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the seven pearls of financial wisdom. Copyright © 2012 by Carol Pepper and Camilla Webster. All rights reserved. Printed in the United States of America. For information, address St. Martin’s Press, 175 Fifth Avenue, New York, N.Y. 10010.

www.stmartins.com

Design by Patrice Sheridan

ISBN 978-0-312-64166-5 (hardcover) ISBN 978-1-250-00832-9 (e-book)

First Edition: May 2012

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CHAPTER 1 WEALTH BUILDING THE FIRST PEARL OF FINANCIAL WISDOM: A Woman Must Build Her
CHAPTER
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WEALTH BUILDING
THE FIRST PEARL OF FINANCIAL WISDOM:
A Woman Must Build Her Own Wealth
The first pearl of wisdom we want to offer you is that a woman must
build her own wealth. Traditionally, we have been raised to think that
somehow, magically, our financial well-being will be taken care of by oth-
ers, either by family inheritance or, more likely, by marrying a man who
earns a lot of money.
It is understandable that most of us have never really considered the idea of
building our own wealth; only in the last few years has it even been a realistic
possibility. Women couldn’t get a business loan on their own until the 1970s
in America. As Ana Harvey, the assistant administrator for women’s busi-
ness ownership at the U.S. Small Business Administration (SBA) explains,
Congress passed the Equal Credit Opportunity Act in 1974, which,
among other things, made it illegal for creditors to discriminate against
anyone on the basis of race, color, religion, national origin, sex, marital
status, age, or whether or not a person is receiving public assistance. Sud-
denly women, who had always been required to have a male cosigner,
could secure loans on their own, at least in theory. In fact, women con-
tinued to face significant discrimination for a number of years.

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It wasn’t until 1988 and the passage of the Women’s Business Own- ership Act that the needs of women in business—such as access to re- sources and the elimination of discriminatory lending practices by banks that favored male business owners—were addressed. It was a move that Julie Weeks, the head of Womenable, a research, program, and policy- development consultancy whose mission is to improve the environment for women-owned businesses worldwide, calls “the big bang in women’s entre- preneurship.” According to the American Express OPEN State of Women- Owned Businesses report, in 2011 there were an estimated 8.1 million women-owned businesses in the United States, generating $1.3 trillion in revenues and employing nearly 7.7 million people. 1

in revenues and employing nearly 7.7 million people. 1 Here is the grain of sand that

Here is the grain of sand that first enters our snug shell—the unfortunate reality of what happens to a woman who does not assume responsibility for building her own wealth: She develops an unspoken terror that one day she will be the little old homeless bag lady she sees on the street. A report from the Center for Prog- ress called Straight Facts on Women and Poverty reveals that 13.8 percent of women are poor in the United States versus 11.1 percent of men. Over the age of seventy- fi ve, 13 percent of women are poor versus 6 percent of men. This gap is bigger here than in any other developed country in the world. 2 Three quarters of the women with incomes below the poverty line are single women. We say a woman “must” build her own wealth to avoid becoming an unfortunate statistic. We really must take care of ourselves!

THE GRAIN OF SAND IN THE OYSTER SHELL

Do you know a woman who

• Works in a low-paying, service-oriented job?

• Has a great corporate job but still earns less than the men in her field?

• Has been divorced and has had to lower her standard of living?

• Has been divorced and has to pay alimony to her husband?

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Has to shoulder the entire burden of child support because of an ex- husband who won’t pay?

• Has a wonderful husband who lost his job and can’t find another one?

• Has a husband who became ill and can no longer work?

Has been widowed and whose late husband left insufficient funds for her retirement years?

Has no money saved for retirement and no idea what she will do to support herself in her old age?

• Is one of the 13 percent of American women who are poor in their old age (versus only 6 percent of men)?

