Saturday, September 8, 2018

Blink: Once you’ve mastered business, you can become a sophisticated investor

So you’ve started a business, and it’s going well. Now it’s time to use the income and the experience you’ve accumulated and take things to the next level. It’s time to become a sophisticated investor.

As a sophisticated investor, you’ll take more control over management, corporate structure, investment decision making and taxes. The result? Maximized returns.

Let’s look at a restaurant owned by Bill and Jane, two hard-working Americans. They operate as a sole proprietorship, which means that they have one income source. They pay normal, personal income tax and they are liable if anything goes wrong – like a sick customer filing a lawsuit. All their eggs are in one basket.

No disrespect to Bill and Jane, but the sophisticated investor knows better. He would have two corporations: Bill would own the restaurant itself and Jane would own the building it’s in. This way, risk is spread.

If a customer falls sick and sues the restaurant, the real estate is legally separate and protected. Meanwhile, under this corporate structure, expenses like health insurance and legal fees are allocated as business expenses and paid pre-tax. Tax itself is paid at lower, corporate rates – less risk, less tax, more financial return.

Whatever you want to invest in, as a sophisticated investor, you know how to make your money work for you.

An average person’s plan for retirement might consist of squirreling away $15,000 a year in a 401k plan and hoping for an 8-percent return.

The sophisticated investor is more likely to invest in real estate, some stocks and shares and a business venture. With the experience brought by building a business, and by investing in his financial literacy and education, he can make the investment decisions of the rich: spotting the best opportunities, understanding what’s really risky and what isn’t.

The average approach sees you work for your money. The second approach sees your money work for you. Don’t be average.

Excerpt from book, "Rich dad's guide to investing" by Robert T. Kiyosaki

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