New into small business and this forum - Need advice

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Topic Author
ajm1489
Posts: 5
Joined: Mon Apr 15, 2019 3:31 pm

New into small business and this forum - Need advice

Post by ajm1489 » Mon Apr 15, 2019 3:45 pm

Hello,
Me and my wife started a dance school as its her passion. We both have regular jobs and this is purely out of passion. Though, this business is not supposed to earn our daily living, I dream of growing it in the future. We have a monthly profit of around $600, and would like to put that money into work. Our dream is to buy a dance studio in 6-8 years. My questions is:
- Do I invest a part of monthly profit into a certain index fund or some other fund that we will be able to withdraw after 8 years? I hate to miss out on power of compounding which is why I would like to invest.

Thank you for taking the time to read my question. I am following Dave Ramsey baby steps in our personal finance to pay off debt, save for emergencies etc. but I am totally confused on how to proceed with the business finance. Would greatly help if you can guide me in this area.

Have a blessed day!

ResearchMed
Posts: 8472
Joined: Fri Dec 26, 2008 11:25 pm

Re: New into small business and this forum - Need advice

Post by ResearchMed » Mon Apr 15, 2019 5:33 pm

ajm1489 wrote:
Mon Apr 15, 2019 3:45 pm
Hello,
Me and my wife started a dance school as its her passion. We both have regular jobs and this is purely out of passion. Though, this business is not supposed to earn our daily living, I dream of growing it in the future. We have a monthly profit of around $600, and would like to put that money into work. Our dream is to buy a dance studio in 6-8 years. My questions is:
- Do I invest a part of monthly profit into a certain index fund or some other fund that we will be able to withdraw after 8 years? I hate to miss out on power of compounding which is why I would like to invest.

Thank you for taking the time to read my question. I am following Dave Ramsey baby steps in our personal finance to pay off debt, save for emergencies etc. but I am totally confused on how to proceed with the business finance. Would greatly help if you can guide me in this area.

Have a blessed day!
Welcome to Bogleheads!

And congratulations on getting of to a nice start with the dance lessons.

However, while you are putting money aside for a studio in the future (from lesson profits or otherwise), what is this about "pay[ing] off debts"?
If you have serious debt, then that probably should be the first use of extra funds, especially if these are not at a particularly low interest rate, similar to what your savings would be earning.

RM
This signature is a placebo. You are in the control group.

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arcticpineapplecorp.
Posts: 3882
Joined: Tue Mar 06, 2012 9:22 pm

Re: New into small business and this forum - Need advice

Post by arcticpineapplecorp. » Mon Apr 15, 2019 7:19 pm

ajm1489 wrote:
Mon Apr 15, 2019 3:45 pm
Hello,
Me and my wife started a dance school as its her passion. We both have regular jobs and this is purely out of passion. Though, this business is not supposed to earn our daily living, I dream of growing it in the future. We have a monthly profit of around $600, and would like to put that money into work. Our dream is to buy a dance studio in 6-8 years. My questions is:
- Do I invest a part of monthly profit into a certain index fund or some other fund that we will be able to withdraw after 8 years? I hate to miss out on power of compounding which is why I would like to invest.

Thank you for taking the time to read my question. I am following Dave Ramsey baby steps in our personal finance to pay off debt, save for emergencies etc. but I am totally confused on how to proceed with the business finance. Would greatly help if you can guide me in this area.

Have a blessed day!
welcome to the group!

6-8 years is sorta short termish. compounding works best over decades. Also, what if you invest and the market goes down and doesn't recover in such a short span of time? I'm not saying you can't take any risk, but I think you have to limit the risk because of the time period in which you need the money.

Let's say you put it in a high yield savings account. Ally's paying 2.20% right now. Let's say you put $600 in that each month for 6 years, 7 years or 8 years. Compounding at 2.2% (we don't know the future, it could pay more or less so let's just assume no change for the moment).

using excel if you earn 2.2% a year, and save $600 per month, you'd have:
In 6 years: $46,135.77 (you will have saved $43,200 and the rest is interest). Formula is =FV(.022/12,72,-600)
In 7 years: $54,434.10 (you will have saved $50,400 and the rest is interest). Formula is =FV(.022/12,84,-600)
In 8 years: $62,916.85 (you will have saved $57,600 and the rest is interest). Formula is =FV(.022/12,96,-600)

don't forget you'll have to pay taxes each year on the interest earned

How much will you need to buy a studio (in 6, 7, or 8 years. Don't forget about inflation. The cost to buy a studio will likely cost more years later than now because of inflation)? If you will have enough from the amounts above, then you really don't need to take additional risk to earn more. If the amounts above are not enough, you'll either have to:

1. save more than $600 a month
2. take longer than 8 years to reach your goal
3. take more risk for higher return (like an intermediate term bond fund or a balanced fund)

what are your thoughts?
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

Topic Author
ajm1489
Posts: 5
Joined: Mon Apr 15, 2019 3:31 pm

Re: New into small business and this forum - Need advice

Post by ajm1489 » Mon Apr 15, 2019 11:26 pm

ResearchMed wrote:
Mon Apr 15, 2019 5:33 pm
ajm1489 wrote:
Mon Apr 15, 2019 3:45 pm
Hello,
Me and my wife started a dance school as its her passion. We both have regular jobs and this is purely out of passion. Though, this business is not supposed to earn our daily living, I dream of growing it in the future. We have a monthly profit of around $600, and would like to put that money into work. Our dream is to buy a dance studio in 6-8 years. My questions is:
- Do I invest a part of monthly profit into a certain index fund or some other fund that we will be able to withdraw after 8 years? I hate to miss out on power of compounding which is why I would like to invest.