If you do know any women like this—or if any of these situations apply to you—then it’s a perfect opportunity to turn a grain of sand into a pearl of great price. The good news is that today, by following our first pearl of wisdom and by realizing that you must build your own wealth—for your own sake and for the sake of your family—you can avoid the heartbreak of poverty in your later years. When you have money, you have security, you have choices, and you can make plans. Whether you are a mother planning your children’s education, a new wife discussing money plans with your husband, a new college graduate considering your first career, or a retiree considering helping a family member, remember that your own financial security is paramount.

How do we build our own wealth? There are many ways to go about it; below, we will cut through the bewildering number of possibilities and help you get focused on the most effective strategies.

START YOUR OWN BUSINESS

Why Investing in Your Own Company Delivers the Biggest Return by Far

Starting a business is by far the best way to build your own wealth today. When you are trying to build wealth, you need to recognize that the world

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still offers obstructions as well as opportunities. If you are a highly edu- cated woman, chances are good that you have pursued a corporate career. Working for a large company may make sense in the early years, so that you can develop great experience in a field. However, in the corporate world, women are still earning seventy-seven cents on the dollar compared to men. The glass ceiling is very much alive, and the ranks of women at the most senior levels are thin. Many women leave the corporate life to start their own business precisely because they realize that they will never earn as much as their male counterparts, particularly at the senior level. They then take their excellent skills and put them to work in a small business. Between 1997 and 2011, when the number of businesses increased in the United States by 34 percent, the number of women-owned businesses increased by 50 percent—a rate one and a half times the national average. 3 When you own your own company, you have a chance to level the playing eld in terms of your salary, bonus, and even preferred insurance rates. “The great equalizer for women in my mind is entrepreneurship,” says Marsha Firestone, Ph.D., the founder of Women Presidents’ Organization (WPO), a nonprofit membership organization for women who serve as presidents of multimillion-dollar companies. Today, two out of every three new businesses are started by women. 4 “Many [women business owners] come from the corporate world, where they’ve hit the glass ceiling or the level of flexibility they seek is not avail- able. They know they can do just as well—or better—on their own, and so they go into business for themselves,” explains Ana Harvey of the U.S. SBA. Although the prevailing view is that women are running mom-and- pop-style operations, Marsha Firestone says research shows that “the fastest- growing segment of women-led companies are those that have more than a million dollars in annual revenue.” The World Wealth Report, published each year by Merrill Lynch and Capgemini, reveals that the majority of all global wealth is created by family-owned businesses. Business-owner data also reveals the potential for greater earnings for business owners rather than employees. In the top 25 percent of earners, entrepreneurs make more money than those who work for employers. The average small-business-owning family earned $185,350 in 2007, compared to $64,207 earned by non-business-owning households. 5

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If owning your own business becomes your sole vocation, you’ll be able to set your work schedule and get excellent tax breaks. If it’s a secondary interest, you will gain more financial security in the new freelance econ- omy. This is the era when your business vision can come true at any age, and there’s a lot to consider when starting your own business. As Oprah Winfrey says on her website, “What I know for sure is that if you want suc-

cess, you can’t make success your goal

the key is not to worry about

being successful; but to instead work toward being significant—and the success will naturally follow.” We realize there are many excellent resources available to help women start businesses. In this section, we want to dispel some of the myths sur- rounding this path to wealth building and help you focus on the most im-

portant things to know before you get started.

To Succeed in Your Own Business, Start with a Good Idea

We want to dispute the widely held belief that you must only start a busi- ness that reflects your deepest passion. Although that would be ideal, this daunting preconception can stop you from pursuing the best way to build your wealth. According to Marsha Firestone, the single most important char- acteristic of the women who have created businesses that earn more than $1 million per year is that they focus on some type of innovation. That means that the idea for your own business might be found in something simple— improving the way you do an everyday task, inventing a better version of an existing product, or coming up with a less expensive way to deliver a prod- uct to market, thereby drastically reducing costs. There are also many success stories of women who started a business based on a beloved hobby like working with pets or gardening.

