Some financial decisions are personal not rationally motivated
Wealth can take many forms. We generally think of wealth in terms of personal, business and investment. The balance between these is critical to our long-term financial outlook. Having all your eggs in one basket is not necessarily a good thing.
Too many small business owners have all their equity tied up in their business. The risk is that the business will fail, leaving the owner with no equity going forward in life. Taking too much out of the business may cause the business to fail or impair growth.
The makeup of the assets in the business also is crucial. Current assets are those assets that will convert to cash within a year. Generally, that is cash, accounts receivable and inventory. It's good to have ready cash but you also need the tools of your trade. You need a building, equipment and often some intangible assets. Again, balance is everything. Cash often is not very productive in increasing profit. Equipment can be very efficient in producing profit but cannot be converted to cash if money gets tight. You should be working with your accountant to see that your assets are in proper balance.
It's good to have investments. Again, they should be in balance. No matter how old you are, you should have some ready cash in case of emergency. You should have some assets that have the potential for growth and some that are less risky. With a balanced portfolio, you gain a little less in a hot market and lose a little less in a bad market.
The next group of assets is the one nobody talks about: personal assets. Personal assets are important. To a certain extent, they are what we work for. My youngest brother, Don, talks about having assets that do not generate any revenue: Are they really assets or are they liabilities? In one week, my weed-whacker broke, my chainsaw quit, my boat’s electrical system failed, I received a quote on restoring a 120-year-old barn built by my great-great-great-grandfather, the hydraulic system blew out on my tractor, and I had two flat tires on the trailer used to take the tractor for repairs. That was an abnormal week, but it is indicative of what it costs to own stuff.
When my mother died in 1986, four of my brothers and I split up our maternal family farm outside Cheboygan. Due to the Headley amendment, which holds down property taxes until the property changes hands, the township assessor tells me local government employees check the obituaries daily for my name. So I have this beautiful piece of property that is my favorite place in the world, but it comes with a cost. I am responsible for buildings well over 100 years old and feel an obligation to keep the property for the benefit of future generations. My great-great-grandfather originally received the property as bounty land for service in the Creek Indian wars. The original deed was signed by Abraham Lincoln’s secretary on April 20, 1863. In 2013, this property will have been in my family for 150 years. What a great legacy, but what a responsibility.
I am using my own situation to illustrate a point. Keeping a balance in your assets is critical. Too much retained in your business puts you personally at risk if the business fails. Any broker will say you can't have too much in investments. Financial responsibility requires that you not invest too much in nonproductive personal assets. But each has its value. Having a healthy business that generates profits provides you with the money to invest in personal assets. Investments provide you with the security for retirement. But how do you put a value on personal assets? My farm generates little income and is exceedingly expensive to maintain, but it gives me great personal satisfaction to stand in a barn or a log cabin that my great-great-grandfather built more than 100 years ago. Assets are not just about financial issues.
About 15 years ago, a stockbroker mentioned to me that if I had put the money I paid for a boat into the stock market, I would have doubled my money. She was absolutely correct. I would have more investments if I had not owned the boat. But here's what I would not have had: I took my older brother, who was terminally ill, from Cheboygan to Mackinac Island on a beautiful October day on that boat. What is that worth?
My means of being able to do this is to still be working at 69. A lot of people don't have that option. If I did not have the farm and the boat, I would have a whole lot more investments and could have retired years ago. But I would not have the gratification of preserving a family heirloom and I would not have had the wonderful family experiences of boating in northern Michigan. In that is the yin and yang of life.
In the end, do you want to leave a fortune to your kids, or enjoy the fruits of long years of working? No financial planner, CPA or estate planner can answer that question. Whatever decision you make, you live with the results. If you leave a rich estate in business assets and investments, that's good. If I take my grandchildren out and show them the ax marks in a log cabin and tell them their great-great-great-great-great-grandfather made that cut, that's good too.
Everything is not black and white and some financial decisions are not rationally motivated. In the end, it really boils down to what’s important to you.
Paul Hense is president of Paul Hense CPA PC, a local accounting firm. He also is past chairman of the Small Business Association of Michigan.