The Risks of Being in Business with Family

Every now and then I get a call from a client wanting my opinion about starting a business with a friend, investing money in a business owned by a family member, or co-signing a loan to help a family member buy a business. Being in business with family is something I know a little bit about, having been in partnership with my father and brother for 40 years. Going into business with family members or close friends can carry a high degree of risk, both financially and emotionally.

In part this is because it is uncomfortable or difficult to ask the necessary dollars-and-cents questions. We don’t want to seem uncaring, unsupportive, or untrusting. We are concerned about damaging the relationship. Yet the relationship is far more likely to suffer if we don’t ask those questions and the venture fails.

The following are some things to consider before you invest or go into business with someone close to you:

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Collecting Treasures–Or Not

Almost everyone has a story about a cousin or an aunt who bought a box of junk at an auction and found in it a diamond ring worth several hundred dollars. Every once in a while a valuable painting by a famous artist turns up in someone’s attic. “Antiques Roadshow” sometimes features odd items that have been sitting around in someone’s house for years and that are appraised for thousands of dollars.

This doesn’t mean buying and selling art or collectibles is a good way to make money.

Buying art, antiques, or collectibles is extremely speculative, in part because values are so subjective. What a given item is worth depends entirely on what a collector might be willing to pay at any given time. A piece of pottery or jewelry might fluctuate considerably in value as trends come and go. Yesterday’s hot collectible (think Beanie Babies or Jim Beam bottles) might be tomorrow’s overpriced embarrassment.

Does this mean you should never buy art or antiques in hopes that they’ll increase in value? Not necessarily. I am suggesting, though, that investment shouldn’t be the primary reason for your purchase.

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Spenders, Savers, and Successful Savers

Are you a spender or a saver?

According to Scarborough, a market research firm, only 9% of adults in the U.S. label themselves as spenders. This is the percentage who “mostly agree” with the statement, “I am a spender rather than a saver.” On the opposite side, 29% “mostly disagree” with the statement and are considered savers. Presumably, the 62% in between consider themselves to have well-balanced financial habits that include both spending and saving.

Given these numbers, it would seem that most of the adults in this country ought to have healthy savings accounts. Unfortunately, that’s not the case.

According to a report released in March 2013 by the Employee Benefit Research Institute, 57% of U.S. workers have less than $25,000 in total household investments and savings, not including the value of their homes. The Social Security Administration’s current figures show 34% of American workers have no savings set aside specifically for retirement.

Something doesn’t quite add up. Either a lot of Americans aren’t willing to admit that they are spenders, a lot of Americans are so poor that they can’t afford to save, or a lot of Americans are delusional.

Or maybe a lot of us just have different definitions of “saving.” Here are a few money habits that might encourage people to think of themselves as savers, but that don’t necessarily add up to being successful savers:

1. Buying things on sale. Waiting for discounts on items you need and want is a wise and standard practice for frugal shoppers. But you aren’t a saver if you buy bargains that you don’t need, might not even really want, or can’t afford. Maybe that $150 pair of shoes is half price. Yet if they will just sit in your closet, you haven’t saved $75. You’ve spent $75.

2. Having money in the bank. Yes, putting money into a savings account is the first place to start saving and a great habit to teach your kids. But once you have accumulated an emergency fund, keeping your money in the bank isn’t a good savings habit. Over time, savings accounts and CD’s don’t pay enough to keep pace with inflation. Money in the bank may be safe, but it isn’t really an investment because it isn’t growing. Mutual funds that include a well-diversified range of investments are far better places for your long-term retirement savings.

3. Not spending anything. There are times when choosing not to spend money now will only cost you more money later. Failing to maintain your car or do home repairs are two common non-spending habits that may seem like saving but actually turn into spending.

4. Saving for someone else. The time-tested advice to “pay yourself first” usually means taking money off the top for savings before you spend anything. Yet this has another application, as well. Make saving and investing for your own retirement your first priority. It needs to come ahead of saving for your kids’ college educations, weddings, or first homes. This may seem selfish or greedy, but in fact it’s the opposite. When you provide for your own financial well-being in retirement, your kids won’t end up having to help pay your bills.

When we’re asked to label ourselves, it’s normal to tend to choose answers that fit the way we would like to think of ourselves. I’m sure most of us would prefer to think of ourselves as savers rather than spenders. But if we really want to become successful savers, we can’t settle for the money habits we wish we had. We need to look at the money habits we actually practice.

Trusts–No Panacea To Retaining Family Wealth

When passing wealth to your kids, consider creating a trust to limit the later generation’s ability to tap into the principal. Several astute readers suggested this strategy after my recent column citing research that shows 90% of inherited wealth is gone by the third generation.