Thank you for taking the time to read my question. I am following Dave Ramsey baby steps in our personal finance to pay off debt, save for emergencies etc. but I am totally confused on how to proceed with the business finance. Would greatly help if you can guide me in this area.

Have a blessed day!
Welcome to Bogleheads!

And congratulations on getting of to a nice start with the dance lessons.

However, while you are putting money aside for a studio in the future (from lesson profits or otherwise), what is this about "pay[ing] off debts"?
If you have serious debt, then that probably should be the first use of extra funds, especially if these are not at a particularly low interest rate, similar to what your savings would be earning.

RM
Thank you for the reply. The debt I was talking is our personal debt like student loan, car payment etc. We keep our personal account and business account totally separate since we do not live on it.

Topic Author
ajm1489
Posts: 5
Joined: Mon Apr 15, 2019 3:31 pm

Re: New into small business and this forum - Need advice

Post by ajm1489 » Mon Apr 15, 2019 11:30 pm

arcticpineapplecorp. wrote:
Mon Apr 15, 2019 7:19 pm
ajm1489 wrote:
Mon Apr 15, 2019 3:45 pm
Hello,
Me and my wife started a dance school as its her passion. We both have regular jobs and this is purely out of passion. Though, this business is not supposed to earn our daily living, I dream of growing it in the future. We have a monthly profit of around $600, and would like to put that money into work. Our dream is to buy a dance studio in 6-8 years. My questions is:
- Do I invest a part of monthly profit into a certain index fund or some other fund that we will be able to withdraw after 8 years? I hate to miss out on power of compounding which is why I would like to invest.

Thank you for taking the time to read my question. I am following Dave Ramsey baby steps in our personal finance to pay off debt, save for emergencies etc. but I am totally confused on how to proceed with the business finance. Would greatly help if you can guide me in this area.

Have a blessed day!
welcome to the group!

6-8 years is sorta short termish. compounding works best over decades. Also, what if you invest and the market goes down and doesn't recover in such a short span of time? I'm not saying you can't take any risk, but I think you have to limit the risk because of the time period in which you need the money.

Let's say you put it in a high yield savings account. Ally's paying 2.20% right now. Let's say you put $600 in that each month for 6 years, 7 years or 8 years. Compounding at 2.2% (we don't know the future, it could pay more or less so let's just assume no change for the moment).

using excel if you earn 2.2% a year, and save $600 per month, you'd have:
In 6 years: $46,135.77 (you will have saved $43,200 and the rest is interest). Formula is =FV(.022/12,72,-600)
In 7 years: $54,434.10 (you will have saved $50,400 and the rest is interest). Formula is =FV(.022/12,84,-600)
In 8 years: $62,916.85 (you will have saved $57,600 and the rest is interest). Formula is =FV(.022/12,96,-600)

don't forget you'll have to pay taxes each year on the interest earned

How much will you need to buy a studio (in 6, 7, or 8 years. Don't forget about inflation. The cost to buy a studio will likely cost more years later than now because of inflation)? If you will have enough from the amounts above, then you really don't need to take additional risk to earn more. If the amounts above are not enough, you'll either have to:

1. save more than $600 a month
2. take longer than 8 years to reach your goal
3. take more risk for higher return (like an intermediate term bond fund or a balanced fund)

what are your thoughts?
Thank you for this wonderful analysis. I am totally in agreement with you. I think at this point, the easiest thing we could do is to grow our business that will generate more revenue and profit so that we can save for the dance studio. Would you recommend putting that saved money in some market at all rather than keeping it in savings account?

User avatar
arcticpineapplecorp.
Posts: 3882
Joined: Tue Mar 06, 2012 9:22 pm

Re: New into small business and this forum - Need advice

Post by arcticpineapplecorp. » Tue Apr 16, 2019 4:43 pm

ajm1489 wrote:
Mon Apr 15, 2019 11:30 pm
Thank you for this wonderful analysis. I am totally in agreement with you. I think at this point, the easiest thing we could do is to grow our business that will generate more revenue and profit so that we can save for the dance studio. Would you recommend putting that saved money in some market at all rather than keeping it in savings account?
what market do you mean? stock market? bond market? money market?

money you need in the short term you really can't take too much risk with because what will you do if it's not there when you need it? Stock market investments are best for 10+ years because if there's a downturn it could take several years before you recover. If you don't need the money until then, you'd be fine. That doesn't sound like the case here.

bonds are safer than stocks but carry some risk (interest rate risk)

so high yielding savings or a bond fund that's short to intermediate would be your options. Or a money market account which at Vanguard is competitive with Ally's savings acct.

I would be hesitant to tell someone to invest in stocks when they need the money in 6 or so years.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

dbr
Posts: 28517
Joined: Sun Mar 04, 2007 9:50 am

Re: New into small business and this forum - Need advice

Post by dbr » Tue Apr 16, 2019 4:52 pm

Any investment these days compounds meaning the return each years applies to the total of what you had and what you earned the year before. The difference is how large the returns are on average and how much they vary. Risky investments like stocks can compound into a big loss just as well as into a big gain. In one year stocks could compound down to half what they were to start with. The real question is how harmful if would be to your plans to take a loss when you need the money. If I were saving to grow a business I would just be saving in savings accounts, money market funds, or CDs as you can get at least around 2% or so these days and no chance of negative returns. (There is a slight oversight in that given one is ignoring inflation; the cost of your business could be more as time goes on. There are short TIPS and even I bonds for that, though.))

Topic Author
ajm1489
Posts: 5
Joined: Mon Apr 15, 2019 3:31 pm

Re: New into small business and this forum - Need advice

Post by ajm1489 » Wed Apr 17, 2019 1:09 pm

Thank you for the reply everyone. I am looking into increase the amount and putting that amount in Vanguard money market for minimal gains and no risk.

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