Do you find yourself constantly aggravated about never having the cash on hand to accomplish all you desire or the capacity to jump at opportunities as they arise?
As small amounts of reserve capital begin to accumulate, it’s incredible how many demands surface to deplete us of that money: quarterly tax deposits, a job gone bad, a late subcontractor invoice that floated in from a job completed 90 days ago; and so on and so on.
Smart owners feverishly squirrel away any extra money not needed to pay this month’s bills and hope they won’t need it next month and maybe even will have a bit more to add to it if they’re lucky. This is building a savings account by the wish-and-hope method.
Really smart owners use a planned method that builds cash reserves. Here’s one I’ve recommended for years and used myself quite successfully.
Go to your bank and open a corporate savings account. The next check that you receive, have the bank show you how to make a split deposit between the operating account and your new corporate savings account.
Do not deposit the entire check into your operating account.
Take five percent of the total check and put it into that corporate savings account. Ninety-five percent lands in your operating account.
After that comes the hard part: You have to forget about that five percent split. Pay all obligations out of the operating account.
Put this money away mentally under a lock and key.
Do not touch it!
I have found that accumulating cash reserves in this way is addicting, and once entrepreneurs begin to taste it, it becomes an unquenchable thirst.
A $1 million company, at the end of one year, should have an unencumbered savings account of $50,000. At the end of five years, this will grow to $250,000 in cash sitting in a standalone account.
If this is accomplished by the time you are 40, and you never add another dime to it after that, you can simply let it grow at a 2.5 percent compounded interest rate until you’re 65 and you’ll have a $440,000 nest egg waiting for you at retirement. At five percent interest, it would be $770,000.
Now that’s really smart.
In that same 25 years, if you do add $50,000 every year, and it keeps growing at a compounded 2.5 percent interest rate, you’ll have $1.75 million. At 5 percent interest, it would be $2,505,000.
Now that’s really, really smart . . . and yeah, it is addictive!
You like playing with numbers? Check out the Growth Stability Calculator over at Remodelers University!