Business & Personal Finance Articles

Planning for the Expense of a College Education

June 1, 2023

When it comes to funding college tuition for your children, sending one child to college is expensive, sending two is almost manageable, and sending three could be downright impossible.

The cost of college for your family is based on a calculation done by the government. It’s calculated using the parent’s income, the parent’s assets, the children’s income and the children’s assets. The more you make typically, the more you’re going to spend.

So when you’re sending your first child to college, it’s pretty expensive. And when you get into sending multiple children to college, it could not only be expensive, but it could also totally derail the retirement plan for the parents.

And on top of that, we have the issue of fairness. You see, from what we’ve seen from our experience, the youngest child usually gets shortchanged. The oldest child has the most money because, let’s face it, the grandparents, the aunts and uncles, they all put money aside for the future of the first child. Not to mention they’re first in line. So they get first dibs on Mom and Dad’s cash flow.

Did you notice in the four factors you use for the FAFSA calculation? Not a single one of them had to do with the parent’s debt. So if the parents have a lot of debt, whether they be car payments, mortgages, boat payments, credit cards, that doesn’t factor it all into the formula for college aid.

But now we have the issue with each child, as we go down the ladder, there’s usually less money set aside for the younger ones, and the youngest usually has the least.

So there are a few factors to consider here. Number one, is your child picking their college or are the parents setting guidelines on what they’re able to afford for each of the children? Number two, how much money is being set aside for each of the children, and is that sustainable throughout the life of the parents? And is that enough to get your children through college without derailing your retirement income?

A lot of times parents that we see are faced with the choice of sending their children to their dream school or funding their own retirement income. No parent should have to make that choice.

So what’s the key? What are the keys to setting yourself up for college success to make sure your children could be successful and you could retire someday?

Well, the first is to start saving and to start saving early. Ideally, you want to be putting away 20% of your income and living within your means so that you’re able to fund college but also live comfortably.

But let’s face it, there’s only so much cash flow to go around 20% sounds great, but how in the world can you do it when you’re struggling to get by today? And you know that somewhere down the road your children are going to want to have the opportunity to go to college. And college isn’t getting cheaper as time goes by.

Well, the key is to start where you are. Start saving what you can and start saving it on a consistent basis. And then as you progress and maybe you get a raise, you’re able to save more and more towards your goals. And that’s where we can help you. We help people identify where they’re giving up control of their money unknowingly and unnecessarily.

If you’d like to learn exactly where you’re giving up control of your money and how you could make it more efficient, check out our college page on our website, where we go through a deep dive of how we use this process for our clients.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

Planning for the Unexpected

May 30, 2023

When it comes to planning for the future, there are a lot of factors to consider. How do you know what’s going to happen from day to day? One day you could have it all and the next day you could be scrambling for cash flow.

Typically when you’re a business owner, the reason why you got into business in the first place was to control your own destiny. Take your fate out of someone else’s hands and to stop being dependent on them for income, and instead go off and make it on your own and be in control of your own destiny.

However, in life and certainly in business, we know that we could plan for the future, but it doesn’t always happen the way we think it might happen. There’s an old saying: man plans and God laughs. The point is you need to build flexibility into your finances.

A lot of times in the beginning stages of business. It’s important to reinvest all your profits back into the business to get the ball rolling so the business will be able to take care of you. However, as your business ages and matures, it’s important to build flexibility into your plan and plan for life’s uncertainty. A lot of times in business there’s cyclical or chronic cashflow issues that need to be addressed.

Think of it as a three legged stool. The first leg is to make sure there’s enough cash to operate the business. The second leg is to make sure there’s enough cash to grow the business, and the third leg is to make sure there’s enough cash for you and your family, both now and in the future.

Now, if you could picture a three legged stool, you need all three legs or else you’re going to fall over. And what we have found in most business is they’re so focused on pouring all their profits back into the business, to run the business and to grow the business, they don’t take enough time to take care of themselves and their family, both now and in the future.

Think about it. What’s the point of pouring your blood, sweat and tears into the business if you don’t get to also enjoy life and provide for your family? This is why it’s important to plan for the flexibility, not only within your business, but also within your family finances.

That’s why we always build flexibility and access to cash for our business owner clients, both in the business and outside the business. So they’re able to take care of emergencies and also take advantage of opportunities, whether personal or business.