Understand the Limitations of a Service Business

Many people decide to start a business based on providing a service. If the service is something that is provided by you, the growth of your business will be limited by the number of hours in your day. A good example of this is a massage therapist who works at a gym and decides to leave the gym to

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take only private clients. The growth of her business will be limited to the number of hours in a day in which she can give massages. Service busi- nesses do not have property, manufacturing plants, or equipment, which means that they do not have assets that could be used as collateral for a business loan. Eventually, in order to expand a service business beyond what you can personally do, you will have to hire employees who do what you do, and these employees may or may not be able to provide the same level of excellence you provide in giving the service. On the other hand, people who are excellent at providing a service can translate this excellence into a products-based business. For example,

a Pilates instructor can consider writing a book on Pilates, creating DVDs

to sell, and marketing a line of clothing to wear during Pilates classes. Products do not require you to personally interact with each potential customer. You write a book once, and it can be read by millions, for ex- ample. You can standardize excellence much more easily in a product than in a service. Many products take equipment to produce, and these assets can be financed through business loans. There are tax incentives and subsi- dies available from the federal and state governments to businesses that hire employees. In the long run, a products-based business generally pro- vides you with more personal flexibility than a service-based business. As your business becomes more successful, you can hire others to run it while you sit back and enjoy the benefits of ownership.

Start Your Business in Twenty-four Hours

If you’re feeling overwhelmed by the task of starting your own business,

don’t be. Getting started now takes only a few strokes of the keyboard, thanks to technology. Jane Applegate, America’s leading small-business expert and the author of 201 Great Ideas for Your Small Business, declares to reluctant entrepreneurs: “Only in America can you wake up in the morning with

a great idea and start a business by nightfall. Anyone can do it in a day. It really is the American dream.” You used to need between ten thousand and twenty thousand dollars to set up a business. Now you can accomplish

it with less than five thousand dollars, and do most of the work on your

computer.

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SMALL BUSINESS TIPS

These helpful tips come from author and small-business management expert Jane Applegate.

Set up your preferred business structure—a corporation, partnership, or limited liability company (LLC)—and register it with your city, county, or state online through websites like Rocket Lawyer or LegalZoom.

• Open a business bank account online.

Surf your way to a Web domain registration site (examples include Go Daddy and Network Solutions) and register a name for your website.

Set up Web hosting, fill in a design template, and have a website on- line before bedtime.

• Hire outsourced talent to service your business from sites like ELance .com. They handle all the tax forms and arrange payments between you and your freelancers or employees.

If you need marketing help, go to a website like growyourbusinessnetwork.com.

Set up a cloud-based telephone system on RingCentral.com, or go to Google Voice and set up a “follow me” phone number.

Take a step into social media for your new business by setting up a Facebook fan page, a Twitter account, and a LinkedIn page.

Order your promotional materials on sites like 4over4.com, Zazzle.com, and 1800postcards.com.

• Finally, before you rest your head on your pillow, you can announce your new venture through PR Newswire or EnFlyer.com.

Do Your Research and Write a Business Plan

The most important investment you can make is taking the time to write a business plan. It is absolutely critical to figure out if there is a market for your business idea and to figure out how much money it will cost to get started. There are a number of great online resources and software programs

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you can purchase to help you write a business plan. You must get very clear on the costs of running your own business and understand how you will pay for these costs. The high failure rate of new businesses can be overcome by smart planning. If you are new to working with numbers, hire a good accountant to help you develop a business plan, and bounce your ideas off people with experience in the field you want to enter if you are not highly experienced. Take advantage of the wisdom of retired executives available through SCORE (www.score.org), which provides free small-business train- ing and mentoring. The more research you do in advance, the more likely your business is to thrive.

Be Able to Cover Your Living Expenses Before Quitting Your Day Job

There are conflicting ideas on how much money you need to set aside when leaving a job to start your own business. Conservatively, you need to have two to three years of living expenses put aside—because that’s how long it’s going to take for a new business to start generating cash. It’s always a good idea to keep your day job as long as possible. Use your spare time to write your business plan and source materials, and when you absolutely can’t move forward unless you quit your job, then it’s time take the plunge.

