ARMSTRONG WILLIAMS: Wealth building 101: Squirrel something away

ANALYSIS/OPINION:

The most important concept in business is leverage. Leverage in physics means using gravity or other natural forces to move a large object with a relatively small amount of applied power. In business, leverage implies using a relatively small amount of capital to earn a large amount of profit. The principal job of the business owner is to seek opportunities to employ financial leverage.

But opportunities, whether created or merely stumbled upon, require the business owner to have some funds already. Even if, for example, you were to find a bushel of apples selling for one-tenth of the price one could sell them for somewhere else — you’d still have to come up with the purchase price before you can even begin thinking about making a profit off those apples.

The reality is that business owners these days rarely have all the capital on hand they need to take advantage of great opportunities. Often, by the time they are able to assemble the capital — whether through finding others to invest or through borrowing — the opportunity has passed.

One of the most important things a good business person can do in the early stages of his or her career is to squirrel something away. Whether one’s source of income initially comes from employment or profits from a business venture, some money should be stashed away to be applied to future opportunities. These funds should not be mistaken for a rainy day fund. No, the rainy day fund should be separate. These funds are in essence a ’sunny day’ fund. Because that is their purpose — to enable the entrepreneur to take full advantage of future sunny days.

I learned the real importance of squirreling something away for a sunny day from my parents. As small farmers, they always saved something whenever they were able to sell their produce or livestock. No matter how tight our household financial situation, the savings was just automatic. They squirrelled away at least 10 percent of everything they took in. And over time that amount grew and grew and grew until it was a sizeable nest egg. They in turn used these funds to make purchases of equipment or land at a great discount when opportunities arose.

Squirreling away is a practice that I have followed faithfully since the beginning of my business career. I have always saved at least 20 percent of any income that I have earned, and often much more. I did not do this to achieve any particular goal — such as saving up for a car or a home — but merely as a business ethic. I did not know what opportunities might have been on the horizon, but I knew there would be opportunities and I wanted to be prepared to capitalize on them. In fact, after almost a decade of business, I really had no idea how much I had saved until one day my accountant in 2001 casually remarked, “Hey, Armstrong, you are now officially a millionaire.” I was shocked.

Over time, the ethic just reinforces itself. Wealth becomes almost a foregone conclusion. One of the most important things the sunny day fund did for me was to buy time. I was able to participate in longer-term business projects and choose partnership opportunities based on my real interests, not because I had to do so to keep my lights on. I was also able to meet and learn from some of the absolute best entrepreneurs in the country, because I could travel and hang out with them, but didn’t need anything from them. I didn’t need a job or a loan, or even a partnership in a business deal. This enabled me to build solid relationships, to learn at the side of great men and women, and to gain important contacts and wisdom that would come into play when really important opportunities eventually arrived.

Another great benefit of the saving for a sunny day is that I could self-finance some of my own projects. When I saw an opportunity, for example, to rent hotel rooms in bulk far in advance of presidential elections and create a tour package for inauguration attendees, I could immediately act and get a great price for the rooms. Of course, no bank would have lent me the funds with only hotel rooms as collateral. And of course, there was no guarantee that the project would be successful. Had I borrowed the funds from a bank or private individual and the venture had failed, I would have been in debt and would have had to pay back the borrowed funds plus interest.

Squirreling away is not only a great business strategy, but it is one of the fundamental ethics of wealth creation. It not only allows one to take advantage of opportunities when they arise, but puts one in a position to wait and choose the right opportunity for the right reasons.

• Armstrong Williams is sole owner/manager of Howard Stirk Holdings and executive editor of American CurrentSee Online Magazine.