Think about it. What would happen if a piece of equipment went down, or your hot water heater went at home, or your child’s college tuition was twice as much as you expected it to be?

All of these aspects would pinch your cash flow further and could leave you feeling stuck. And the best way to make sure that there’s enough cash available both in your business and outside, is to make your money more efficient. Get one dollar to do multiple jobs, and by doing that, that positions you to take advantage of opportunities and to work through emergencies because you have access to cash.

The key is not to save in buckets. Don’t put a bucket on the side for retirement, for college, for building your business. All of your dollars need to be accessible so they’re available when you need them. Availability, without penalty and without major tax consequences, so you’re able to adapt and grow within your life.

And that’s the flexibility that we automatically build into the plans that we designed for our clients, making sure that their major needs are taken care of, but also that the plan is flexible and they have access to cash.

If you’d like to learn more about exactly how we put this process to work for our clients and how to build flexibility within your financial plan, visit our website at Tier1Capital.com.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

What is an Irrevocable Life Insurance Trust or ILIT?

May 25, 2023

When it comes to estate planning, a common tool to use is an irrevocable life insurance trust, commonly known as an ILIT. And sometimes you want to transfer a policy from one ILIT to another, and you may be wondering, how do you do that?

So when you’re using an ILIT, an irrevocable life insurance trust, the keyword there is irrevocable. And what does that mean? Well, that means basically the die is cast. Any assets in that trust have to stay in that trust until an event occurs.

But what happens if you have a life insurance policy owned by this ILIT?

Now, this is where things get a little interesting because there are only a few ways you can take money out of one trust and put it into another trust. Let’s say you have a life insurance policy with $310,000 of cash value. One of the ways that you can get that policy out of the trust is to exchange $310,000 of cash for the policy. So you’re just swapping assets, but now you can get the policy and the death benefit out of this trust and put it into the new trust. That’s all well and good, assuming you have $310,000 of assets. If you don’t have $310,000 of assets, what are your choices?

Well, real simply, you can freeze the policy and make it a paid up policy, which would probably reduce the death benefit. Now you can take whatever premiums you were putting towards that old policy in the old trust and put it into a new policy in the new trust. And then I would step back from that transaction and say, “am I making any progress?” Because, to me, it probably doesn’t make sense If you had a ten year old policy and now you’re going to take out a new policy in the new trust while you’re paying for a premium. When you’re ten years older, probably in your sixties or seventies, that premium is going to be significantly higher than the premium on the original policy. Again, what are you trying to accomplish?

These policies are actuarially designed to get better and better year after year, meaning the premiums are locked in. The cash value is growing, and the death benefit, assuming you earn dividends, is going to increase. If you were to transfer it to a new policy, or freeze it, or any of these other options, you’d be giving up a great deal of gain.

So let’s take a step back. What exactly is an ILIT? Well, an ILIT is a trust that lays out exactly what the grantor, the person designing the trust, wants to have happen to the assets that are going to fund it. It’s irrevocable, meaning it can’t be changed. It’s set in stone. So with that, the decisions that you make when you’re setting up this ILIT are important because in a sense they’re permanent. The control of the trust is in the hands of the trustee.

But, because of the irrevocable nature of the trust, there are limitations as to even what the trustee can and cannot do. And that’s the point. Make sure you know what you want to have accomplished before you get into an irrevocable trust, because you’re limited, and your trustees are limited as to exactly what can happen down the road.

The trust is a blueprint of what can and can’t be done with the money and the funds within that trust.

Conventional Savings Account vs Life Insurance

May 22, 2023

Since that whole fiasco with the Silicon Valley Bank, a lot of our clients have been calling us and saying, “Hey, is my money safe with a life insurance company?”

One day everything is fine. The next day you have nothing. One day you think your bank is safe and now you’re facing uncertainty. When it comes to saving in the bank, we’re certainly not depositing our money for high interest yield returns. We’re putting it there for safety, for security, for liquidity use and control.

However, when something happens like adjusted with SVB, our faith and trust in the banking system gets rocked. Silicon Valley Bank became insolvent because there was a run on the bank, meaning that a lot of depositors wanted to withdraw their money because they saw that the bank was unsafe. The problem is, not everybody got their money.

