My book WEALTH: Simple Tips for Young Professionals is short. As such there are many topics I don't touch on in detail. One of those topics is investing money by setting up your own business.
This is close to my heart. I'm in the process of building my own business. There are many costs associated with this. The biggest cost is opportunity cost - the income I'm foregoing from working elsewhere.
If I were to take a narrow view, the sensible thing would be to continue to work in professional services firms, generate a respectable salary, and use this salary to build wealth.
But let's analyse the situation from a risk and financial perspective.
How risky is it really?
- In terms of financial investment, the cost of setting up a financial services firm is limited. I have to pay for professional registration, professional indemnity insurance, membership of relevant associations, education and continuing professional development, marketing, some office equipment and stationery, and office space.
The costs add up, but unless you're already on the edge financially, it's not likely to bankrupt you.
The big financial cost is the opportunity cost. I try not to let my wife think about it too much, but every week I am working on my business represents another week's worth of salary that I am foregoing, that has at many times in the past supported a fairly comfortable lifestyle.
- I'm exposing myself to potential liability. As the director of my own company, the buck stops with me. But this is why I have professional indemnity insurance. And more importantly - I make sure I provide high quality, appropriate advice!
- There is potential career risk. If the venture doesn't work out, will prospective employers look at my decision to go out on my own as a liability? For example, am I the sort of person who will go out and do his own thing and a "flight risk"?
What about the upside?
- Hand on heart, I think this is the most lucrative thing I can do over the long-run. In the short term it won't be, but over the long-run, setting up my own business and developing a reputation as someone who provides fiercely independent, high quality advice is probably the best thing I can do. The sooner I can set it up, the more good years at the end of my career I'm likely to have.
- Setting up my own business means I don't need to spend a substantial amount of money to buy equity in another professional services firm, whether that be a law firm or a financial advisory business. In some ways, the income I'm foregoing now by working in another firm would need to go towards buying in at some point in the future.
- If I need to get back in the employment market, I believe that establishing my own business, whether it's successful or not, is a professional asset rather than a liability. It means I have more experiences and skills to bring to any potential role I might have. If I can demonstrate an ability to develop business, generate revenue, and operate all of the moving parts of a business, it is likely to make me more valuable.
- From a personal perspective, I have flexibility and autonomy. I can build a business around the lifestyle I want, and around my own personality. I can pursue things I wouldn't be able to otherwise (ie, my conflict-free remuneration structure). I can write a blog and I don't have to worry about whether it represents the views of any organisation I'm associated with. This is priceless.
In the long-run, I think setting up my own business is less risky than being a salaryman. It's better to have dozens or hundreds of employers (clients) rather than one employer. If I can master my own destiny at this point, I'm much less likely to be displaced from the workforce as I get older.
It's important to note that every person's circumstances are unique. If I were wanting to set up a cafe or a restaurant, for example, the calculus would be different. The capital cost would be significant, and it may be difficult to recoup. What I'm doing is aligned with what I've been doing for many years, and it's aligned deeply with my developed and demonstrated professional proclivities.
The purpose of this article is to draw attention to the popular idea that setting up a business is "risky". On the contrary, one of the reasons I'm setting up my own business is because I think it's too risky not to.