Personal finance / investments advice for bootstrappers
Hi friends,
What's your take on long-term passive investments (regularly putting a certain percent of your income into an indexed fund or a retirement account and leave it there until retirement) versus keeping saving up money in case you need that for your business (or for paying bills before your business can pay you).
There are many resources on personal finance for people with a 9-to-5 job but few for bootstrappers living off savings without a steady income yet.
My business is not profitable yet but I also have a decent amount of saving (enough to support myself for a few years) and letting them sit there without any investment sound like a mistake. Since I'm not interested in any active or short-term investment, long-term passive investment sounds like the only option.
I didn't invest earlier while I had a fulltime job b/c I wanted to save up more money for a longer runway for my business. But I'm conflicting now because it doesn't seem wise to just leave the money in a saving account.
I think fundamentally I can't reconcile "planning for retirement" with "bootstrapping a business". Ideally, I want my business to generate (passive) income. If that's the goal, how does a retirement investment plan fit into the picture? Use it as a tool to take advantage of the power of compound interest? As a backup safety net? (the tax-saving purpose is a bit irrelevant for my case)
Would love to hear how do you think about this subject or any relevant resource recommendation.
Thanks!
I wouldn't recommend investing in stocks if you may need the money in the next 4-5 years.
Thanks for the advice, @blindvalet! The 4-5 year timeline you pointed out is a pretty good way to think about it.
Thanks for sharing this thread! As a bootstrapper, personal finance / savings is always in the back of my mind as well. The way I currently mange it is pretty simple. I put most of my real future savings all into stocks (tech of course) and then have cash in a savings account that I estimate will cover living expenses for a year or two (which is my current runway). And then I try to refill this cash / runway with any short contract projects that come my way.
I think it depends on your mindset.
Building wealth with stock markets takes 40 years, with compound interests.
We're in one of the longest bull run in the history, it might end tomorrow, next year, or in 4 years, I don't know.
If you're young, with modest savings (say 30-$100k) and willing to take "risks", then put 6 months of living expenses aside, so that if your business fail, you have time to find a job. Invest everything else in yourself (education, courses, hard/soft skills, books, HEALTH) and in your business.
Then after a few years, there can be two different outcomes:
Your business is alive, profitable, and you earned more by investing in it/yourself that you would have with the stock market
Your business is dead, but you learned so much that your market value increased significantly and you won't have any problems "earning back" the money you lost
Thanks a lot for your reply, Kevin! Your suggestion about focusing on investing in myself and my business is exactly the mindset I have.
What I'm considering is if I should put aside some money (~20k) in the market (most likely index funds) as well, mostly b/c I might never end up needing them throughout the years. I need to assess if that's actually the case and make a decision based on that.
Thanks again for your advice. It definitely helped me organize my thoughts.
If you need them short term, which you probably will, I don't think it would be good to invest them in an index fund. Index funds return on average of 6-7% a year ONLY in the long run.
Say the market crashes next year and you're down 30% but you absolutely need the money to run your business... you might be forced to sell. You would lose a lot.
I'd only invest in an index fund if I can afford to hold long-term.
I am assuming you are in the US. If are not you can disregard this advice.
If you are not in the market you are losing money, literally. If you ar e in the US, the approximate inflation at end of 2017 was 2%. If your holdings are in pure cash you obviously are losing money's value at rate of about 2% per year. At least put them in money market fund or laddered CDs.
Since, you were not invested in the market, you lost out on the longest bull run in the US stock market. Neways, we can't change the past. Lets think about the future. I would recommend you invest at least some portion of what you have in a total market index fund (VTSAX or VTSMX). Don't try to time to the market its a futile exercise. These funds have very low expense ratio.
Thanks for your reply, @hemanpag! I totally agree that doing nothing with the money is wasting them due to inflation. I'm also very much on the same page about total market index fund and not to time the market.
My only concern is about needing the money in short term. I try to avoid the case @stoico pointed out in his reply.
I might set aside some money for those funds, try to not touch them as much as possible, and take on some contract works when my savings run low. (like the what @junetic said above!)
Thank you all for your help!