much of our own money are we willing to invest in fulfilling our entrepreneurial dreams.
How do we decide how much of our retirement savings are worth risking on a business? What kind of return would be worthwhile?
There is an old saying that just like gambling on horses or real estate, you should never risk more money than you are prepared to lose.
But you can be a lot more scientific about it than that.
In investment terms, pretty much everything in life can be calculated on the basis of a mathematical formula to determine a fair return on your investment.
Even if you are taking some of your savings to invest in learning to play golf, and adding to that by paying for club fees, you calculate to a certain extent whether the lessons you receive are working for you and whether the enjoyment you get from playing on the club’s greens and frequenting its facilities are returning sufficient enjoyment to you to be worthy of the cost.
In more philosophical terms, we go through life to some extent calculating returns on relationships. If we have lovers or friends who bring us joy and fulfillment and happy times, we are prepared to invest serious time and money in those people because we have determined they are of value in our life.
Having established that there is a return on investment (ROI) for even the most basic exchanges in life, let us now look at the concept of whether we should invest in a business as part of our retirement package.
If you are looking at purchasing an existing business, besides an accurate value of any real estate and stock included, one of the most important calculations to determine is what would be a reasonable return on investment.
Only then can you determine if it is worth investing your money, your talent and your personal energy.
Only then can you prepare a solid business plan and have a reasonable chance of being considered for additional investment by any lending institution, individual, or organization that might support your venture.
Simply put, the ROI is the guiding light that should lead you into the business or cause you to steer around it.
The “return” in ROI means the actual profit you are going to put in your pocket when your business year is completed. The return on investment means this figure, this final profit, divided by the money you secure to put into the company. This money includes the funds from your own savings or investments, and from any other financial sources that you secure funds.
You need to calculate your anticipated ROI at the start of your business, and then keep your eye firmly fixed on it every quarter of a year as your business continues.
If the business is already up and running, you need to go over the books and carry out these simple steps before you put your own money into it. If you have already invested your own money into it, you need to do it as well.
Start by surveying your accounts ledger. Figure out precisely how much money you have at the end of each quarter. Call this money you have on hand A for use in your ROI mathematical formula.
Next tally up the money you and other lenders put into the business to get it started or to purchase it in the first place. Call this amount of money B.
Subtract B from A and then divide by B. Then multiply that number by 100 so you can describe your return on investment as a percentage.
How much of your savings you are willing to invest will always come down to your risk profile, but in practical terms, seriously calculate if what you are willing to invest has the likely potential to be returned to you with reasonable interest. If you can make no more from the business than you would buying bonds or making different wise investments, even if your company is successful, you should likely walk away from it now.
Also consider, if you are using your retirement funds, how long it will take for the money to return to you. If you want to leave work in two years, but it will be at least three before the business will start to make any real profit, then maybe this isn’t for you.
Keep in mind under any circumstances that the longer your money is needed to shore up the company without any money coming back to you, the higher the rate of return on your money should be in the long run.
If you can see that happening, you are better off to leave your money in more traditional investments.