The Power of Re-Investing Profit

By | April 16, 2012

As I covered last week, I don’t have a large pile of money sitting around, waiting to be used. The only advantage that I have right now is time. I am working hard to develop some passive income from my online properties. I know that I will probably invest in real estate eventually, but I need to save up a down payment and emergency fund before I buy my first rental property. With that in mind, my main goal right now is to develop a larger income from my websites. Many people have questioned my large time investment, but I think it’s worth spending a few extra hours in order to develop a more sustainable source of income.

As it turns out, I am making some decent money. I’m not quite yet ready to retire, but I am making progress. The question then turns to what should I do with my profit? What’s the best use of my income?

How I Could Use My Profits

As it turns out, there are quite a few options that I have considered when try to answer this question. It’s not always easy to determine the best use of your profits with any business, so it is important to consider all of your options.

  1. Save for Rental Property Investment: As I mentioned, buying a rental property is one of my long term investment goals. I think this will make  nice supplemental retirement income, especially after the mortgage is paid off. In order to start early (and pay off the mortgage sooner), I need to invest soon. This won’t be a problem if I am able to secure a 20 year loan or sooner, but if I get a 30 year mortgage, that I would be almost 55 by the time the mortgage is paid off if I bought a home within the next year.
  2. Buy More Sites: One of the things I have done already is to use some of my earnings to buy an already-established site. I really like this option as buying a blog can be quite profitable. I have purchased two major sites in the past 4 months and have increased my passive income a lot already. I am just starting to look at affiliate income seriously, so I expect this to increase even more over the next few months. The only thing holding me back right now from buying more sites is that I am already quite busy and want to focus my efforts on the sites that I have already. Any more sites could push me beyond my limits and force me to hire out more services (which is still a possibility).
  3. Invest in Dividend Stocks/Investments: Another option that I am considering is using my net profit (after taxes) and investing in dividend stocks. This would serve two benefits. It would ensure that my profit is working long-term while also providing some additional passive income. It would help diversify my income flows as well, which is always a good thing. The only disadvantage to this route is that it would lock up my money and limit my ability to buy a rental property or website if a great opportunity presented itself.
  4. Put in Individual 401k: Paying self-employment taxes on top of income tax is a lot. I just sent my first estimated tax payment to the IRS for 2012 and it hurt. I am paying about 1/3 of my income in taxes. This makes me consider investing my profit in an individual 401k. I would still have to pay self employment tax, but the income tax would be deferred until retirement. Along with dividend stocks, this would limit my flexibility with my profit (even more so, since I can’t touch it without penalty until 59 1/2 years old).
  5. Spend it on Fun Stuff: Another tempting thing is to use my extra money to treat myself. After all, I am working hard to earn this money- I should be able to do what I want with it, right? While it would be nice to treat myself, this is a dangerous path and could easily lead to significant lifestyle inflation. This would go against my goal of early retirement.

Why Re-Investing Profit is Powerful

While I could divert my profit towards other routes, I am leaning toward putting the money back into my websites. Re-investing my profit is important because of three major considerations.

  1. Keeps My Money Working Hard: It ensures that the money earned is continually earning more money. Think compound interest.
  2. Tax Benefits: Second, and perhaps most important, is the fact that re-investing my profit into my online business lowers my taxable income.
  3. Increase Future Income Potential (faster): Lastly, by investing money into my business, I am working towards a future income. Because I don’t need the money now, I am willing to pay some expenses. I am interested in passive income for the future (to replace my day job)… not cash right now. By investing it now, I am pretty much guaranteeing that my sites will grow faster.

While I plan to re-invest my profits into my business, I still want to save some money to go towards my long-term goals. I will therefore find a balance between saving some profit in a high-interest savings account, re-investing it into my sites, and possibly buying dividend stocks.

What would you do with profit from your business?