Ring in the New Year with a Fresh Look at Your Financial Plan

January is not only a perfect time to implement your personal and professional resolutions – it’s also a great reminder to review your financial goals, plans and strategies. Decades of data have proven that successful financial outcomes are more likely to happen because of purposeful and thoughtful planning. As we start 2023, I recommend my clients reflect on their personal situation over the past year and consider how changes may impact their current plans.

I’ve compiled a checklist to get your year off to a fiscally fit start:

1. Get Organized

At the start of the year, it is helpful to have a full picture of what your anticipated overall income streams and cash requirements are going to be for the year. Plan for larger expenditures, especially if you will be withdrawing from your pool of investments to pay for them. You don’t want any needed funds at risk in the stock market; with advanced notice, you may reduce any associated tax liabilities as well. Make sure you have a good account of all current assets and liabilities; it’s essential to know what dollars you have available to you.

2. Identify Changes in Your Goals

Each year can be filled with surprises in your personal situation that may change your long-term goals and current objectives. Without a clear end goal in mind, you won’t know whether you’re saving too much or too little to meet short- and longer-term objectives such as funding education, buying a home or retiring. It’s important to reevaluate your goals annually as with life events such as marriage, the birth of a child, divorce, a new business venture or death of a loved one.

3. Adjust Your Plan Accordingly

When I work with my clients, my foremost concern is ensuring they aren’t at risk of running out of money during their lifetime. To do this, we build a plan based on the context of their current needs, wants and wishes. By starting with your goals in mind, you can revise a savings plan, update a portfolio allocation strategy, calculate a realistic retirement date and more.

While planning is vital for a healthy financial life, it’s equally important to make sure you aren’t suppressing your lifestyle too much along the way to retirement. Life is meant to be enjoyed! While we focus a lot on non-working years, you want to have fun during your working years as well. With proper preparation, you can strike that balance between planning for the future and living in the now. Or as I like to call it, giving yourself “permission to spend.”

4. Develop and Maintain a Budget

Regardless of your economic position, it’s essential to know where your dollars are going. This is often the single most difficult form of homework for clients. Your budget and your plan are only as good as the assumptions being used. If you are looking for a starting point, there are some great online options such as Mint and You Need a Budget. If technology isn’t your thing, you can also utilize a basic budget template like the one provided here.

Once you know what your goals, spending needs and available monthly dollars are, it’s time to determine if you are falling short or have an overage. To account for all of your money, I suggest assigning every dollar to a spend, save or give bucket.

5. Maximize Your Savings

To ensure you are maximizing your money, work with your advisor to review popular savings opportunities, such as:

Company Retirement Plans – Don’t miss out on free money. Take note of whether your company offers a matching contribution, and if so, what is needed to earn your match. You can save up to $22,500 per year in these plans with a $7,500 catch-up contribution option for those 50 and older. It will also be helpful to explore if your plan includes traditional pre-tax or Roth post-tax deferral options. Your advisor can help you decide which path will be most beneficial to you from a tax standpoint.
Health Savings Account (HSA) – This may be beneficial for those on a high deductible health plan. Built like an IRA but for health care, a 2023 HSA allows an individual to annually contribute a maximum of $3,850; a family may fund the account up to $7,750. For those 55 and older, you are eligible to contribute another $1,000.
Individual Roth IRA – You may invest $6,500 annually, plus a $1,000 catch-up contribution option for those 50 and older.
Individual Traditional IRA – Like an Individual Roth IRA, you may invest $6,500, plus a $1,000 catch-up contribution for those 50 and older.
College 529s – Every person can give up to $17,000 to any individual without having to do a special tax filing as part of an annual exclusion for estate taxes.
Custodial Accounts – With this strategy, you must be mindful of 529 contribution amounts to ensure you stay within annual exclusion totals as noted above. There are retirement and non-retirement account options.
Donor Advised Fund (DAF) – Think of this as a Roth IRA for charity and a means for enhancing your gifting power. The idea is to give dollars today using appreciated stock to your DAF with the flexibility to donate to charity over time. Meanwhile you enjoy an upfront tax deduction and the ability to invest and grow tax-free dollars over time.