You see, in the old days when you wanted to do a run on the bank, you went to the bank, you asked the bank for money. They gave it to you. Or if there was none left, they would let you know. Nowadays, with online banking, we’re able to withdraw money and transfer it somewhere else without the bank even being open.

We’ve all seen those iconic pictures during the Great Depression of people standing in front of a bank waiting and hoping to be able to get their money before the bank ran out of money. Because of electronic banking, the ability to access your money should be quicker. However, when there’s a run on the bank, that liquidity disappears.

So you may be wondering what safeguards do the banks have in place to make sure that you’re able to access your money?

First and foremost, the bank needs to put money in reserve to guarantee that you could get your deposit. Do you have any idea how much the bank needs to put aside in reserve to make sure that you can get your money?

Well, the answer is somewhere close to $0.10 for every dollar. What that means is if you deposit a dollar in the bank, the bank only needs to put aside $0.10 to guarantee that you’ll get your dollar. Now, they’re banking on the fact that not everybody is going to want their money at the same time. And for the most part, that holds true, except when it doesn’t.

So what happens when it doesn’t? Well, that’s where FDIC comes in. FDIC stands for the Federal Deposit Insurance Corporation. One of the first things people ask when they’re putting money with an insurance company is, “Hey, is this FDIC insured?” And my response is, “No, thank God.” And then they look at me with a puzzled, look and say, “What are you talking about?”

You see, the reason banks need FDIC insurance is to guarantee that you’ll get your money, because if there’s a run on the bank, they know they don’t have enough money set aside to make sure you’ll get your money. So they have to offload that risk to a separate company, the FDIC. What the FDIC does is they charge banks a premium that they use to create the deposit insurance fund. It’s called the DIF. And in that deposit insurance fund comes premiums from all the banks, small, medium and large. And there should be enough money in there, hopefully, to make sure that everybody will get their money.

Here’s the problem. As of December 31st, 2022, the FDIC held $128.5 billion in the deposit insurance fund. But consider this, It was backing $22 trillion of assets. That’s like a penny and a half for every dollar of deposits. Is your money really safe?

So let’s transition over to the reserve requirements of an insurance company, specifically a life insurance company, whether it’s with an annuity or life insurance. Life insurance companies have the highest reserve requirements of any financial institution. That means they have a higher reserve requirement than banks and investment firms. And consequently, your money is safer with a life insurance company than any of those other financial institutions.

You got to realize the reason the banking industry pushed for FDIC insurance during the Great Depression, when 9000 banks failed, was because people lost faith and trust in the banking system. And that’s why FDIC was created.

So how does this translate? Well, let’s take a look at a poorly run insurance company, a poorly run life insurance company would have a dollar and $0.04 of assets for every dollar of liability that they own, meaning they could pay all of their claims and still have money left over, not like an investment where your money is at risk, or a bank where there’s only a fraction of your deposit actually held by the institution. We believe that life insurance companies are a much safer place to store and build and accumulate your wealth.

And as we just learned, it’s not how much money you make. It’s how much money you keep that really matters.

Leveraging the Cash Value of Your Life Insurance Policy

May 18, 2023

So you’re a business owner, and you have a whole life insurance policy, and you want to leverage the life insurance cash value to make an investment in your business. But what happens when you want to infuse some of that wealth into a business expansion, into operations, or into a business opportunity?

Let’s assume that I own an insurance policy, and I want to take a loan for my business. The first step will be for me to request a loan from the insurance company. The insurance company will send me a check or direct deposit into my bank account, and then I could make a separate loan to my business.

With that, we’ll have a promissory note drafted up between the business and myself laying out the terms of the agreement. It’ll include the payment amount, the interest rates, and the amortization of the loan. Additionally, there’ll be an amortization schedule that’ll lay out the principal and interest payments of this loan between me and my business.

You see, it’s important to make sure that you’re following the amortization schedule because the business is going to want to deduct the interest that it pays to the loan provider (myself), for the loan that I made to my business. So the business wants to get that deduction.

But now, I have to claim that same amount of interest as interest income, and now I have to file that on my tax return as interest income. Any accountant can help with that because they’ll have the amortization schedule and hypothetically, they’ll be handling both my business and my personal tax returns.

So continuing with the logistics, every month, my business will pay me the set amount from our promissory note, and I will repay my policy loan.

