Road to FI: Entrepreneur (32, F)

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My (32, F) goal is to become financial independent as soon as possible and to be in a position where I don’t feel like I have to work as much as I can all the time while enjoying some of the finer things in life (i.e. traveling comfortably).

I moved to Switzerland almost 10 years ago to complete my graduate degree. After several years of financial hardship, I started my own business and it has been rather successful for the past 5 years. However, as with any business, future success is not always assured. Initially, I just deposited all my money into my account until I was rather uncomfortable with the amount that I had in the bank (especially after reading that the president of the Swiss Federal Bank said that having a substantial amount of money in the bank just means that you are losing money daily). As such, I started to look for options to invest my money. I contacted a financial planner who charged me quite a bit and referred me to discretionary fund manager in Jersey who would have charged me 2.5% of my total assets annually so that they would invest my money for me. I quickly learned that this was significantly more than the normal rate after consulting with other firms in Zurich, since most of them were charging less than 1% per annum. When I checked their proposals, however, I saw that they would not allow for any customisation and that they would just be investing in ETFs for me since I did not have at least CHF1 million. With that information, I just decided to just do the investment by myself through IBKR. I have dabbled with IBKR before but I was never comfortable with putting in most of my assets in the platform and investing but now I am just diving in head first (and hoping for the best).

While I am married, our finances are completely separated and so I will only be discussing my income and expenses in this thread.

Assets

Pillar 3a (VIAC, Sustainability 80): 130,000

IBKR: 385,000 (VT: 52%, CHSPI: 20%, VWO:1.5%, VOO: 4.5%, Individual Stocks: 4%, Cash: 18%)

Cash: 70,000

Property Abroad: 120,000

I do not have any debts but we do own an inexpensive car. I plan to invest 10,000 every month (ca. 30% of income) to ETFs this year as well as maximise my 3a (35,280CHF). If I have any leftover funds, I plan to invest this into ETFs as well. My savings rate is difficult to determine because my income varies monthly but it ranges from 10,000CHF to 40,000CHF per month. I would be comfortable investing 40-50% monthly but I have just allocated 10,000 monthly to ensure that I don’t stray, if that makes sense. My set monthly expenses are the following:

Apartment Rent and Utilities: 1100CHF
Office Rent and Utilities: 2000CHF
Health Insurance: 550CHF
Business Expenses: 500CHF
Travel: 250CHF
Leisure: 500CHF
Food: 750CHF

Questions:

  • Considering the volatility of my business, does it make sense to aggressively invest in this way? Is this even considered aggressive at all? (Information: I am in the service sector and I am being paid by the hour. If clients stop coming or do not come as often, I will lose a huge part of my income).
  • I still have cash in IBKR and considering the volatility of the current market I am not sure whether I should just buy all of the ETFs now or wait it out and take advantage of DCA. I know this has been repeatedly discussed on the forums but I guess my question pertains more to the current volatility of the market.
  • Would you have any suggestions for optimisation? Am I on the right track?
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First off, congrats on your journey, you seem to be doing very well and to have avoided pitfalls on the way.

Second, a disclaimer: I am not an entrepreneur and other members will probably be able to grasp and handle that aspect of your situation better.

Third, I’d view this from (at least) two angles:

  1. Income: is your income from entrereneurship sufficiently insured for your needs, do you have an ability to find another gainful activity should your flow of clients dry up or do you need to keep an extra amount of safe (low volatility) assets on the side as an emergency fund to carry you through potential major hardships?

From the very few you’ve shared, it looks to me like, as long as you are mentally and physically healthy, you would find a way to bounce back, but I may be wrong, so your need for safer assets may be higher than I would suspect.

  1. Liquidity: there is no safe holding period for stocks but, historically, they have had positive returns over longer periods of time. 10 years is a commonly used standard minimal horizon for stock holdings so I would not consider money invested in stocks as easily available for less than such a period. I would try to assess how much cash I would need/want to keep on hand for liquidity purposes. If your business gives you access to a line of credit, that should be taken into account when making your assessment.

Money that isn’t needed to cover for these aspects could, in my opinion, be freely invested according to your need, willingness and ability to take risk.

Your current allocation seems to be roughly 60/23/17 (stocks/cash/real estate), with a 160K cash cushion (you can switch your 3a allocation to Sustainability 100 and sell 22K of your IBKR ETFs to free 22K more cash without lowering your exposure to stocks). That cash cushion covers more than two years of your after tax expenses. If you feel you can find new cashflows in that amount of time should your business go belly up overnight (not very likely, but it can start making less money, and then start loosing money as you hope/try to turn it around), that may be sufficient (I would consider it is and feel comfortable investing more of it - even if you invested all of your cash currently at IBKR, you would still have more than 1 year of expenses banked - but I don’t know your business expenses, which could change things).

