Owning a business can be a great way to build wealth—despite the challenges facing Latino and other underrepresented entrepreneurs. In fact, while Latino-owned businesses tend to have lower cash liquidity than other businesses, self-employed Latinos still have approximately five times the median net worth of Latinos on average.
But simply starting a business isn’t a guarantee of long-term financial success. Business owners tend to wear a lot of hats and don’t always know where to focus their energies so as to ensure that the business is working as hard for them as it is for the customer.
We spoke with entrepreneurs and wealth managers across the country to learn how business owners can avoid common pitfalls and establish a foundation strong enough that they—and their companies—can build wealth over time.
1. Shift Your Mindset from “Worker” to “Owner”
Wealth and business manager Louis Barajas has worked with artists and entrepreneurs of all kinds—including the likes of Nicki Jam and Jenni Rivera—and says a common oversight is the way business owners think about themselves.
“[Some business owners] don’t understand the difference between creating a job for yourself and owning a business,” he says. “If you have to be there every day, you don’t own a business. You own a job.”
Graduating into a business owner mindset, Barajas says, comes down to scaling the business. Business owners who have simply created a job for themselves will eventually reach a Ceiling of Complexity, a point where their business cannot grow any further—or bring in any additional revenue—with their existing skills, knowledge, and systems. Founders who have successfully shifted their mindset to see themselves as true owners will think about what their company could look like five or ten years down the line and envision what they need to do to get there.
2. Invest in Yourself
In 2020, Rita Soledad Fernández Paulino transitioned from her job as a public school teacher to a role as founder of her own education platform and money coaching business, Wealth Para Todos.
Over the past two years, she has learned the importance of investing in herself, such as paying for day care for her children and hiring a housecleaner to ensure she had free time to establish her business. Now, she is focused on contracting a business coach, lawyer, and fractional CFO to help with bookkeeping, setting up a trademark, and other projects necessary for moving the company forward.
“[Those are] things I could have done myself,” Fernández Paulino explains. “But I decided, ‘Let me do what I do best, which is my marketing and working one-on-one with people.’”
3. Pay Yourself First
In the eyes of experts, paying yourself first (whether through a traditional paycheck and/or through “owner’s draw”) is not a luxury, but a must have.
“Because they’re living paycheck to paycheck, a lot of business owners take all their money and put it back into the business if their company is growing,” Barajas says.
Those business owners are counting on the fact that the investment in their company will pay off in the long run. But that doesn’t always happen, and then those owners are left without a profitable business and without a personal safety net to fall back on.
4. Implement a Cost-Effective Retirement Plan
Preparing for the future is more important for a business owner than it would be for a typical employee.
Through a Simplified Employee Pension Plan (SEP), employers can contribute to their own retirement as well as their employees’. This type of plan doesn’t have the high operating costs of a usual retirement plan and allows employees to contribute up to 25 percent of their pay.
5. Protect Your Investment
While owning a business can be very lucrative, that’s only possible if you have trusted legal and financial advisors (such as an attorney, tax advisor, and financial planner) who will help safeguard both your original investment and your future profits.
“You need to protect yourself . . . [your] real estate interests, investment interests, and the like,” says Aquiles Larrea, AIF, the founder and CEO of Larrea Wealth Management. “Trust can be the difference between you staying late at night worrying about what would happen if someone sued you versus knowing [you are protected].”
This article is for educational purposes only. This material is not intended to constitute business or financial advice.