Suze Orman in New York City.
Suze Orman, personal finance expert and best-selling author, advises small business owners to get their personal and business finances back on track as they recover from the pandemic.
Saving, investing, and managing credit card debt are all part of it.
“You have to put yourself in a position where you can pay your bills no matter what,” said Orman, host of the podcast “Women & Money (And Everyone Smart Enough To Listen).”
During CNBC + Acorns, Orman shared her advice and much more with LGBTQ+ small business owners and allies. Thursday, Invest in Pride: Ready. Set. Grow. on LinkedIn.
Here’s how Orman suggests small business owners handle money in the aftermath of the pandemic.
Small business owners can save for retirement in a variety of ways.
They can set up a SIMPLE IRA, which allows employees to contribute to the plan, or a SEP IRA, which only allows the owners to contribute. They can also fund a solo 401(k), which is for a sole proprietor with no employees.
James Kingman, psychotherapist and owner of Unlimited Spectrum Counseling in Atlanta, wanted to know how to get started.
Orman’s advice: Because he doesn’t have employees, he should contribute to a Roth IRA until it is maxed out (which is $6,000 in 2020, or $7,000 if you are over 50). Then, set up a solo Roth 401(k) (k).
Once Kingman has employees, Orman suggests looking into other options.
Because compound interest is interest earned on interest, the earlier you start saving for retirement, the better.
“It’s like a little snowball rolling down a mountain in beautiful snow, and it gets bigger and bigger, and the longer it rolls, the bigger it gets,” Orman, who recently co-founded Secure, an employer-matched emergency fund for employees, explained.
For example, if an 18-year-old opens a Roth IRA and contributes $100 per month for the next 40 years, assuming a 12% annual average rate of return, he or she will have $1 million at the end. She claims that if he or she waited 10 years to begin, the end result would be only $300,000 by the age of 58.
Orman believes that having a 12-month emergency fund is essential these days.
If you want to save more after that, outside of a retirement plan, she recommends a series I savings bond if you have at least $10,000. It is linked to the rising rate of inflation.
The interest rate is a combination of a fixed rate, which is currently 0%, and a semiannual inflation rate, which is currently 3.54 %.
It has a one-year minimum term of ownership, and if you redeem it before five years, you’ll lose the interest earned over the previous three months. There is no penalty after five years.
The answer is dependent on how much money would be left over after the debt was paid off. Orman recommends saving a year’s worth of working capital as well as a 12-month emergency fund for your business.
Then, if you have extra cash, pay off your credit cards, she advised.
“When you pay it off, your debt-to-credit-limit ratio decreases and your FICO [credit] score increases, so when you need a loan, you’ll be able to get it at a lower interest rate,” Orman explained.
Investing should be done after you have an emergency fund in place, and it should be done for the long term — at least five years, preferably 10 to 20 years, according to Orman.
Denise Merritt, founder and CEO of Apopka, Florida-based Merritt Business Solutions, is concerned about protecting those investments from an economic downturn.
Orman’s advice: If you have investments, don’t panic when the markets begin to fall.
“I don’t know of a single market that hasn’t returned to its peak in all the years I’ve been doing this,” she said.
Catherine Swanson, a therapist, is currently working a 9-to-5 job to make ends meet. She, on the other hand, aspires to make her part-time business, Alternatives: Music Therapy and Counseling, her full-time occupation. Her main concern is determining the best time to do it.
The Ankeny, Iowa-based company currently does not generate enough revenue to support Swanson, falling short by $2,000 to $3,000 per month. Swanson, on the other hand, believes that if she goes full-time, she will be able to make enough money.
Before making the leap, she should have a one-year emergency fund and three to four months of working capital set aside for the business, according to Orman.
She also recommends obtaining business credit cards, which do not report to credit reporting agencies, in case Swanson requires some assistance. There are some who don’t, unless you’re a criminal.
“Then go have some fun and kiss that job goodbye,” Orman advised.