There is no question that a trust, done correctly, can go a long way to preserve wealth after the death of the wealth accumulator. Let’s explore what “done correctly” means.

1. Trust law is complex. Engage an accountant and attorney with strong skills and expertise in trusts.

2. Be sure the assets you intend to go into the trust will actually transfer.

Retirement plans like IRA’s, 401(k)’s, and profit sharing plans will pass to whomever you listed as the beneficiary. This must be the trust. In addition, the trust must include a number of special provisions in order for a retirement plan to be distributed according to your wishes and not as a fully taxable lump sum.

Annuities, insurance policies, and accounts with a TOD (transfer on death) clause will also pass to the named beneficiary.

Assets held in joint tenancy will not pass to the trust. Many married couples jointly own most of their major assets, such as the family home, investment real estate, brokerage accounts, or bank accounts.

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Finding the Right Path to Wealth

After three decades as a financial planner, working with successful wealth-builders, you’d think I would have a clear idea of the right path for creating wealth.

Instead, what I’ve learned is that there is no such thing. Here are just a few of the paths that aren’t the sure routes to wealth they might seem to be:

1. Education and career choices. Going into a field like law or medicine might seem to guarantee financial success. Not necessarily. I’ve seen many physicians, for example, who have accumulated significant wealth. I’ve seen just as many who live paycheck to paycheck.

2. High earnings. Again, this isn’t the reliable predictor of wealth it would seem to be. Continue reading

Comparison Shopping for Financial Advice

You can spot comparison shoppers a few aisles away at any retail store. They are the ones carrying articles from Consumer Reports, badgering the salesperson with a million and one questions. People who manage money well are usually big fans of comparison shopping.

If comparison shopping is important before choosing a new refrigerator or lawn mower, it’s even more essential before choosing an investment advisor. Unfortunately, there is no easily available consumer’s report on advisors. Even more frustrating, those selling financial products often have incentives not to be forthcoming with the information that is crucial for comparing advisors.

One aspect of shopping for an investment advisor is knowing what questions to ask. Continue reading

Leaving Money to Your Kids–Or Not

“I’ve never seen money passed from one generation to another in a manner that actually benefited the recipient.” When a psychologist said this to me several years ago, I was dumbfounded.

Many parents scrimp, save, and sacrifice so they can “leave something to the kids” with the intention of doing them good. It’s hard to accept that inheritances may actually do harm instead. Most of us have money scripts that don’t support this idea.

Typically, I used to hold several money scripts around inheritances. One was that leaving money to your children is a loving thing to do. Another was that parents should always leave their money to their children. A third was that anyone who received an inheritance would invest it wisely, using only the earnings to improve their lives.

Today I know those money scripts were not universal truths. I have more understanding of the problems involved in giving money away in a manner that is beneficial to the receiver. It isn’t as easy as I once thought.

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Defining “Fiduciary”

Okay, I did it again in a recent column. And I got into trouble again. That’s what I get for using the F-word.

“Fiduciary.”

My most recent transgression was to point out the simple fact that insurance agents are compensated by commissions on the products they sell. They have no fiduciary duty to legally act in the best interests of their customers.

Every time I remind readers that sellers of financial products do not have a fiduciary duty to their customers, I get indignant responses from financial salespeople who seem to think I have accused them of being unethical.

Not so. Continue reading

What Is a Middle Class Income?

The middle class. Marketers target it. Politicians champion it. Economists talk about it. Most of us consider ourselves part of it.

Yet, when I’ve asked for a clear definition, I have not found anybody yet that really can tell me what “middle class” is.

I recently posted on Twitter that $90,000 was a middle-class household income and that it would take a nest egg of $3 million to generate that income in retirement.

A couple of my colleagues responded that my figures were way too high and accused me of being out of touch. As a lifelong South Dakotan, I’m used to being seen as “out of touch,” but the idea that $90,000 was beyond a middle-class income intrigued me.

I figured a few minutes with Google would point me to a definition of “middle class.” It wasn’t that simple. I soon discovered that neither politicians, economists, sociologists, nor financial advisors can agree on what makes someone middle class. It is a little easier to define a middle class income.

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New Book by Dave Jetson Shows Value of Therapy

frontcover“It’s not about the money.” This saying has become almost a cliché among financial planners and therapists who help clients address the emotional aspects of their relationships with money.

We keep using this phrase because it is so true. Overspending, taking unreasonable risks, money conflicts that strain marriages, failing to learn from money mistakes, and a host of other problematic money patterns are not about money. They are about emotions. And since brain researchers tell us that 90% of all decisions are made emotionally, it literally “pays” to pay attention to your emotions.

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