6. Protect Your Wealth

Have any changes over the last year impacted how your dollars are protected? With proper planning you can safeguard your wealth from creditors, fraudsters or an unforeseen life event. Keep these items in mind as you consider the plan you have in place.

Review and update your account titling and beneficiary designations on all accounts including checking and savings accounts.
Assess who is overseeing your health care decisions, finances and guardianship of minor children when you are no longer able to do so. Consider creating and/or updating your power of attorney for health and financial matters, estate documents including a revocable trust and appoint an executor of your will. Once you have a current estate plan, it’s critical you work with your attorney and advisor to implement it properly.
Utilize strategies to protect your assets and your identity. This includes freezing your credit, regularly monitoring your bank account and credit card transactions, reviewing your credit report annually, assigning a pin number to your tax return and signing up for theft prevention services such as LifeLock or Identity Guard.
To minimize gaps and ensure your insurance coverages are cost effective, evaluate your life, disability and long-term care needs. It’s also recommended you review property and casualty insurance coverages.

Rarely does one’s plan withstand the test of time. Life inevitably changes, almost as quickly as tax and estate laws. Plans should be created, implemented and monitored for changes; a good financial advisor can help hold you accountable, provide proactive advice and be your best advocate.

About the author: Erica Bouchard, CFP®
As a respected, resourceful problem solver and an enthusiastic collaborator, Erica delivers comprehensive long-term plans to her clients, all while accounting for complex dynamics and their ever-changing needs. She invests her time and energy in rigorous continuing education and is committed to bringing skill, insight and confidence to Buckingham client relationships.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third party information which may become outdated or otherwise superseded without notice. Third-party information is deemed reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed adequacy of this article. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements, or representations whatsoever by us regarding third-party websites. We are not responsible for the content, availability, or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products, or services available on or through them. R-22-4846

Buckingham Weekly Perspectives | Three Tax Tips for 2022

While the year may almost be over, what you do NOW may still impact your finances in 2023. In this episode of Buckingham Weekly Perspectives, Chief Planning Officer Jeffrey Levine shares three tips you can utilize immediately to lower your 2022 tax liability.

How to Share Your Values with Legacy Letters


In wealth planning, it’s important to consider not just tangible assets but also the impact you hope to make on your community and family. This is often called one’s legacy, and a big component of that is intangible assets: your values and life lessons that can be passed down to future generations.

As families and friends gather for the holidays, it’s a good time to reflect on your values and the principles that guide your life and financial decisions. One way to articulate these is to put pen to paper and create a legacy letter. This exercise is a chance to express your gratitude, share wisdom or make amends. It can also be a meaningful gift to your loved ones and yourself.

Why are legacy letters important?

Legacy letters communicate our love, values, beliefs, life lessons and wishes for future generations. These types of letters have been around for over 3,500 years. They originated with the Jewish faith and became popular in the Renaissance period but faded from use in the 1800s. Recently, they’ve re-emerged as a popular way for people of all faiths to share their life story. Several technology services have been developed to help people draft their stories on their own or with professional help.

A legacy letter offers a level of authenticity and truth that enables our loved ones to embrace our story and live and grow from it. It becomes a living document. A survey by Oxford University found that 81% of U.S. respondents want their heirs to have this intangible wealth.

When do I write a legacy letter?

You may be inspired to write, or update, a letter at milestones such as births, graduations, marriages, religious events or holidays. At three of my grandchildren’s baptisms, their parents and godparents wrote letters to the baby. Recently, at the oldest grandchild’s confirmation celebration, the letters were opened and read. For his eighth-grade graduation, his mother gave him a book that included written notes from all his teachers since pre-school. All of these would be considered legacy letters since they discuss wishes and values.

How do I write a legacy letter?

A legacy letter can take many forms — written, video, audio. Written is typically the best option since it will not rely on future technology to replay a recorded version. Nevertheless, I highly recommend you make the decision based on which format you are most comfortable in expressing your thoughts.

