Investing in our Business vs. Investing in the Stock Market

Owning a business is hard. As a business owner, the first priority is making sure you are able to cover your base expenses, which also involves ironing out pricing.

Once you get things going, and are generating profit, you can then figure out how you can earn more money and improve your bottom line.

Recently we became debt free, and are finishing up some other financial priorities. This includes re-filling our emergency fund and paying to have our roof replaced. Once these things are done, we have those funds available to pursue other priorities.

It’s crazy to think about where we were a few years ago, and the options we now have at this stage. It took a lot of hard work and determination to get here, and we are excited about the future.

Acknowledging Our Progress

I think the first thing we need to do is acknowledge and celebrate how far we’ve come.

It was just a few years ago when we were looking at large credit card balances. Getting to this spot is a huge step for us, as we are breaking bad spending habits, thinking about what matters most to us, and what we want in the future.

If we don’t make a big deal about this accomplishment, we might forget about all the pain it took to get here.

So what does this look like for us?

  • Taking small vacations where we don’t have to micromanage our spending as much this year.
  • Re-look at our budget to see if we want to re-adjust our budget categories.
  • Making sure our priorities are right, and that we are on the same page in what we are working towards.
  • Are there things that would add to our lives that we didn’t purchase before?

This celebration isn’t an excuse to go crazy with our spending. But if this isn’t a reason to loosen our budget belt a little bit and do some extra spending, what is the point of our hard work?

This point is also a great time to make sure Andrea and I are on the same page with what we are doing. Does this mean we have to 100% agree with each other? Not necessarily. But it does mean that maybe we both need to find a middle ground so we can equally celebrate our accomplishments.

It took hard work from both of us to get here. And it is going to take both of us to continue to push things forward in the future.

Ironing out the Next Phase

As part of the celebration in what we’ve done up to this point, involves thinking about the next steps.

Should we 100% focus on increasing our investments? Or would it be better to invest in our business?

It’s a hard decision because we want to see immediate progress in increasing our net-worth. But also increasing the income generated from the salon would increase our profit, and allows us to invest more money in the future. This profit would be mostly passive and not require too much extra work from our part.

And when we are talking about extra income with little to no extra work, that is a huge benefit.

Which option has the highest potential in increasing our net-worth over the long-term? Let’s look at both options.

Expanding our Salon

The idea of expanding our salon involves creating two additional premium rooms we can rent out for an additional $500-$650 per month each. This equates to an extra $1,000-$1,300 additional income every month.

With stocks (index funds), over time, our investments should grow. But there is no way for us to predict exactly what the stock market is going to do (especially over the next few years).

As part of the salon expansion, each room would have a sink and some storage and would open up the possibility of getting different types of booth renters who might be interested in this new space. This would benefit the whole salon, as it could attract new clients that might be interested in services provided by other booth renters.

We also would like to add additional hair washing stations, re-organize the main space for the salon, and also do some work in our dispensary.

These are the things we are thinking about doing as part of the salon expansion:

  • Creating doors and busting out some walls. This is what would create the rooms and improve the main salon space.
  • Plumbing for the room sinks and hair washing stations.
  • Purchasing new hair washing stations.
  • Creating a few hair booths and figuring out where the eyelash extension tables will go.
  • New cabinets in the main salon area and dispensary (lockers).
  • Sinks + cabinets in the new rooms.
  • Flooring

We currently aren’t sure how much all of this is going to cost, but we are setting a soft budget of around $20,000 to do all of this work. Once we get to the point where we are saving money for the salon expansion, we’ll start the process of planning out the details for the expansion and getting estimates.

Doing this work not only has the potential to increase our profit from the salon, but it also should improve the overall space dramatically. We want to attract the best booth renters, and this should increase the value in being in our salon —a win-win situation for us and everyone in the space.

Stock Market Timing

Another reason to not feel like we need to go heavy into the stock market is that people keep on talking about how there is a good chance we are at the top of the current bull market cycle.

I don’t know if this is true or not, but it might work out well by focusing on expanding our salon and holding off on going heavy into the stock market.

I’m definitely a little nervous about this idea because it might not be true. We could be at the beginning of a massive rally and miss out on huge gains. But this is a risk I’m willing to take, as increasing our income will give us more options in the future.

We sacrifice some time and money in the market, to increase our income over the long term.

Looking at the Math

If we take the $20,000 we are planning on investing into the salon, and put that into the stock market, that might turn into around $30,000 after 5-years (assuming an 8% annualized return).