You see a very key step is making sure that I make the payment back to my policy. Why? Well, number one, I wants to reduce the amount of interest I pay to the insurance company. But number two, I wants to make sure that I have money in the policy for the next opportunity, or the next emergency, or the next expansion of my business.

You see, there’s a second layer here. With the life insurance policy I’m paying premiums, and after I took the loan, I’m also infusing cash back into the policy via these loan repayments. So it’s like I have two hoses filling up the same bucket. Because I’m filling up this bucket from two hoses, the premium and the loan repayment, it’s going to get more and more efficient each and every single year. I’ll have access to more and more cash with each passing year, and that will help to take advantage of bigger opportunities down the road.

You see, the goal is to control the entire financing function in my life so I could control the financing for myself, things that I want as well as for my business. And when we talk about making sure that you’re in control or regaining control of your cash, we’re talking about your cash. We’re talking about your cash flow. And we’re talking about your future.

If you understand this concept, it’ll be easy for you to create, cultivate and keep your wealth.

And remember, it’s not how much money you make, it’s how much money you keep that really matters.

Experience the Benefits of Compound Interest

May 15, 2023

Do you realize we finance every single purchase we make? We either go to a bank or finance company and pay up interest, or we pay cash and we give up interest. But if you’re paying cash, I’m sure your intention isn’t to give up control of your money, or isn’t to lose opportunity cost.

Today, we’re going to talk about how you could still pay cash for things without giving up opportunity costs and without giving up control of your dollar.

You may be familiar with the two main ways of financing any purchase. The debtor, who digs a hole and fills it up and just fights to get their head above the horizon, that zero line. Or the saver, who is kind of the debtor in reverse. They save up money as a matter of course, but once they have enough to make their major capital purchase, they drain the tank and they give up the opportunity cost of the money that could have been earned on their assets.

In both situations, the debtor and the saver spend a lot of their time at the zero line. They don’t get to experience any of the benefits of compound interest. You see, when you’re in debt, your cash flow is obligated to filling in that hole, to getting back up to that zero line. But when you pay cash, you’re still married to that zero line, you’re still saving as a matter of course, but you’re not really getting ahead because once that purchases made, you’ve traded your cash, that you owned and controlled, for the asset for the purchase, whether it’s a vacation, whether it’s a home remodel, it doesn’t matter. All of that cash is gone because you made a purchase.

But that can’t be what the wealthy are doing, right?

What wealthy people do is really simple. They create, cultivate, and keep their money. They keep in control of their wealth as long as possible. Now we have this question, if I want to make a purchase, we don’t want to finance and we don’t want to pay cash, how can I make the purchase?

The answer is simple, leverage. Leveraging other people’s money without draining your savings. Making your money more efficient by accessing other people’s money. We use this by leveraging the infinite banking concept with a specially designed whole life insurance policy designed for cash accumulation.

With this product, we’re able to leverage against our cash value that has accumulated within the policy, without giving up the compound interest. In essence, we’re able to take back the finance function within our own lives.

The key thing here is that we still get to make the purchase. We can make purchases for our own life, whether it’s sending our kids to college or paying for their tuition or paying for a wedding or a down payment on the house. The options are literally limitless.

What this extra step adds is a way to finance these purchases using your own money, without giving up control of the money, without being penalized by taxes, and without being dependent on banks and credit companies.

Not to mention without having to drain down the tank and giving up opportunity costs on our money or without having to give up control of the process. We give our clients a choice. You can either be controlled by the process or be in control of the process. Which would you rather?

I would argue that most financial frustrations come from not having access to money when we really need something. When you have access to cash, it seems like opportunities naturally find you. So whether it’s a business endeavor or an investment opportunity, the options are limitless as to why you should use this cash for. And when you’re able to take advantage of an external opportunity, you’re able to earn an external rate of return on your money, as well as the internal rate of return on your money.

That’s the continuous, uninterrupted compounding of interest.

So how does this play out? Well, you start a policy, you build up a pool of cash that you’re able to access and repay because you own and control that policy. And it’s a matter of course, you’re a saver. You’re always saving money. You’re always being an honest banker and paying yourself back. Then you’re able to leverage that money for retirement on a taxpayer basis and the leftovers get passed on to your family on a tax favored basis.

The tax benefits of life insurance are numerous.

Number one, the cash value grows on a tax deferred basis.

Number two, you’re able to access the cash value on a tax free basis through the loan provision.

