It’s possible to reach financial independence either with your own business or a job. But there are five reasons why it’s more likely to happen if you own your own business.
1. There’s No Limit on Your Income
When you hold a job – any job – there’s usually an income range that determines how much you can earn. A position might pay a range of, say, $50,000 to $75,000. If you have little or no experience, you’ll earn the lower end of the range. But if you’re well-qualified, and you do the best job possible in the position, your salary will be at the upper end.
But that’s where it will end. Even if you exceed expectations, it’s unlikely that your income will rise past the maximum. And if it does, you may find yourself unable to move into comparable positions with competing employers. They may be either unwilling or unable to match your income level.
If you have your own business, none of that applies. You’ll earn as much as your time, talents and effort will allow. And even if you reach the limits in those areas, you can always leverage your business by bringing others into the picture. That includes hiring employees, engaging contractors, joining networking groups, or even taking a partner. Since you are in control, you can do whatever is necessary to increase your income.
2. Doing What You Love = Higher Income
Sadly, many people take a job primarily to pay the bills. They may even assume that it’s temporary. But as most of us know, temporary has a way of turning into permanent, especially when it comes to a job. You get on the career ladder, and the specific work that you do is closely controlled by your employer. That’s not the way to reach financial independence.
One of the advantages of having your own business is that you get to choose what field you’ll be in. You can decide if you want to sell a product or provide service. It can be primarily a creative function, or a management process. You can start small, and grow large. As a matter of fact, you can take the business in any direction you want – because you’re in control.
And a funny thing happens when you’re in control…you tend to thrive. Life is a blank canvas, that you’re painting anyway you choose. That will give you a greater level of personal commitment, which almost always translates into a higher income. That’s to say nothing of the many options that will be available to you to continue increasing your income beyond what you ever believed possible.
3. You May be Able to Sell Your Business for a Big Windfall
Many businesses can be sold for a substantial amount of money. It’s not uncommon for a business to sell for two or three times annual revenues. For example, if your business has a gross income of $250,000, you may be able sell it for somewhere between $500,000 and $750,000. The actual amount could be higher or lower, depending on the type of business it is. But this is an example of what’s possible.
In this situation, the sale of your business could produce an immediate increase in your wealth. You may want to do that when you retire, or you might do it after just a few years, freeing you up to pursue other options.
4. Financial Independence means You Never Need to Retire
It’s always nice to know that you can retire. But it’s equally encouraging to know that you don’t have to if you don’t want to. A lot of self-employed people don’t. Their businesses are an important part of their lives, and they have no desire to retire. But that opens interesting wealth building opportunities.
Imagine that you could retire at 50 or 55, but you choose not to. You have a substantial amount of wealth, but you’re not ready to quit. How much more wealth can you build from that point forward? You may have financial independence, but it might be a matter of building up extra for the benefit of your children and grandchildren, or even to support a favorite charity.
The point is, you’ll have that option. In most jobs, you’ll be expected to retire somewhere around age 65. But the reality is that in many career fields, you’re forced out as early as 50. With your own business, there’s no one to force you into retirement. You can choose when to retire, and under what circumstances. That can enable you to continue earning money when job holders are forced off the payroll.
5. More Generous Retirement Plans
With most employer-sponsored retirement plans you’re limited to the contributions that are permitted under common plans, like a 401(k), 403(b), or 457 plan. For 2018, the contribution limits to those plans are $18,500, or $24,500 if you are 50 or older.
You can receive an employer match, but it’s usually well below the amount of your contribution. As well, employer matching contributions come with vesting schedules.
But if you’re self-employed, you can take advantage of either a SEP IRA or a Solo 401(k). Both have much higher contribution limits.
Under the SEP IRA plan, you can contribute up to 25% of your income, to a maximum of $55,000 for 2018.
The Solo 401(k) plan works much like an employer-sponsored 401(k) plan. The exception is that you are both the employer and the employee in the plan. As the employee, you can also contribute up to $18,500 for 2018 ($24,500 if you are 50 or older).
But as employer, you can contribute up to 25% of self-employment income, or of compensation as defined by the plan. This means that your total contribution to a Solo 401(k) plan could be as high as $55,000, or $61,000 if you are 50 or older.
There’s one more major benefit: you can invest your retirement funds anyway you like. There are no employer restrictions.
Can you see how the larger contributions that are available to a business owner make you more likely to reach financial independence than a job? Better still, they can even help you to reach retirement sooner.
When you consider all the advantages that come when you own your own business, it’s easy to see how financial independence is easier to attain.