How long should my legacy letter be?

Making sure you know what you want to say and how you want to say it is more important than the length. Rather than focusing on word count, make sure the letter reflects your voice and answers questions your family would like to know. Often, that can be achieved in only a few pages, or you may feel compelled to write more. However, it does not need to be the length of an autobiography or memoir.

What should I include in my legacy letter?

Some questions you might want to consider when you sit down to write:

  • What in your life are you most grateful for?
  • What are your most treasured memories?
  • How are you involved with your community?
  • What are your plans for the future?
  • What is your hope for your family’s future?
  • What are you passionate about? And what about it excites you?
  • Do you have any regrets up until this point in your life?
  • What type of person would you like to be remembered as?

Is there anything I should not include in a legacy letter?

It’s important to understand that a legacy letter is not a legal document. Therefore, it is likely not appropriate to explain all the legal details of your wealth transfer plans. That’s what your estate documents and living trust are created for. However, you may choose to add greater context to your wealth plan so that your family understands what factors motivated your choices. Try to keep the tone positive and to share your story constructively.

What resources exist on writing a legacy letter?

Here are a few good book recommendations I share with my clients:

Your advisor’s role in legacy planning

Wishing you the best of luck on your writing journey; I hope that it helps you plan with a purpose. If you are looking for additional resources, your advisor can help to discuss how to define your goals and values and, of course, translate those into your wealth planning decisions.


The post How to Share Your Values with Legacy Letters appeared first on Buckingham Strategic Partners.

Buckingham Connects Webcast: December 2022

In our final webcast of the year, Managing Director of Investment Strategy Kevin Grogan shared his perspective on the recent market optimism. He attributed the change to markets becoming more hopeful that the Federal Reserve will be able to bring inflation under control without causing a recession. He also answered clients’ most pressing questions about investing, including the differences between mutual funds and exchange-traded funds (ETFs) and an explainer on why diversification is still a winning strategy.

On the planning side, Chief Planning Officer Jeffrey Levine gave a rundown of his year-end checklist as we look toward tax season. Some notable to-dos include reviewing Roth conversions, tax-loss harvesting opportunities and estimated tax payments and withholdings. He also fielded questions from clients about tapping into home equity, the impact of midterm elections on financial plans and the upsides and downsides of annuities.

President Wendy Hartman ended with a positive note for 2023. She reminded clients that Buckingham’s team of advisors strive to bring clarity and education for any event – be it a personal development or pending legislation – that may change their financial plan. And Kevin reminded clients that whether a recession happens or not in the year ahead, it’s important to keep in mind that the markets have already priced in this risk. Find out more on what he expects for the bond market next year in his year-in-review video.


Buckingham’s Leadership Team’s Book Recommendation

This holiday season, if you are looking for a book recommendation for your favorite bibliophile, yourself, a family member, friend or colleague, Buckingham’s Leadership Team is spreading the cheer by sharing a few of their recommended reads.

“My father shared a copy of one of Larry Swedroe’s books at the beginning of my career, and it forever changed my path in life. My hope is that his book on retirement will inspire you as well.” – Adam Birenbaum, CEO Buckingham Wealth Partners

Preparing for retirement is more than putting money into a 401(k). Written by Buckingham’s own Larry E. Swedroe and Kevin Grogan, “Your Complete Guide to a Successful and Secure Retirement,” breaks down every important aspect you need to think about as you approach retirement. They dive into often overlooked issues that may affect your golden years such as Medicare, Social Security, elder financial abuse, challenges faced by women in retirement, heir preparation and more.

“Whether it’s fitness or finance, instilling healthy habits at a young age is a gift of a lifetime! As a parent, I want to install values in my children around money and finance. This book is a great gift, a way to leave behind a legacy and to teach empowerment of impactful decision making.” – Wendy Hartman, President, Buckingham Strategic Wealth

When you decide to start investing is just as important as the amount you invest. In “One Decade to Make Millions: A Strategy to Maximize the Power of Your Twenties,” author, speaker and Buckingham Strategic Wealth advisor Jeff C. Johnson shares why it’s so important to start investing in your future earlier rather than later. Even if an investor doesn’t have a high-paying job or an advanced degree, with proper saving and spending habits they can set themselves up to retire with a comfortable nest egg.

