Obviously a metaphor for a lot of time and money, small business owners often sink so much of their energy and finances into their business that putting something away for the future becomes an afterthought.
In the next of FE Trustnet’s case studies, one such business owner – Sally – is at a point where after seven years of hard work her catering business has become a success and she wants to start thinking about putting money away for retirement.
At 33, she is single and her immediate goals are to finance a deposit for a flat and build an investment portfolio that can tide her over during dry patches for her business.
She has sunk every penny she has into the company so far but is paying herself a handsome dividend this year and wants to invest for the future.
In Sally’s position, it would be very easy to plough her money into something like an absolute return fund, which offers some stability and a higher yield than cash to boost the amount she will have for a flat deposit, or choose an out-and-out growth fund that will build up a nice pot for retirement.
However, Kerry Nelson (pictured), managing director of Nexus IFA, says the most important thing Sally can do now is make sure she has some cash on hand and then worry about her ambitious investment goals.
"You have to have the basics in place," she said. "Because of the fact that it’s her own business, there’s added risk because it’s all on her shoulders." "Her first port of call is cash savings. I know it’s difficult to do, but ideally you want three to six months’ worth of income as a starting point for an emergency fund that you can get your hands on. That’s very difficult because money is often tight and people have bills and all that kind of thing, but in an ideal world, you want that cash."
Nelson recommends putting some funds in an instant access savings account with a reasonable interest rate, something that is clearly difficult to come by in the current economic climate.
Since Sally has several short-term needs, however, the safest place to put her money is still cash, in spite of the low return.
Chelsea Financial’s Juliet Schooling-Latter says having cash on hand is certainly the first thing Sally should think about, but it is important that she considers both the cash needs of her business and her own cash balance separately.
"Liquid cash is very important. Cash rates are so terribly low at the moment but someone with their own business will need cash because their income might be patchy. Having a reasonable amount of cash they can draw on is key."
After she has built up a cash pot, Nelson says, it is time to think about her two major goals – buying a a flat and retirement.
Buying a house
Nelson says someone in Sally’s position, unless her business has really gone steaming ahead, should consider using the Government’s Help to Buy scheme.
"This will make a big difference if you’re limited on funds," she said. "It’s been difficult to get your foot on the property ladder and this can give you a head-start."
Nelson adds that on top of the expensive price tag, anyone who is thinking about purchasing a property needs to factor in the cost of stamp duty, solicitor’s fees and any other costs that may creep up in the transaction process – all of which add up on the total bill.
"She already owns her own business, so it’s another big financial responsibility to have a mortgage," Nelson continued.
"She needs to anticipate any problems and again have funds in place in case of an emergency."
Planning for the long-term
Sally has been entirely focused on getting her business off the ground over the past few years, so has neglected her retirement planning up to this point.
However, Nelson says at 33 she is still young and has a reasonable time horizon in front of her to build up a healthy pot of money to live on once she is done working.
One of the key advantages of being a business owner, Nelson says, is that you can take advantage of tax efficient ways to plan for your retirement.
"The most tax-efficient way for her to plan for retirement is to take money out of her business. She can pay employer contributions through her own company while making sure she’s got resources in place for her business," she said.
"Even if she has only got a minimal amount to save on a monthly basis, if she adds a lump sum payment at the end of the financial year in a pension pot, it will reduce her corporation tax."
"There are a lot of things she wants to look at and she needs to focus on the immediate requirements first, but you don’t want to neglect a savings requirement. You don’t have to put away huge amounts, but if you start it off and you get into that mindset it will help down the line."
"The worst thing you can do is neglect it. Put a plan in place and keep coming back to it," she stressed.
Don’t take on too much
Nelson says Sally is in danger of spreading herself too thin if she tries to begin an ISA in addition to saving for her flat and retirement.
"The most tax-efficient thing she can do is pension planning. She’ll compromise too much if she does an ISA as well. At this point, she needs to prioritise her goals and stagger them," she explained.
However, Nelson says when Sally reaches a point where she can put more money away, or her business starts providing ahead of her needs, the best place for her to start investing is in a fund of funds.
"This will still allow for diversity even if you’re only putting away £100 a month," she said. "A good starting point is a fund of funds and then you can revisit it when you’re ready to save more."
Nelson recommends the Jupiter Merlin range of funds of funds and CF Miton Special Situations, managed by FE Alpha Manager Martin Gray and James Sullivan.
