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Financial Literacy

Financial Literacy

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Case Studies

So you're ready to stick it to The Man by becoming your own boss?

Great.

Let's take a look at a few different kinds of businesses, from dud to stud.

Restaurant

Foodies and celebs alike love the idea of owning their own restaurant, but this type of business can be rough. Over half of all restaurants fail in their first year, and many have an expected life span of three years or less. Not ideal.

Wait a sec, though. Everyone loves to eat, so why are restaurants not a sure thing?

Well, they have huge overhead and recurring costs. You're going to have to pay for a restaurant space, waiters, lots of insurance, industrial-strength ovens and equipment, plus all the plates and cutlery. You're paying for all that stuff before you even get your first customer, so if your restaurant isn't popular, you'll end up drowning in debt.

It gets worse, too. There are only two ways to make money with a restaurant: liquor and food. Sadly, food doesn't have a great profit margin. It may take about $2 in ingredients to make that nice $8 salad plate. You have to pay a chef about $14/hour to make the food and then all your other staff to clean up and serve the salad. Then there's those pesky overhead costs we talked about—utilities, leases, and power. That $8 salad might make you only $3 in profits, so you'd better hope lots of people want lunch. If they don't, your salad ingredients will go bad and you'll waste even more money, not even breaking even.

It gets a little better with booze. It doesn't go bad, for one thing. There's also almost no prep involved: someone just has to pour the stuff. A $7 glass of wine might only cost $1 or $2 in overhead costs and expenses, so you're raking in most of the rest as a profit. You'd better hope so after that salad debacle.

If it's your dream to own a restaurant, we're not gonna poo-poo your future, but we are gonna warn you: it ain't easy.

Online Business

You make cute purses or great phone covers. Could you go into business for yourself? Sure, easy: you could sell your stuff on eBay or Etsy.

In some ways, it's a better deal than a restaurant. There are no health inspectors lurking about and your start-up costs will be lower. But the costs aren't negligible. You'll have to pay for web hosting (unless you sell through eBay or a platform that takes care of that for you; in that case, you'll need to pay that company), production, advertising, shipping…the list goes on. Of course there are ways you can keep those costs lower—you can use social media to market, for example—but you're going to have to pay the piper.

Now for the fun part: how much can you earn online?

As always, it depends. You might lose money or you might make millions. Nothing in business is ever for sure.

Sports

Let's use a golf touring pro as our example. These guys have to pay for their own travel and caddie commission—all with no salary made. So how do they do it?

If they're lucky—and, uh, skilled—they get lucrative sponsorship deals with major companies like Nike and win prize money. If not, they're out all the cash they spent to get to the tournament.

Ouch.

Even if you're successful on the PGA tour, you might not make as much as you'd expect. The top 100 golfers on the tour make a few million dollars a year, yes. But most of them are only earning for a few years; after all, there are always new and hungry golfers coming up the ranks to make their cash.

So let's say that a player makes $6 million over the 6 years he plays. Seems pretty good, right?

Not so fast. That $6 million is really $3 million after the IRS gets through with him. And he has to pay his caddie up to 10% of his winnings as a commission. And then there are all the fees and travel expenses of actually getting to the PGA. He can't exactly pull up to the green in a rusty Winnebago, so we can count about $1 million for travel fees over the six years.

That's about $2 million for 6 years of work; or just over $330,000 a year. Not too shabby for walking around the golf green. But most golf pros think the gravy train will last a lot longer than it does or just get carried away wanting to live it up like a rock star. That's how they wind up broke at 30 with no employable skills other than teaching golf.

Even if you love golf (or basketball or football or Quidditch), keep in mind that unless you show amazing talent really early and have agents offering to pay for your ride, you're better off heading to college and getting a degree in something that will earn you a nice living. You'll still be able to play golf on the weekends, but you'll be able to afford dinner and a place to live, too.

Start-Up

If you're brilliant and lucky and come along at just the right moment when the sun and stars align, you can end up with a hot property like Google. The founders of Google created a product that everyone needed, and they started raising money in 1998 and 1999, right at the peak of the internet bubble. They had no trouble raising cash, and they used convertible notes and seed and angel investing to get started.

Wait…angel investors? No, they don't carry harps. Much better, actually: they carry cold, hard cash.

These investors got together and raised a bunch of cash to hand over to the Google guys. In exchange, they got a note saying that the money they raised would be converted into a specific share of ownership of Google during the next round of financing. Since Google didn't have to sell tons of stocks to individual investors, the founders didn't have to dilute ownership of the company very much and they stayed at the helm in ownership. Translation: dolla dolla bills, y'all.

Whatever path you choose to entrepreneuring it up, just remember that it involves a lot of planning and even more luck.

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