“This book has not only provided me with practical steps to become a more effective leader, but it has also helped me positively resolve personal decisions logically and effectively.” – Jeffrey Levine, Chief Planning Officer, Buckingham Wealth Partners

Whether it’s due to emotions, preconceptions or ill logic, as humans we have all struggled with making a decision at some point in our lives. In “Decisive: How to Make Better Choices in Life and Work,” authors Chip and Dan Heath introduce readers to an evidence-based four-step process to make better decisions in both their personal and professional lives. Their powerful, practical and effective strategies and tools can help readers get on the path to leading a happier, more productive life, no magic eight ball required.

“I love Clint Haynes’ positive viewpoint and advice on making the most out of retirement.” – Alex Potts, President, Buckingham Strategic Partners

There are two types of people in the world – those that dream of saying farewell to their 9-to-5 lives and those who dread not having the daily routine that comes with being in the workforce. No matter which side of the fence someone is on, retirement can be scary. In “Retirement the Right Way: How to Retire with Pleasure, Purpose and Peace of Mind,” independent Buckingham Strategic Partners advisor Clint Haynes explores the bigger picture of retirement, including finding a balanced perspective, reimagining life, learning to mind your money and more.

“I love how ‘The Founders’ brings the reader into the ground floor of the two Silicon Valley startups that would eventually merge to form PayPal. The book is filled with lessons on entrepreneurship and provides insights into the personalities that are still making headlines today.” – Kevin Grogan, Managing Director of Investment Strategy, Buckingham Strategic Wealth

For many, PayPal is a convenient, cashless option to pay for online purchases. But did you know many of the creators and original employees of this controversial startup went on to become an integral part of some of the world’s most famous companies? They landed at Facebook, Tesla, YouTube and SpaceX, to name a few. In “The Founders: The Story of PayPal and the Entrepreneurs Who Shaped Silicon Valley,” author Jimmy Soni shares the triumphs, trials and innovations of this groundbreaking company and how it has forever changed the way we live.

“‘Enlightenment Now’ offers a refreshing viewpoint to our modern world. In our work at Buckingham, we often counsel our clients away from the daily fads, new hot trends and shiny pennies. Instead, we use science and data to educate and inform solid financial plans that are designed to stand the test of time. This book is filled with long-term perspectives (and many examples) that result in wisdom that will serve you well throughout life. I hope you enjoy this book as much as I did.” – Justin Ferri, President, Buckingham Wealth Partners

Despite constant news of gloom and doom, research shows people around the world are living longer, happier and healthier lives. In Steven Pinker’s “Enlightenment Now: The Case for Reason, Science, Humanism, and Progress,” he dispels the recency bias we are all susceptible to and replaces it with a refreshing perspective based on reason and science. The author illustrates through dozens of data rich graphs how our lives are being enriched through the gift of enlightenment despite the obstacles we face daily.

“Ben Westhoff’s joy and heartache as a mentor in the Big Brothers Big Sisters program, along with his exploration of the two vastly different world’s he and Jorell inhabited, made this the hardest book for me to put down this year.” – Jeff Remming, Buckingham Strategic Wealth Chief Transformation Officer

St. Louis transplant Ben Westhoff was a 20-something college graduate from an affluent family. When he was paired up with eight-year-old Jorell Cleveland through the Big Brothers Big Sisters program, they quickly became inseparable. They weren’t just mentor and mentee – they were brothers. Tragedy struck in 2016 when Jorell was murdered in the middle of the street at close range. In “Little Brother: Love, Tragedy, and My Search for the Truth,” Westhoff shares his personal story of heartache, the realities of impoverished communities and the truth about the man he considered family.

