4 investment mistakes made by the self-employed
By ATB Financial 29 October 2018 4 min read
There are many benefits to being self-employed, including control of how much you work, what hours you work, your holiday time and your career direction.
But, because you won’t be getting a company pension or access to an employer retirement savings plan, you’re also in control of and wholly responsible for your retirement savings.
Here are four investment pitfalls for entrepreneurs to avoid.
Putting all your extra revenue into the business
It’s common for people who are self-employed to put extra funds back into their business, either to pay off business expenses or to invest in its growth. While it’s true you sometimes have to spend money to make money, you also have to save money so it’s there in the future.
“Each individual situation is unique, but retirement savings must be part of the plan in order to maintain financial balance,” said Allan Leung, Compass and Wealth Lead with ATB Investment Management.
“It can be tempting to invest all you have into your business, but its risky putting all your eggs in one basket.”
Just because you’re saving for retirement doesn’t mean you can’t save for your business, too. If your business is registered as a sole proprietorship, there is no concrete distinction between your personal and business finances. You might find it difficult to differentiate personal savings with business savings, but keeping them separate will help you determine how much you can and should be saving for retirement.
“A good rule of thumb is save 10 per cent of your income, but aim for 20 per cent,” says Leung.
“It also depends on your debt level and the repayment of that.”
A financial advisor will help you determine the best balance between paying off any debt, the amount you could put into a retirement savings plan and how much you can invest back into your business.
Not taking advantage of tax-free investment growth
A Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) will provide tax-deferred and tax-free growth of your investments.
By maximizing contributions to your RRSP, you reduce taxable income and lower your tax burden for the year. Depending on your income and deductions, you could save a lot of money come tax time. And if you’re really savvy, put those savings back into your RRSP or TFSA.
TFSAs are more flexible than RRSPs, which is attractive to small business owners. If you need money for an emergency, you can withdraw from your TFSA without paying any taxes. Withdraw on your RRSPs while you’re still working and you’ll have to pay tax on it.
Not diversifying your investments
As a small business owner, taking care of your clients and managing your business often eats up the majority of your time. Many don't have time to sit back and determine which investments allow you to optimize your portfolio. Save time and let our experts work with you to craft the perfect diversified investment portfolio, customized according to your investment horizon and risk tolerance.
A financial advisor helps you to create a balanced portfolio that works with your income and savings allowance, and provide you the best return for your situation and retirement goals.
“Speaking with a financial advisor will ensure you’re getting the maximum growth potential for the amount of risk you are willing to take,” says Leung.
“They will also help you maximize your tax efficient vehicles first.”
Waiting too long to invest
Investments mature with time. Given time, even small amounts will reap maximum returns when it comes time to retire. That’s why it’s important to start investing as soon as you can.
Still, it is not too late to save. If you feel like you have started investing too late, you aren’t alone. According to a survey taken for the ATB Investor Beat in January 2016, 52 per cent of Albertans say they are behind on their retirement goals.
Consider the “7–10” guideline to help you see the potential of investing in RRSPs, even later in life. If your investment grows seven per cent each year, your money will double in 10 years. If your investment has a 10 per cent annual return, your money will double in just seven years. With this in mind, imagine how much growth your investments could have if you start saving at age 30 instead of age 50!
One benefit of never having contributed to RRSPs before is that you have been accumulating a large amount of RRSP contribution room. That means you can contribute a large lump sum when you are ready to start investing. That lump sum will help you save when it’s time to pay your taxes. Reinvest that savings and you will be well on your way to saving for retirement. See where you can find your RRSP contribution limit.
Avoid these mistakes and meet with a financial specialist to create a formal retirement savings plan so you can live the lifestyle you’ve always imagined for your retirement.