In short, we lack significant information to assess your situation (so your assessment is what really counts, but you already know that) but I’d say your plan is not over-aggressive. Your wealth should grow over time making your situation even more comfortable as time passes.

Regarding your second question, it is usually advised not to take the current volatility in the market as an indicator of how to invest. We should, instead, always consider that such volatility can happen at any time and we should be ready for it (I ascribe to that line of thoughts). As such, what matters for the decision to invest with a lump sum or to DCA is your willingness to dive into the market. If you can do it all at once, great! If you feel better with a DCA plan, that’s fine too. Both will work on the long run and we can’t know which one would be best at this precise point in time. Statistics favor lump sums, but behavioral discipline is what trumps all.

For your third question, I feel very not in a position to judge that but I would say that you are indeed on a very right track, your investment plan makes sense and you are likely to find a lot of success going forward.

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I’m in a somewhat similar situation (entrepreneur in the service sector, roughly 3M net worth), my 2 cents:

  • I personally keep a cash cushion to cover at least 2 years of my expenses because I would not have any income (no ALV) if I suddenly had no more jobs. That is probably too cautious, but gives me peace of mind, so it is worth it for me. I think you need to asses what your risk tolerance with respect to that is.
  • I would definitely consider setting up a LLC (if you have not considered it already), this would give you much more flexibility regarding taxation & AHV, which could result in an immediate guaranteed return. For instance, you can decide to pay yourself a smaller salary and leave the rest in the company (where you can invest it) or distribute it as dividend (with privileged taxation). If RE (or for instance a sabbatical to travel) is an option for you, leaving the money in the company and distributing it later can be very interesting as you reduce your overall (private) tax rate significantly when paying out smaller amounts over multiple years.
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Thank you so much for being so generous with your time and for giving me a really in-depth analysis on the information that I have shared with you. I really appreciate it.

  • Regarding my income, I am in the process of insuring it at the moment. The business is not so volatile in that most clients stay with me for a couple of years and so there is some predicability regarding the business drying up. Also, I am in the position to find another gainful activity. However, I just have an exceptionally high workload and so I do not have time to dedicate to another “side hustle,” if that makes sense. Moreover, my personal expenses are quite low and I can decrease this even further should I lose my business.

  • I believe that I am quite happy with the cushion that I have and will continue to keep it at this level and invest the rest. Also, I just changed my 3a allocation after having read your comment. I have been thinking about it for a while and finally bit the bullet. Thanks for the advice!

Thank you for assuring me that my plan is not over-aggressive. I’m starting to think that way as well after reading the threads. I guess, as a new investor, I am just a bit more cautious and nervous about this. I am slowly investing the money on IBKR and will continue depositing monthly as well. I can’t quite do a lump sum but definitely slowly and surely getting there.

Thank you again so much!

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Thank you so much for your time. It’s so nice to hear from someone who is coming from a similar situation. If you don’t mind, I just have a quick question on establishing an LLC since I have been going back and forth about this issue. My concern with the LLC is the high accounting costs coupled by double taxation. Has that been an issue for you? Also, is it true that setting up an LLC would potentially give you access to RAV should the business fail?

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Accounting costs are not an issue for me, I do the bookkeeping myself, which is not that hard if you have the right software and read up a bit on it. Double taxation is offset by the lower AHV contributions, the privileged taxation of the dividends, and the greater flexibility (spreading out payments, optimizing by combining dividends with second pillar buybacks or renovations of your apartment, etc…). Calculating that in practice is quite hard. I wrote a detailed monte carlo simulation in the past that takes into account everything and also considers stochastic variables (like stock market return, second pillar rate, etc…) and came to the conclusion that it’s better in every scenario for me (by a pretty large margin). The numbers may vary a bit for you because I live in a low tax canton and optimize taxes heavily wherever I can (calculating the ideal splits, dividing my portfolio between my LLC and my private accounts, etc…), but I did a very rough calculation here: Why do AHV / AVS / OASI contributions not have an upper limit? - #17 by 0xLambda
When you plug your numbers in there, you should get an idea of the differences (and that the fear of double taxation is probably overstated).