Why Businesses Should be Treated as Investments

A business is typically its owner’s largest and most complex investment. It is also a fundamental piece of their personal retirement plan. But what if the business owner’s perceived value of the company does not reflect its true value? This could derail their personal retirement plan and their future lifestyle.

Unfortunately, this happens often because businesses are rarely evaluated properly for several reasons:

  • Business owners may not know their company’s true cash return because of tax planning or other techniques that disguise its true performance.
  • Investments in the business are often considered as amounts the owner paid years ago. In addition, most investments are shown at the book value of assets or shareholders’ equity. For a profitable business, this does not consider any intangible assets or goodwill value, which may represent a significant amount of the overall value.
  • Many business owners may not fully understand how to translate their company’s risk into a commensurate rate of return on their investment.
  • When business owners fail to correctly calculate their expected returns and quantify risk, it’s difficult to know the current fair market value of the business. As a result, they may make decisions based on incorrect or incomplete information or miss major opportunities.

The value of a business can also vary depending on its owner’s circumstances and goals. If selling the business to a third party, the owner would expect to receive a maximum purchase price. However, the sale of that same business to a family member or employee might need to be structured so that the company’s cash flow can support the purchase price and make payments to the owner.

Many business owners have heard the rule of thumb that sales of companies are typically three to five times its earnings before interest, taxes, and depreciation (EBITDA), though many don’t investigate why. By taking steps ahead of a potential sale, they may discover the business is actually worth twice its EBITDA or—much better for the owner—seven times its EBITDA. Knowing this can help business owners focus on techniques to boost earnings and reduce risk, which would justify a higher EBITDA multiple.

To create value, business owners should consider the various value drivers of profit margin and asset turnover, shown in the tables below. In addition to focusing on these value drivers, business owners should benchmark their company against similar-sized companies within their industry—as investors do when making investment decisions. Proper comparisons can drastically improve a company’s operations and cash flow.

While many investors have close to instant access to the value of their personal investments, this is not available to most business owners. It takes time to understand the value of a business, what drives and impacts value, and how to enhance it. In addition, too many business owners tend not to treat their business like an investment. For example, if a part of your personal portfolio fails to accomplish what you intended it to do, you’d adjust that investment accordingly. But what if your business isn’t generating an adequate return? Similarly, business owners can explore their options for adjustments that will lead to greater value.

Fortunately, really understanding what your business is worth can be easily accomplished through regular business valuations. Conducting one each year can help identify the true value of the business, track the performance over time, and identify critical factors and techniques that have a direct impact on enhancing its value.

Regular valuations also help a business owner’s financial team—including wealth advisors, accountants, and attorneys—design a streamlined, holistic plan that accurately incorporates their personal and business finances. Of course, planning for the disposition of the business itself will add clarity to their overall roadmap for retirement.

This commentary originally appeared August 17, 2022 on thestreet.com.

About the Author: Chuck Laverty
As Director of Business Solutions at Buckingham Strategic Wealth, Charles “Chuck” Laverty, ASA, CBA, CVA, MAFF, CEPA, works in tandem with the firm’s advisory teams to help business owner clients understand and enhance the value of their business and its role in their holistic financial life plan.

This article is for general information and educational purposes only and is not intended to serve as specific financial, accounting, legal, or tax advice. Individuals should speak with qualified professionals based upon their individual circumstances. The analysis contained in this article may be based upon third-party information and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, confirmed the accuracy, or determined the adequacy of this article. R-22-4086

© 2022 Buckingham Strategic Partners®

The post Why Businesses Should be Treated as Investments appeared first on Buckingham Strategic Partners.

Why The Location Of Your Investments Matters

Most investors have a process for deciding which investments to buy in their portfolio—with different objectives for building wealth over time. But once you’ve selected your investment mix, have you considered how the account that holds your investments affects what you ultimately earn?

A potential game changer for your expected returns is the amount of tax you’ll need to pay, which may be annually or when you make withdrawals depending on the account type. The type of account also makes a big difference in the amount of tax owed. Thinking about asset location—or being strategic about which account holds each of your investments—can help investors keep more of their income.

