Investing as a small business owner

As a small business owner, you work hard for your money and your money should work hard for you too. Here are some financial tips for your business and your life.

Planning for your future

An investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition plan is the foundation for building your financial future. A good plan can help you increase your savings and stay ahead of inflationInflation A rise in the cost of goods and services over a set period of time. This means a dollar can buy fewer goods over time. In most cases, inflation is measured by the Consumer Price Index.+ read full definition. It can also help reduce your stress levels by mapping out a blueprint for the coming years. You might find taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition incentives or advantages too, depending on how you decide to investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition. With a solid financial plan in place, you’ll have more time to focus on your passion — running your business.

Investing 101

When you started your business, you likely had a dream of where you hoped it would be in five or ten years. Long-termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition thinking is important for investing too. Over time, your investments normally grow in value, this can give you the financial resources to expand your business or provide a steady income in retirement. Your investments can also give you peace of mind by helping to ensure you have a financial cushion for emergencies, or, for your children’s education.

There are many investment products and ways to invest.

Diversification

If you have a diversified portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition, it means you own a mix of different types of investments such as stocks and bonds. It also means you’re investing in different sectors or industries. Spreading your investment risk through diversification, helps prevent significant losses that can occur since similar investment assets tend to lose value at the same time.

Index funds

Many do-it-yourself investors enjoy researching and buying investments on their own, but if you’re busy running a business, you may not have time to follow the markets. Exchange-traded funds and mutual funds offer access to many different investments, such as stocks, bonds and other funds in a single product. They are managed by professional money managers. IndexIndex A benchmark or yardstick that lets you measure the performance of a stock market, part of a stock market or a single investment. Examples: S&P/TSX, S&P/TSX Canadian Bond Index.+ read full definition funds can give you instant diversificationDiversification A way of spreading investment risk by by choosing a mix of investments. The idea is that some investments will do well at times when others are not.+ read full definition as they mimic the performance of a specific index or benchmarkBenchmark A yardstick that you can use to measure the performance of an investment. Example: a stock market index may be a benchmark you can use to compare how well your own stocks are doing.+ read full definition, such as the S&P/TSX Composite Index.

Time horizon and risk

Time horizon is the length of time an investment is expected to be held before it is sold. If you hold investments with a longer time horizonTime horizon The length of time that you plan to hold an investment before you sell it. This may be a brief period of time or span as long as decades, depending on your financial goals.+ read full definition, then the risk is usually lower. Investments like stocks are exposed to higher risks in the short term, but they have historically produced overall positive returns in the long term. A longer time horizon also gives your investments the time to recover from short-term losses.

You might consider investing in low-risk investments if you have a shorter time horizon. Savings bonds, money marketMoney market Low-risk investments that mature in less than three years and are very easy to turn into cash. This includes short-term GICs, bonds, and treasury bills.+ read full definition funds and GICs offer modest, low risk returns, but they are easier to turn into cash. Higher-risk investments may appeal to you for their higher potential returns, but their values can fluctuate significantly in the short term, which can result in poor investment outcomes if you need to cash out before it can recover.

Working with a financial advisor

If you decide to work with a financial advisor, you can benefitBenefit Money, goods, or services that you get from your workplace or from a government program such as the Canada Pension Plan.+ read full definition from their expertise.

A financial advisor can help you develop an investment plan that meets your goals and suits your risk tolerance. Depending on their qualifications, some advisors offer additional services like financial planning, debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition management, and tax and estate planningEstate planning The plans you make to build and manage wealth for your lifetime and thereafter. Goals may include leaving the most money possible to your loved ones, with the least amount of taxes. Other goals may include caring for children, paying off debt or passing on a business.+ read full definition.