Number three, when you die, the life insurance death benefits pass outside of federal income taxes to your name beneficiary. And also, in most states, the death benefit is outside of state income tax and usually state inheritance tax.

So let’s summarize. Number one, you get to make the purchase. Number two, your money earns uninterrupted compounding of interest. Number three, you’re in control of the process. Number four, numerous tax benefits.

If you’d like to see exactly how we put this process to work for our clients, check out our free webinar, The Four Steps to Financial Freedom.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

Building an Efficient Warehouse of Wealth

May 11, 2023

Cash flow is the lifeblood of any business, and having access to cash is kind of like the lungs. If you’re a business owner, you know this and you know it all too well. When you don’t have access to cash or cash flow, it feels like you’re suffocating.

So the question is, as a business owner, how do you position yourself so you have the lifeblood and the lungs of your business working together all the time.

Recently, Intuit did a survey of business owners all over the world, and they found that 61% of all businesses struggle with cash flow and 69% of business owners admitted to losing sleep or sleeping less due to cash concerns.

Some businesses are seasonal and their cash flow operates on a cyclical basis. Some quarters they have cash. Other quarters they’re a little light on cash.

On the other hand, some companies have chronic cash flow issues. It seems like they’re always playing catch up or they never have enough cash to take care of either running their business or growing their business. Either way, it could feel like you’re always putting out cash flow fires. It could feel like your business is suffocating and that could be very stressful. It all comes from cash flow not being as efficient as possible.

Over the past 37 years, I’ve worked with small business owners. I’ve worked with families. One thing I’ve determined is that their cash flow issues don’t have to be. It all stems from an inefficient way of utilizing their cash and their cash flow.

You see, it’s not how much money you make, it’s how much money you keep that really matters. What are you doing to maintain wealth within your business so that you’re off the debt cycle and you’re not dependent on external things in order to have smooth cash flow?

It all starts with building a warehouse for your wealth. So let’s talk about the qualities we want in this warehouse for our wealth.

Number one, we want tax advantages. We are business owners after all.

Number two, we want guaranteed access. We want to be in control of the cash and the cash flow going in and out of this warehouse.

Number three, we want a reasonable rate of return. We don’t need to hit a home run, but we want to make sure that our money is working for us 24/7.

You see, we believe there’s more opportunity in avoiding the losses, than picking the winners. Meaning that if you could make your cash flow more efficient and make this warehouse for your wealth as efficient as possible, you don’t need to hit it out of the park with investments. You’re able to maintain your wealth, keep it safe, keep it within your business, keep it within your family, and still accomplish your goals with guaranteed access to that money.

But what does that guaranteed access actually mean for you?

Well, it means that you could take back the financing function of your business. Imagine not having to be dependent on banks and creditors in order to make major purchases within your business.

Now imagine being able to restructure your current debts to build this warehouse of wealth, to finally be in control of your cash flow so you don’t have these chronic or cyclical cash flow dry spells.

But you see, the first step is creating that warehouse of wealth, because if you don’t have the warehouse, you don’t have a pool of money that you could access. Everything else is out the window. You no longer have control. You no longer have uninterrupted compounding of interest.

So let’s talk about the warehouse. What we talk about on our channel is a specially designed whole life insurance policy designed for cash accumulation, where you are able to store and warehouse your wealth, build up that cash over time, and leverage it in the future without interrupting the compounding of interest on your money.

You see, the money never actually leaves the life insurance policy. A lien is placed against the cash value and a separate loan is taken out from the insurance company. It’s a loan, so naturally there’s no tax to access that money through the loan. And you, as the business owner, get to decide the repayment terms.

What this translates to is a tool that you’re able to use as a business owner to function within your business to relieve the cash flow stress that 61% of you are facing, and ultimately build a warehouse of wealth for your business and your family.

If you want to learn more about exactly how we put this to work for our clients, check out our free webinar, The Four Steps to Financial Freedom.

Remember, it’s not how much money you make. It’s how much money you keep that really matters.

2 Steps to Avoid the Debt Cycle

May 8, 2023

Are you stuck on the merry-go-round of the debt cycle? You don’t have access to cash and so you’re forced to borrow, and then you go and you earn profits, but all of your profits go towards repaying that debt. When something else inevitably comes up, you’re forced to borrow again. It’s a merry-go-round that goes round and round and round until you break the cycle.