Leveling the Playing Field Among Accounts

If you have ever received a Form 1099 from the IRS for investment gains or losses, or if you’ve paid income taxes after taking money from your retirement account, you know that Uncle Sam is your investment partner. Just like you, the government wants these accounts to grow because bigger returns generally mean more tax dollars to collect.

From a tax perspective, taxable brokerage accounts, traditional individual retirement accounts (IRAs) and Roth IRAs are not created equal. To level the playing field, it’s important to consider the after-tax expected return of any investment—the amount we keep. Knowing how an investment is taxed within different types of accounts is critical in determining where to own each of your investments.

Non-Qualified Accounts (Taxable)

  • In taxable accounts, such as a brokerage or joint account, you pay taxes each year you receive dividends and interest payments or when you sell investments for more than you paid for them.
  • Qualified dividends and the capital gains on investments held for at least one year are generally taxed at a preferential rate. This is also known as the capital gains rate, and it is either 0%, 15% or 20% depending on your income bracket.
  • Interest income—such as from bonds—and gains from selling investments held for less than one year are taxed at the ordinary income rate, which ranges from 10% to 37% depending on your income level. So, if you don’t plan to hold your investments for very long in a taxable account, you could wind up paying much more in taxes than if you held them for at least one year.
  • The government bears some of the risk of each investment since it receives a portion of the income in taxes (unless your tax rate is 0%).

Traditional IRAs (Tax-Deferred)

  • Traditional IRAs are tax deferred—there is no immediate tax consequence when you buy or sell investments within the account or when you receive dividends or interest payments.
  • Although you have the benefit of only paying income taxes when taking funds out, you do so at ordinary income tax rates.
  • A good way to think about your traditional IRA is to imagine it is split into two identically invested accounts: one owned by you and the other by the government (the portion of which would equal your tax rate). You’ll receive all of the income from your portion, but you also take on all the risk. Likewise, the government will receive all of the income from its portion and take on all the risk.

Roth IRAs (Tax-Deferred)

  • In Roth IRAs, you make contributions with after-tax dollars, and you don’t pay income taxes on any earnings or when taking funds out as long as you meet certain conditions.
  • Therefore, you can expect to receive all of the income from your returns on investments in these accounts. However, this also means you bear all of the risk on the entire balance.

Deciding Which Accounts Should Own What Is a Game of Prioritization

When making investment decisions, the first step is to decide what type of investments will meet your personal goals—the accounts you already have should not dictate those decisions. Only after deciding on your overall allocation target can you review your existing accounts to determine the optimal location for each of your investments.

When considering location, it’s helpful to view all of your accounts as one household portfolio, rather than separately. Although exchanging investments between accounts may lead to differing returns in one account compared with another, the goal is to create more after-tax wealth overall through tax efficiency.

To make the most of tax treatments, it’s generally favorable for most investors to prioritize tax-inefficient investments in IRAs, either traditional or Roth. As you move these investments to tax-deferred IRAs, you’ll have room in your taxable accounts to take advantage of the preferential rates for tax-efficient investments. Some examples below illustrate how to think about these decisions.

When deciding whether to place your investments in a taxable account or IRA, it’s also important to give the greatest consideration to those investments with higher expected returns—and therefore generally higher risk. For example, it may seem like simple logic to hold investments with the highest expected returns in a Roth IRA because your income won’t be taxed. However, you aren’t always better off taking all the investment risk.

Additionally, there are some instances when the placement of your investments requires more consideration, such as if you anticipate using any of your traditional IRA funds for future qualified charitable distributions because there could be greater tax advantages in doing so. Ultimately, deciding which account should own which investment will depend on each investor’s circumstances. Working with a financial advisor can help you navigate your specific case and help you set up a plan to maximize your after-tax returns.

If you are not currently working with a financial advisor, Buckingham would love to help you reach your wealth goals. Please visit our website for more information or connect with us for a short introductory conversation.

