6 Common Money Mistakes Farm Families Should Avoid
Few professions offer the unpredictability of farming. Where financial planning can be more predictable for salaried employees, farmers often deal with uneven cash flows, uncertain weather & crop conditions, legislative changes and the gamut of business decisions. All these challenges obviously make budgeting, saving projections, and financial planning very difficult!
Amidst these challenges, it’s easy to get complacent and not review the big picture. Below are some of the most common oversights we encounter with farming families:
1. Not Reviewing Cash Returns
With lumpy cash flows like large equipment expenses, quarterly taxes and end of harvest crop sales, short term cash tends to build up for months or years, then needs to get spent all at once. While banks once paid higher interest rates, short-term liquid deposits now yield next to nothing. A financial planner who knows the markets can show you cash alternatives: money market funds, CD’s or short-term bonds can yield multiples of what local savings accounts do while that cash is parked.
2. Misunderstanding Your Retirement Plan Options
Retirement plans are an incredibly effective way to set money aside for the future, lower your current tax bill, and invest with the objective of growing over time. However, there are multiple types of plans, and what works well for a sole proprietor may not be right for a company with employees. A good planner or TPA will help you determine the right plan structure to maximize the amount you can save while keeping incidental costs low.
3. Inefficiently Incorporating Your Business Entity
A great CPA or attorney can help you structure your business in a way that allows for appropriate taxation, maximum liability coverage and eventual business transfer. Businesses with fewer owners might consider a corporate structure that allows for lower social security contributions, while other businesses might be most interested in more personal liability protection.
4. Not Diversifying Assets or Streams of Income
It’s common for farming families to end up with most of their assets in land or equipment. However, when the need for liquidity comes, a bank loan probably isn’t an attractive way to pull value out of the business. An advisor can help you open an account in order to save and invest for income now or down the road. Stocks, bonds and real estate can be a great way to passively generate income or build wealth without relying on the success of the business.
5. Paying Too Much For Investments
Unfortunately, business owners tend to get approached with all sorts of investment or insurance ideas. With finance as complicated at it is, it’s easy to end up with up front commission charges, big advisory fees or high internal expense investments. When you interviewing investment firms, make sure they’re Registered Investment Advisors (RIA’s for short) have a fiduciary role- meaning they legally must put your interest above their own incentives. The words “fee only” are generally a great starting point.
6. Reviewing estate plans and the right amount of insurance
In our experience, farming families tend to be the most commonly over insured type of client. With high property values, and the estate tax exemption changing every couple of years, it’s easy to end up with multiple policies- many of which are loaded with unnecessary, high cost features. What’s worse, some insurance agents try to wrap up liquid investment assets in high-cost annuities as well. Having an unbiased third-party review what you need and what you don’t can save money in unnecessary premiums or hidden costs over time.