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Ask Money

Starting a business and saving

Chris Farrell Jul 7, 2009

Question: I was laid off and now I’m living off my savings. No income for the time being. I’ve been preparing to launch my own business and I’m fortunate because I’ve always been a good saver, so I don’t even have to look for a loan at this point. My question is – where to keep the money I’ve saved? Most of it is in a savings account (got a good deal on interest, but only until 2010) and some is locked into my previous employer’s 401K, earning basically nothing because I’m afraid to go into stocks or bonds. I have a self-employed 401K that’s also inactive – same reason: I don’t want to lose any of my funds… Love the show and the blog and everything! Thanks for any advice. Rina, Bronx, NY

Answer: For the moment, I think you’re doing the right thing keeping your money in a savings account. After all, you’re taking a big risk starting your own business. Good luck with it, too. I hope your idea succeeds. Business history suggests that the best time for entrepreneurs to open up a new business is during a downturn. The savings is an anchor offsetting the risk you’re taking as an entrepreneur. And you need the money to live on.

Don’t let the stock market paralyze you. There is nothing wring with being conservative. The counsel that equities should form the foundation of a long-term investment portfolio owes a huge debt to the finance insights of Paul Samuelson, the Nobel laureate. For many people I think equities should be part of their retirement portfolio. Yet in an interview I had with Samuelson about a decade ago, he said, “there are lots of reasons to have an equity share which is significant. But it all depends on your risk tolerance. For my late mother, her level of risk tolerance called for a very small equity share. You have to always sell down to the sleeping point.”

You’re a good saver. I’d continue to save for your retirement when your financial circumstances improve. But I’d do it in products that are safe and secure–and allow you to sleep.

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