Fund Your New Business Sensibly

You can fund your new business from savings or by obtaining financing. Often, the cash used to start a business comes from an unexpected source. For example, some women have launched businesses by using a divorce settlement or a lump-sum payment received after they have been laid off. If you intend to fund your business from savings, you should fund it from personal savings, not your 401(k) plan. You can withdraw funds from your 401(k), but this is a very unwise thing to do. First, if you are younger than fifty-nine and a half, you must pay a withdrawal penalty and taxes, which means that you are receiving only forty cents of every dollar you have put away. Second, you are potentially devastating your retirement. Your busi- ness may or may not work, but you will certainly grow older and need those funds in the future, regardless of how the business does.

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Although it may be tempting, also avoid using the excess value in your home as collateral for a home-equity loan to start your business. If the busi- ness does not take off, you may not be able to cover the second mortgage payments and may, tragically, lose your home as well as your new company. If you do not have enough personal savings to fund a new business, and many people don’t, then you will need to look for financing.

Borrow against your 401(k): To fi nance your start-up costs, you

might consider borrowing against your 401(k), but this can happen only while you are still employed and working on your new business on the side; once you leave your corporate job, you must repay the loan, so this is a very short-term solution.

• Check out SBA programs: You can investigate loan-guarantee

programs available from the Small Business Administration, which has many good options for women looking to start their own businesses. The SBA does not make loans but does provide loan guarantees to encourage banks to lend money to you. Again, you are more likely to get funds for a product-based business—one that has equipment, a plant, or property that can be used as collateral for a loan. It is much more difficult to get a loan for a service business, and almost impossi- ble to get a bank loan for a service business without years of demon- strated cash flow from multiple clients.

• Don’t place high hopes on the banks unless you have other

collateral: It is extremely rare for banks to give noncollateralized loans to

start up a business. The bank may give you a loan if you have other assets to pledge, such as a personal portfolio of securities. It may make sense to pledge a personal securities portfolio in order to get the funds to start your company; your securities can continue to grow while you launch your business. In this case, negotiate for long repayment terms, or an interest-only loan, to give yourself two or three years before you have to start repayment. Make sure the securities are conservatively invested so that you don’t face a margin call if the markets go through a bad period. (A margin call means that the value of your collateral has fallen and the bank wants to sell the securities to pay back the loan.)

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Take a personal loan from friends and family: Many people turn

to friends and family for personal loans to start a business. In this case,

share your business plan, draw up a promissory note, and make sure family members have reasonable expectations of when you can repay the loan. Offer to pay interest and take out a life-insurance policy that would repay your family member should you die unexpectedly. These policies are usually very inexpensive if the benefit amounts are small.

• Take a part-time job or a second job: You may find it necessary in

the beginning to take a part-time job or a second job to fund your liv- ing expenses while working on your business. This is not as bad as it seems—as long as you can cover your overhead, you can give your business the extra time it needs to become self-supporting.

Live on your partner’s salary while starting the business: If you

are in a relationship, you may be able to join forces with your partner to support you and your family while you are starting your business. This can be an exciting family decision, and if the business takes off, your partner may be able to quit the nine-to-five routine and join you in working on the business. It is critical to share the business plan with your partner and to have regular financial meetings so he or she under- stands the progress you’re making and setbacks you may be experiencing.

• Max out your credit cards as a last resort: Some famous busi-

nesses were started by maxing out credit cards; this is a much less likely scenario today due to tighter credit standards and smaller credit lines.

Beware the Dangers of Angel Investors and Venture Capital

If you have a terrific idea, you may be able to attract the attention of angel investors or venture capitalists. These are individuals who are looking to invest their capital in start-up businesses. Although this route may be ap- pealing, angels can be distinctly devilish to new business owners.