It depends a bit. While you pay for ALV, you do not get access to insurance money until you have completely given up your business (either voluntarily or because of solvency issues). This is usually a quite lengthy process (needs to be done by a notary and announced in the commercial register), so it will take quite some time until you get money by the insurance.

The reasoning is that ALV could be abused otherwise (when you do not have any work for a few months, you could simply declare yourself unemployed). However, changes to this law are discussed in the parliament (because COVID showed that many business owners do not have any reserves), so this may change in the future.

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If you don’t mind, what software fo you use? I used to use bexio but I am not so sure if I would do the same this time around. I started a GmbH with a business partner a couple of years ago and since the business was split 50-50, it was difficult to resolve conflict and I sold my share to my ex-business partner when we disagreed. After I left, I set up an Einzelfirma because I was a bit put off by the accounting work needed for the GmbH but it seems like I made the wrong decision there. Trying to see the possibilities of converting my Einzelfirma to an LLC now. Thank you so much for the advice.

Regarding RAV, I believe I got the same response a few years back which made me question the utility of an LLC. I remember, however, that LLCs do have the advantage of getting access to better insurance. I’ll see what I can do in terms of restructuring now. If you have any advice in starting up an LLC and/or avoiding pitfalls, I would really appreciate it!

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Oh and another question: With the LLC, the maximum Pillar 3a contribution would be 7,056CHF since you would be an employee of the company rather than self-employed. By being self-employed, I am allowed to set aside 35,280 CHF tax free each year. I am sure you have considered this aspect but is it also not worth it considering that I won’t be able to set aside as much?

Also, in terms of investing through your company, would you have to set up a separate IBKR account under the name of the company in order to do this?

So sorry for taking up more of your time and thank you so much again!

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I also use bexio and am quite happy with it. You can directly import the transactions from your bank account, which makes the accounting much easier.

Starting up should be a relatively smooth experience, you just have to follow the legal process quite rigorously, but there are many good guides regarding that. Something to keep in mind is that you need to change all existing contracts with customers (because they are now with a different legal entity). After you have set up the company, there are a few tax optimization methods that are not so well known (sometimes not even by accountants):

  • You have to pay wealth tax for your shares and the value is calculated according to your profit and balance sheet. However, there is a special provision in “Kreisscheiben 28” that a different formula can be applied when the company is completely dependent on one person. But the tax office does not apply this provision automatically, you have to explicitly ask for it. In my case, this reduces my taxable wealth by a few millions.
  • You can pay yourself lump-sum expenses (“Pauschalspesen”) if you have internal expense regulations (“Spesenreglement”) that are authorized by the cantonal tax office. This is a way to pay yourself a few thousand francs per year tax free.
  • It usually makes sense to buy and register a car with the company. You can use it privately, but you have to pay tax on a virtual salary (10.8% of the car value) for that. However, it is usually still worth it because you can pay all car expenses from the account of the company.
  • If you are working from home, you can pay yourself rent (from your company to yourself as a private person). The legal details are a bit complicated (and it probably does not apply in your case when you have a separate office), but it can be worth it, especially if you own an apartment.

Yes, I would definitely consider the lower Pillar 3a contribution. However, something to consider is also pillar 1: When you own the business, you can choose the provider and you can also use special plans for management (pillar 1e) that allow you to invest up to 25% of your salary with up to 100% stocks. Moreover, you can use dividends to fill gaps in your 1st pillar, which can be very interesting and reduce your overall tax level significantly (especially if you have large gaps, which is presumably the case for you). As you can see, considering everything becomes quite complicated, but you do not have to do that unless you are completely crazy like I am and want to optimise every last percentage.

Yes exactly, I have separate IBKR accounts (and also bank accounts) for myself and the LLC. It’s a bit an administrative hassle (because AML/KYC procedures are much more strict for companies), but you get used to it.

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Thank you so so much! Your advice is invaluable, especially to someone who is just starting out!

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The advice was mainly to consider your 3a part of your global allocation because there are ways to sell conservative assets in your 3a and use the proceeds outside of it, provided there is a conservative part in your allocation and you have liquid taxable assets (which you do).

If you want to optimize the use of your 3a, @Dr.PI has made a tremendous job of assessing which assets get the most out of its tax benefits: Splitting the world. That’s advanced level stuff that is by no means necessary to get started with your desired allocation, but it’s very interesting, with good potential returns on the time taken to get acquainted with.

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If I may ask, what kind of business do you have?

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Unfortunately, due to the nature of the business as well as how small the industry is, I cannot reveal this information as it can be easily traced back to me.