It’s not hard to get into debt. In fact, it’s been quite easy up to this point. Whether it’s student loans, a credit card or a business loan, not to mention mortgages and home equity lines of credit.

Once you’re on the debt cycle, the key is not to stay in it.

The first step is taking that first step, determining what amount you can save on a monthly basis to build up a pool of cash that you own and control so that in the future you’re not dependent on financing to make major capital purchases. A major capital purchase is defined as anything that you can’t afford out of your regular monthly cash flow.

You see, understanding how the problem starts is the best first step. And basically the problem starts because you don’t have access to your own money. Therefore, you have to pay for the privilege of using somebody else’s money, a bank or credit company.

This problem is easily overcome if you just build up your own pool of money in which you can borrow or you can utilize for whatever you want. We’re talking about taking back the financing function in your life because let’s face it, every time we turn the corner, it seems as if we’re making a major capital purchase.

To start, you don’t need to know what your first goal is going to be. The goal initially needs to be to break the cycle, build up that pool of cash so when the time comes, because it always does, you are prepared.

We often talk about being in control. Being in control of your cash. Being in control of your cash flow, and what does that actually mean? What are the benefits of being in control? Well, let’s take a look at what life looks like on the other side of the debt cycle.

The first step is being aware that you’re on the debt cycle. The second step is to make a change, start building up that pool of cash. And then after you have enough money, you’re able to leverage that cash to make major capital purchases. What does that mean for you?

By leveraging the cash, number one, you don’t have to borrow from a bank or a credit company. You can either use your own cash, which we would recommend not doing or borrowing against your cash and replenishing that money over time so that you can make the next purchase.

What we’re talking about is the infinite banking process that uses specially designed whole life insurance policies designed for cash accumulation to help accumulate and keep your wealth. By using the specially designed policy, you’re able to place a lien against the cash value in the policy and access it via a policy loan. What does this mean for you? Well, it basically means that money never leaves your policy.

A lien is placed against the cash value and the death benefit of your policy, and a separate loan is taken out from the insurance company’s general fund. Again, the benefit of this is that your money is able to continuously compound and grow within the policy, and you’re still able to access cash with no questions asked from the insurance company.

And if that was all there was to it, that would be great. But that’s not all there is to it, because the loan you get from the insurance company is an unstructured loan and basically what that means is you determine how, if, and when you repay that loan. And because of that, you get to determine what the monthly payments are. And if they’re too large, you can back them down. If they’re too small, you can increase them. If things go well, you can finish the amortization schedule. If things don’t go well, you can extend the amortization schedule. You’re in complete control of that payback process.

So the two benefits that we see that most of our clients enjoy are, number one, their money gets to earn continuous, uninterrupted compounding of interest. And number two, they control the payback process.

So what does this look like using the policy? Well, you have premium deposits building up the policy’s cash value on a systematic basis, whether it’s monthly, quarterly, semiannual or an annual basis. So it’s building up the cash value over here. And once you leverage that cash value with a policy loan, you set up loan repayments. And so you have money coming in over here rebuilding that cash value, reducing the lien against it as you go.

What that does is infuse cash into the policy from two angles, from the premium deposits as well as the loan repayments. So you’re able to get out of debt faster by using this process because you have so much cash going into an entity that you own and control, not the banks, not the finance companies.

So instead of having that money going out or leaving your control, you have the money staying in and you maintaining control. And if you look at this from a big picture perspective, you never lose control of that money. And as time goes by and compounding interest continues to work for you, all of a sudden you have an ever increasing pool of money from which you can borrow for the next larger purchase.

If you want to learn more about exactly how we put this to work for our clients, check out our free webinar, The Four Steps to Financial Freedom.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

How to Reach Your Financial Position A

May 4, 2023

When you’re starting off in business, your goals are certainly different than when you plan on exiting your business. But the question becomes how do you build within your business to get to your business Position A?

We define Position A as having enough cash outside of the business equal to the value of your business, so that your exit or your retirement is not dependent on your ability to sell the business.

Now, when you’re growing the business and you’re just starting off, it’s important to reinvest the profits back into the business so you could explode the business and grow so it could take care of you and your family.

But reinvesting your profits back into the business creates its own set of problems. According to the Bureau of Economic Analysis, 80 to 90% of a business owners wealth is tied up in the company and that makes their money inaccessible for things like repairing equipment, hiring new personnel, or growing the business.