About the author:

As a wealth advisor, Patrick Kuster believes a financial plan is only as good as its implementation, and seeing the plan through is one of the most rewarding parts of his job. He loves helping clients solve their financial puzzle, pulling apart plans and discovering concepts that question industry norms. He also likes educating clients and providing them insight that keeps them on track toward achieving their financial goals.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Certain information is based upon third party data which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party websites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them. The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®. R-22-4212

The post Why The Location Of Your Investments Matters appeared first on Buckingham Strategic Partners.

What Should I Be Thinking About When Making a Capital Investment in a Rising Rate Environment?

Whether you want to upgrade to the newest technology, need to replace worn equipment or give your lobby a facelift, what should you consider before making a capital investment in your business? Unlike recent years, business owners now face increasing costs to carry debt. How do you make improvements to your business while still remaining financially solvent? I have outlined five key factors to consider before committing to a capital investment:

Will your current cash flow support new debt? Any recent debt will need to be structured in a way that is not burdensome to cash flow and allows you to obtain advantageous lending terms.

Know your targeted cash reserves. COVID-19 taught many practice owners that navigating business interruptions is a crucial piece of a strong and healthy financial plan. Knowing your targeted cash reserves is critical. It’s important to take into account your current debt picture if you are carrying any loans that should be paid down first. If you do not know your cash reserves target, take a moment to work with a financial service specialist to determine that amount.

Make sure you are getting competitive loan offers. If you decide to move forward with your capital investment project, how do you structure the loan in a rising interest environment? While the banking industry is continuing to offer competitive terms for borrowers, working with multiple banks to secure the best loan is something that should not be skipped. Do not settle for one bank’s offer without checking what competing banks are willing to do for you. Letting banks know they are in a competitive bidding process will help to drive the best possible terms.

Optimize the mix of down payment and amount borrowed. Now that you have spoken to multiple banks about your borrowing needs, how much money do you want to put down for the project? For many years when rates were suppressed, it made good sense to finance as much of the project as possible. Today, that may not always be the case and the impact on cash flow of a new loan should be tested. Financial service professionals can stress test your cash flow, determine the impact to your bottom line and create a financially responsible path to move forward. You do not want to sacrifice retirement savings or necessary cash on hand to complete a project if you do not know how it may impact your business.

Know the short and long-term cash flow impact and profit contribution of each capital investment. In the past, practice owners would make a purchase with the mindset they will refinance the debt later and secure better terms. New equipment purchases were a common item to be bought directly through the seller to secure incentives for the deal. In many cases, the buyer planned to refinance the debt in six to twelve months. This is no longer a guarantee and makes the initial terms of the loan more important.

There is no hard and fast rule for how much money should be put down when securing a loan. The bank will have its requirements, but should you consider putting more dollars down for the project? Or is it more advantageous to elect a different loan that has a higher interest rate, but helps to protect your cash reserves due to a lower capital requirement at the time of the purchase?

Practice improvements are commonly made to increase production, streamline your business operation or to update an office space to create an optimum patient experience. All of these projects can be good investments over the course of your lifetime as a business owner but determining the short and long-term impact on your cash flow and profitability should not be left for chance. Know before you commit your dollars to the project. As you navigate this process, it is important that you have a fiduciary advisor supporting you along the way and not someone who stands to collect a commission for closing the loan.

The practice integration advisors at Buckingham help dentists achieve financial success by incorporating a thought-out and customized approach to managing your practice. We are happy to help you understand how a capital investment in your practice fits into your business and can help support your professional and personal financial plan. Schedule a conversation a conversation with us today!

About the author:
Brian Roemke, Buckingham Strategic Wealth Practice Integration Advisor

As a practice integration advisor, Brian provides comprehensive financial planning services to clients. He appreciates the importance of a well-rounded team working collaboratively to develop, implement and monitor a plan that helps clients achieve their distinct goals.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information may be based upon third party information and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. R-22-4166

The post What Should I Be Thinking About When Making a Capital Investment in a Rising Rate Environment? appeared first on Buckingham Strategic Partners.