Question: I am a full time employee with a leisure resort company and I am thinking of investing in a franchise as sideline business. My friend told me that the investment will be in few hundreds of thousands but the thing is I also have debts of about the same amount. Should I use my savings now to invest or pay off my debts? What do you suggest I do? – Ali Keith by email

Answer: The first thing you need to do is to organize your financial life by securing your cash flow. If you invest your money now in your sideline business without settling your debt first, you will only continue to incur interest costs, which may make you financially unstable because you will constantly struggle with cash outflows from interest costs against uncertain cash inflows from your sideline business. 

Before you start thinking of venturing into business, make sure that you are financially capable. Here are 4 tips that you need to consider:

1. Pay off your debts and extend your cash

Analyze your monthly expenses. How much is spent for your essential needs such as rent, utilities, and groceries? How much is discretionary, or what you spend for eating out, watching movies, or buying clothes? Sum up your expenses and identify the potential savings from expenses that you can postpone. If you are fond of buying designer coffee every morning, perhaps you can limit it to once a week. If you are fond of eating out every week, you could cut it down to twice a month.

2. Plan how much to save monthly

Do not spend your monthly paycheck immediately hoping that you would have enough cash at the end of the month savings. Prioritize deducting a certain percentage from your monthly salary as savings. Start saving as low as 5% of your monthly income and slowly increase it to 20% once you are able to adjust your spending habits with your life style. Then open a savings account and credit all your monthly savings to that account until it accumulates to an amount that is sufficient for investment.

3. Invest in a financial instrument that provides passive income

The level of returns on your investment will depend on your risk appetite. The higher the returns you want, the higher the risk you should take. Relatively higher risk investments will be those investments in stocks. You can make 25% return in less than a year in a good market but you can equally lose that much in a bad market. 

An alternative is to invest in government-issue bonds where there is no risk but lower returns. If you have enough savings to invest, you can consider diversifying your risk by investing portions of your money in riskier investment class such as equities.

4. Find the right entrepreneurial venture

When you have enough savings, enhance your investment appetite by investing portions of your money into entrepreneurial ventures such as startups or franchising. Getting into business entails some risks. You may lose your savings if your business fails. But if your business turns out right, your investment may reap high returns.

Perhaps, one way to lessen your risk of failure is to educate yourself. You may have a lot of business ideas and the passion to sell, but if you are not financially literate, you end up making the wrong financial decisions later on. When you have the savings to invest, you may want to invest in yourself first. Learn the skills you need before venturing into business.

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HENRY ONG, CMC®


Henry Ong is an entrepreneur, investor, researcher and business columnist for more than 15 years. He holds double degree in accountancy and applied economics, a Registered Financial Planner (RFP) and Certified Management Consultant (CMC). Follow him on twitter @henryong888