July 15, 2024 – Wealth Planning Commentary

Planning for Young Entrepreneurs

Are you a Gen X, Millennial, or Gen Z entrepreneur? Startup founders in these age groups often work in tech, ecommerce, and digital marketing. Even if you've already achieved success at a young age, it's crucial to keep up the momentum on your financial journey to meet your objectives.

Income Tax Considerations

Navigating income taxes can be tricky, but there are many opportunities for savings. For instance, if your startup is backed by institutional investors and structured as a C corporation, you might be eligible for a fantastic tax break: the Qualified Small Business Stock (QSBS) exemption. This allows you to exclude up to $10 million of taxable gain per person when you sell your corporation.

Another strategy is the Section 83(b) election for restricted stock awards (RSAs), which lets you pay taxes on the fair market value of the stock when it's granted. If the stock's value rises, you could save significantly on taxes. Collaborate with a CPA and wealth planner to fine-tune your tax strategy and boost your financial strength.

Budgeting and Cash Flow Management

Create and maintain a straightforward but effective personal and business budget. Avoid common pitfalls like lifestyle creep and overextending finances, especially after a significant financial windfall. For example, one entrepreneur we know bought a $5 million house by leveraging a single stock position, but a drop in the stock's value led to a painful margin call and ultimately forced her to sell the house.

Save more than you spend and assess the risks of your financial decisions carefully. Consider focusing on your current situation rather than relying on future earnings. High-income earners sometimes save very little, which can jeopardize long-term financial security. Effective wealth planning can show the benefits of disciplined saving and the risks of spending everything you earn.

Retirement Planning

Many young entrepreneurs dream of early retirement or becoming digital nomads, but it takes meticulous planning. As life expectancies stretch into the mid-90s, covering your own medical insurance will become increasingly costly with age. Unless you secure significant liquidity, it's wise to work in some capacity. Contributing to tax-advantaged retirement plans can help support an early retirement, with savings compounding over your lifetime.

Investing

While you're likely optimistic about your ventures, balance it with caution. Keep 6-12 months of cash reserves to guard against short-term uncertainties. Diversification is key to maintaining and growing wealth. If you're in the tech sector, consider diversifying other investments away from tech to spread out risk. Be cautious with cryptocurrency due to its volatility and remember that while investing in friends’ startups can be tempting, 90% of startups fail. Explore well-vetted alternative investment options for more favorable risk-adjusted returns and diversification.

For any questions or further advice, feel free to contact your Wealth Manager.