Adams: You've already got a growth-company investment -- your own business. So to me it's natural that in the next two to three years you should get into municipal bonds. First, invest in a closed-end mutual fund that has a specific purpose, like investing in New Jersey bonds. A closed-end fund brings few surprises, since its portfolio is fixed just once, unlike an open-end fund's portfolio, which is continually adjusted. Look again in the Wall Street Journal for a closed-end fund that is trading below its net asset value.
Moerdler: How much and for how long do you think we'll be aiming to invest in the closed-end fund?
Adams: Once you've put in $25,000 to $30,000, it's time to diversify a little -- not by selling what you've got but by purchasing individual municipal bonds. Then you, not a portfolio manager, control the bonds you buy. You can stagger their maturities according to your own financial needs. Also, you save yourself the management fees.
Moerdler: I'm wondering when we can consider investing in the stock market?
Adams: I think people should wait until they've invested, say, $50,000 to $100,000 in munis before they diverge from that path. By that point, your investment profile will be solid. The money you'll have in munis is safe and liquid. Your pension funds, through your 401(k), will be mainly in the stock market, growing at tax-deferred rates. And your own company offers the best prospect for capital growth. In three to five years, if you've been able to double your salaries, you could look at the stock market. By then, you'll have about $50,000 invested in municipal bonds, which will probably be earning $2,500 a year in interest. You can invest that $2,500, and eventually, you'll be able to invest as much as you want.
Datskovsky: Do you think, when we get to that stage, that we should invest in companies that are not in our industry? Some people say that would keep us from getting hurt twice if economic conditions affect computer businesses.
Adams: I believe it's best to invest in what you know. And in your case, there are so many fast-growing companies that represent different segments of the technology industries. That's the world you know best.
Datskovsky: How should we evaluate a company's stock?
Adams: I advise people to buy a company's stock as though they were going to buy the company. Analyze the company's financial statements to figure out, at whatever the stock price is, if you'd be stealing the company, if you're paying a fair price, or if the stock is priced too high. Consider the company's revenues, assets, and profits -- historic and projected -- and take a look at cash flow, debt, and other key numbers.
Datskovsky: Everything you've recommended sounds reasonable and promising, but tell me, where do we find the time to do all this?
Adams: Financial security is important to everyone. If you don't address it, it becomes a nagging problem that wastes your time. But simply by coming up with a financial plan -- even if it's only three or four lines long -- you'll have something to work toward. You'll find people who will work with you. And eventually, you'll manage your finances yourself, with the help of good advisers. Soon you'll outgrow some of those advisers -- given the kind of growth your company is achieving.
But the first step is setting goals. Then you'll have started, and you'll be light-years ahead of everyone else.
DIVERSIFY YOUR RISK
This is not sacrilege: the essential first step for entrepreneurial company owners who want to build wealth and financial security is acknowledging the need to divert their assets from their companies.
That may sound blasphemous, but we're not suggesting you withdraw everything from your business. We do say that it makes no sense to keep all your eggs in one basket -- even when that basket is the company to which you devote your life. When your company can pay you an adequate salary, that's the time for you to diversify by spreading your financial risk to increase your payoff potential.
According to the strictest investment criteria, entrepreneurs are locked into the worst of all worlds. Their companies are illiquid, high-risk, long-term investments ready to swallow every drop of cash their owners can find. Long-term investments should be the safest and the most predictable. High-risk or illiquid investments are meant for risking only small, controlled sums you can easily afford to lose.
Convinced now? Here's how to start:
Pay yourself a decent salary. Most new businesses can't support much in the way of salaries, and their founders wind up struggling along on take-home pay that leaves no room for outside savings. And it can get worse. When cash-flow crises loom, owners often skip paychecks entirely.
Here's a better approach: as soon as your company generates the revenues to cover it, pay yourself a salary that permits you to fund an emergency money-market account to the tune of three to six months' worth of living expenses. That fund will protect you should you face high medical bills or other unexpected personal expenses. Give yourself raises as sales and profits increase, and use extra cash to expand into other investment areas.
Be disciplined. Don't touch your emergency nest egg or your kids' college savings accounts at the first sign of business trouble. You should guard your personal investment portfolio with as much determination as you protect your investment in your company.
Safeguard the financial investments you put into your company. If a cash crisis requires you to forgo a paycheck or to plow in additional funds, keep detailed records that show you extended the company a loan, payable with interest as soon as cash flow revives. Keep the transaction official: sign a promissory note. Grim as it is to contemplate the prospect of bankruptcy, that procedure will at least ensure you some degree of compensation as a secured creditor.
Protect personal assets from your company's bankers and other creditors. Most business owners are forced to secure their credit lines and other loans with collateral. Too often, that amounts to the equity in your house or car. So channel as much of your income as possible into legally protected personal assets such as a 401(k) plan and college savings accounts in your children's names.
