As we talk about legacy plans to transition your farm business to the next generation, it’s important that the senior generation keep on top of their finances to better help the younger generation.
Here are a few things you can do right now that will improve your financial situation and lay the foundation for a simpler path to the next generation, whether that day comes in 20 years or next month.
-Cash is King. Keep a Cash Emergency Fund. Understand what you spend each month on necessary living expenses. Keep six months’ worth of those expenses in cash in a savings account at the bank. Sure, it will earn no interest right now. But, it’s federally insured and it’s readily accessible if you need it to tide you over in an emergency.
-Save Some of What You Make. Experts suggest that most Americans need to save about 20% of their annual earnings in order to have enough saved to quit working at some point. You may feel like you are “saving” when you pay down the note on agricultural land, but that’s an investment in the business. Money in an IRA or a Solo 401(k) is a lot more useful to fund a transition to a new generation.
-Invest What You Save. If you are putting money away each year from your earnings, you should invest it to grow faster than the rate of inflation. That way the money you save will allow you to buy more in retirement, even if the cost of things continues to rise.
-Diversify What You Invest. Be sure your investments are prudently diversified across different investments. That way, if the value of land falls, or the price of corn in your bins falls, you have less of an impact on your lifestyle. That’s because you will have other investments that may be up on value at those times.
-Keep it Simple, Stupid. Use low cost, broadly diversified investments to start. You get two important benefits:
-You reduce the investment expense. If you avoid 5% sales charge and the 1 or 2% internal expenses, it’s much easier for your investment to grow faster than inflation.
-You can understand what you own. If you choose a growth allocation fund that owns a broad selection of stocks then every dollar in that fund owns a selection of stocks and bonds in many different industries and even different countries. This allows you to own one or two investments and still have a well-balanced portfolio. Until your account gets to be larger than $100,000 I don’t believe there is much reason to own more than two investments.
If this blog has got you thinking about your own situation, get in touch with my office ([email protected]).
The opinions of the author are not necessarily those of Farm Futures or Penton Agriculture.