Bringing in an additional $1,000/mo after expanding the salon would give us about $75,000 after 5-years (assuming an 8% annualized return). It would take about 1.5 years to hit the $20k break-even point, and go up from there.

Clearly, expanding the salon is much more profitable than investing in the stock market over time. We not only can increase our income immediately but the rate that our after-tax investment account goes up after the first few years is massive.

When I lay out the details like this, it becomes obvious that investing in our small business over investing in the stock market is a much better option.

We Will Still Be Entering the Stock Market

Deciding to invest money into our business does not mean we won’t be putting any money into the stock market at all. It primarily means most of the after-tax money will be put towards expanding our business for the remainder of the year.

The current plan is to do the following:

  • Max out my 401k contribution ($19k/year), which is on top of the 4% company match.
  • Max out both of our Roth IRA contributions ($6,000 each account).
  • Everything else outside of our budget will go towards the salon expansion.

So it isn’t like we are ignoring our retirement accounts during this phase. In a sense, we are diversifying our investments.

Once we do get the salon expansion completed, all of the extra funds will go into our after-tax investment accounts (at least that is the current plan). It probably will end up taking us 4-6 months to save the cash for the expansion, which we can make up for in the following years.

Business Expansion is Investing

When we first started thinking about what we were going to do, it felt like we were considering investing vs. business expansion.

But investing funds into a business is investing. In fact, it is better than putting money into the stock market, as we increase our income almost immediately (or at least have the potential to). Generating recurring income that brings in an additional $1,000/month from the stock market would require a much larger cash investment to generate the same income or appreciation from the stock market.

We also have to consider the salon expansion is less risky than the stock market. However, both options have some risk:

  • With the salon expansion, the main risks are that it could end up costing more than $20k to do what we want, and we might not be able to fill the rooms right away.
  • Investing in the stock market means the short term gain on this money might be negative. Eventually, things should recover, but the timeline is uncertain and the market is unpredictable.

From a risk standpoint, expanding the salon seems much less risky than putting these funds into the stock market. Even if it takes us 3-6 months to fill the space, over time, it should still be the smartest move.

Thinking this through has gotten me excited about this stage as this should open up more options in the future. If the stock market does plummet in the near future, this will provide an opportunity to get into the market while prices are low.

This idea has challenged my perspective on what I considered “investing”. It’s clear that I need to start thinking more about how to increase our income, not just how much money we can put into the stock market.

For example, even if we decide to cut back, we could still keep the salon and generate this semi-passive income by having booth renters. This is a huge opportunity for our future financial picture.

2020 is Looking Bright

I don’t want to toot our own horn, but things are looking very positive for the Roane family come 2020.

If we do encounter unexpected turmoil, having an emergency fund will help us get through the storm.

By continuing to pursue our financial goals, we are increasing the chances we will be in an incredibly strong spot in the next 3-5 years. Do we know 100% what is going to happen in the future? No, but the best we can do is continue on the path we are on.

I want this to sink in to stop the deadly cycle of debt. I’ve been there and done that. And I didn’t like the results of those choices. We are now making better decisions, and hopefully, the fruit of our hard work will start to show itself by how much our net-worth increases. Especially after the salon expansion is complete.

It seems like we are always shooting for some kind of financial goal, and it is refreshing to have a goal that will have a direct impact on our financial future. Paying off debt is important, but it doesn’t feel nearly as good as increasing our income.

Don’t Lose Sight of the Goal

It can be easy to get caught up in the stress of what we are pursuing. This is a great point to remind ourselves, and question what we are shooting for.

What exactly are we aiming for? Is the effort + work worth the cost? Are we cutting too much that we aren’t able to enjoy life? Is the way we are talking about what we want, aligned with our spending? Are Andrea and I on the same page with what we are doing?

These questions can help us iron out our budget, and re-align our spending with what matters most. But in order to achieve our financial goals, we are going to need to be on the same page.

With some luck, we will be able to quickly increase our income by at least $1,000/mo by early next year, and we will see some gains in the stock market. Or maybe the stock market will tank by then, and we can start pumping funds into index funds while prices are low. The more I think about it, there aren’t too many financial situations that could happen that leaves me concerned over the next few years.

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susieq@financialiqbysusieq.com
Guest

Nice analysis, Chris. There are so many businesses that aren’t as profitable as yours for which it makes more sense to invest the money, but that doesn’t look to be the case for you. Good luck!