However, as a business owner, we all have life hopefully outside of the business. You have a family, you have other goals. Maybe you want to send your kids to college, travel the world, retire one day. When all of your money is tied up within the business it makes these other goals very complicated.

And I would argue that the number one stressor that all of us face when it comes to money is not having access to it to do the things we want to do. According to a study by Intuit, 61% of business owners struggle with cash and 69% of business owners sleep less due to cash concerns.

Now, it’s one thing when you’re starting off your business to be stressed about money, but when your business is doing well, your business should be able to also take care of you. And it all comes down to how we’re using our money, how to get to position A so that you’re able to live your life now without financial stress and the health problems that come with stress, but also to know that your business is going to be able to take care of you throughout your entire life.

We recently had the good fortune of helping a client of ours who had been with us for 37 years retire. He had an offer on his business and it was an offer he literally could not refuse. But the great thing was he waited for the best offer. Why? Because he was in Position A. He had enough cash equal to, actually greater than, the value of his business so that his retirement was not predicated on his success of selling the business. His retirement was predicated on the success he had for the past 37 years.

When you’re not dependent on the outcome, you’re able to make clearer, better financial decisions. And the way to get to that position is by taking care of the business in the beginning, but also saving outside of the business so that you’re able to take care of yourself and your family and your financial future.

If you’d like to get to your Position A so that you have enough money saved outside of your business, as well as a thriving business, because too is better than one. Be sure to check out our website at Tier1Capital.com to schedule your free strategy session today.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

How Important is a Clearly Defined Succession Plan?

May 1, 2023

Being in business with your family could get tricky. For example, a recent study showed that two thirds of small business owners plan on passing their business down from one generation to the next. Yet, of those respondents, only 18% had a business succession plan that was clearly documented and communicated within the business.

There are two main reasons why business owners fail to plan for the future. The first is that they literally don’t think that they can afford to retire. 37% of respondents said that they didn’t think that they could afford to retire from their business. And we all know that cash flow is the lifeblood to any business. So it makes sense if you don’t have the cash flow to try to avoid it. But what if there was a way to find that cash flow within your current expenses to fund this planning?

If you’ve worked for the last 30 or 40 years, building your business, the last thing you want to do is strap the business with payments for retirement plan for you. But at the same time, you’ve put your blood, sweat and tears into this business for the last 30 or 40 years. You deserve to use that business for retirement. So it’s a double edged sword.

The second reason that business owners fail to plan for their succession is, they don’t want to let go. Statistically, business owners retire later than their employees and later than the average American. On average, a business owner retires at age 72 versus 66 for their employees and 64 for the average American.

If you think about it, it makes sense, though. A lot of times when people start a small business, the reason why or one of the main reasons why is because they want to be in control. They want to be in control of their own destiny and their livelihood. So the very thought of giving up control can cause stress and anxiety for the business owner who’s been in control for 30 or 40 years.

However, holding on for too long can have some negative side effects. When a business owner stays on too long, there are three negative effects. Number one, it can slow the growth of the company. Number two, it can limit your successors. People aren’t going to wait around forever before you decide to retire. Additionally, they’re not going to put their heart and soul into growing the business if it’s only helping you and not benefiting them. And third, it can literally bankrupt the business. And think of this. Business failures have increased by 226% over the past decade.

Our specialty is helping business owners plan a strategy to set them up for retirement success, as well as set the next generation up for success within the business. We do it in three steps. First, we show you how to regain control of your cash flow so that you can utilize that cash flow to help fund your exit strategy without taking away from the viability of the business.

Secondly, we can help you to incentivize key personnel to stay on, to help you to grow the business and fund your retirement without bankrupting the business. And more importantly, these plans could help incentivize key personnel to maintain their production, help grow the business, but also provide them with meaningful benefits to secure their financial future. And number three, we’ll help facilitate the difficult conversations that have to be made between family members and key people so that everybody’s on the same page and everybody’s pulling in the right direction.

The bottom line is this: with proper planning, business succession can go smoothly. It could take care of the founding generation and generations to come. If you take care of the business, the business will take care of you.

If you’d like to get started with this type of succession planning, check out our website at Tier1Capital.com to schedule your free strategy session.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

Valuable Finance Insights from Tier 1 Capital