Cash Can Hold You Back

Do you know how much cash you really have? You may think you are invested with 60% stocks and 40% bonds but when you look deeper you may see that each entity involved in your investment plan is holding extra cash. Cash does have positive attributes of diversification, lowering risk, and in case of emergency. But with low interest rates and historically lower comparative returns, holding extra cash can be detrimental to your long term returns.

There are three areas that can hold extra cash:

   1. You
   2. Advisor
   3. Mutual Fund

I always advocate holding cash reserves for unforeseen expenses but some people are extreme. They may keep 3 years worth of expenses in cash for reasons including: the government taking over, bank may go under, China is taking over, don't trust investments, etc. I don't discount anyones fears but I do want to talk it over and see if there are other underlying motivations for keeping extra cash. Maybe they have had a bad experience with debt or growing up they were poor and need extra security. We talk about the likelihood of these scenarios and compromising with 6 to 12 months of cash.

If you have a financial advisor they will have their own fears or strategies that keeps extra cash in your accounts. Maybe they believe the economy is going down or that stocks have risen too much. They can decide to switch out of a certain investment and keep cash for a "better" time or "better" opportunity. To guard against too much cash with an advisor it is good to have an investment plan or policy where the advisor spells out how your money is going to be invested and give target percentages for each investment. Maybe cash can range from 0% up to 5% of your account values in the plan. Whatever it is, make sure you agree to it and that the amount stays within certain parameters.

The area where people are most surprised to find extra cash is with their mutual funds. For the most part, passively managed funds like a S&P 500 ETF or U.S. bond ETF will hold a small fractional amount in cash. However, active managers may be holding 5% or more in cash. They have to keep a certain amount in cash for redemptions from their fund and operations. Managers also have their own fears and strategies for the money they manage and may shift a large amount to cash. This increases your overall amount in cash and the potential returns. One major problem with this flexibility and frequent investment changes is the vast majority of managed mutual funds underperform a comparative index. Just another reason to stick with index funds.

How would have extra cash affected your returns in 2012? In a simple portfolio of 60% S&P 500 and 40% Barclays Aggregate Bond the return in 2012 would have been 11.2%. If, instead, there was 10% in cash, 50% in S&P 500, and 40% in Barclays Aggregate Bond the return was 9.7%.

Cash has its place in every investors financial plan for emergencies and diversification. Make sure you know how much cash you have and that it is not holding you back from building wealth and achieving your long term financial goals.

Crossville Tennessee Financial Planner - Peterson Wealth Advisory, Christopher Peterson, CFP®

Growing up in small town there were limited choices for such things as restaurants, clothes, new movies, etc. As consumers, we either had to settle for what was available locally or make trips of an hour or more to increase our purchasing options. 

Another area where choices were limited in Ellensburg was financial services. We had a couple of brokers in town but both were focused on selling products with high commissions and not financial planning. When my family and I were considering moving to Crossville, Tennessee I found the financial service choices were similar to where I grew up. This would be a great opportunity to provide the people of Crossville and the surrounding area another choice for financial advice. Advice that is in the client’s best interest, comprehensive, conflict-free and fee-only.

Peterson Wealth Advisory is the only independently owned Registered Investment Advisor (RIA) firm employing a Certified Financial Planner™ in Crossville, TN. There are significant differences between my firm and brokers like Edward Jones. Peterson Wealth Advisory is paid directly by our clients on a fee-only basis, we disclose any and all conflicts of interest, and have a duty to put our client's interests first. 

Dually registered advisors/brokers may say they are fee-based but this just means they can play both sides of the fence. On one hand they can be paid a fee by the client for advice but at the same time they can sell a product that earns them a big commission. As their client, it is not clear what angle they are taking and if they are taking advantage of you. 

Peterson Wealth Advisory is unbiased and completely independent. We do not receive kickbacks or revenue from mutual funds for selling their products. Conflicts can arise when fund A pays more to the advisor but fund B costs less and performed similarly. We don't sell insurance or complex annuities for their big commissions. But, we will review your insurance and help you shop around for the most appropriate and inexpensive policies.

My company has been in business for five years and I have been an advisor since 2006. Even before that, I had a strong interest in financial planning and investing. I used summer job earnings to buy stocks and mutual funds as a young teenager and then later earned my bachelor's degree in Business Administration/Finance. I have experienced the benefits of saving early and growing wealth through investing.

When I work with clients, I take the time to get to know them personally, their life experiences, and understand the quality of life they are striving towards. Until we first know the answers to these more impactful questions, we can’t possibly make recommendations about all of the traditional financial planning tools like insurance and investments.

If you live in Crossville or somewhere nearby and are interested in learning more about the new choice you have for financial advice, please contact me. I will be happy to meet with you and share my financial planning expertise and knowledge with you. 

Small Business Planning

Business & Life Combined

If you’re like most small business owners, your personal life and business life are practically inseparable. That’s why it’s important for your personal financial planning to take into account the unique considerations—and opportunities—of owning and operating a small business.

The key to success with a financial plan is achieving an integration of life, work, and money goals. No one cares about the money itself. As a small business owner myself what get’s me excited and I’m sure you too, are the things we can do in our business and our lives by building wealth.

Expansive View

To me, financial planning means caring about you and wisely managing finances to achieve your goals and dreams. Through our well-managed discovery process, we have meaningful conversations about you and money. It's about building relationships in order to provide individualized advice and planning for your unique situation. 

• Tell me about yourself?
• What was your family like growing up?
• How has money affected your life?
• Imagine you are financially secure, how would you live your life?

From here I follow a well-managed financial planning process that includes:

• Setting realistic financial and personal goals
• Evaluating where you are now financially
• Developing a plan to reach your goals
• Putting your plan into action
• Monitoring your plan to stay on track with changing goals and circumstances

Below is summary information about financial planning for small businesses. For detailed information click on the subject heading of each paragraph.

Investment Plan: Small business owners frequently focus all of their investment money, including for their retirement, on their own business. After all, it’s the business they know best. The problem with investing solely in your own business is concentrating risk in one area. That’s why I counsel business owners to diversify at least some of their investments and wealth in different areas.

Debt: Determine how much you need and add an extra amount (maybe 10%) to your estimate. This will help cover unexpected needs. Make sure your credit sources are set up in advance. You don’t want to wait until you absolutely need it.

Tax Planning: A year-round approach is advised to help strengthen your other important financial goals. Deciding the type of business structure, timing of income and expenses, the type of retirement plan and contributions, and charitable giving can all affect how much you pay in taxes.

Insurance: Making sure you are properly covered against risks protects your business, family, and wealth. Liability, Property, Business Interruption, Life and Disability, Worker’s Comp, and Health should be reviewed and shopped around annually or when a major change occurs.

Retirement: There are many retirement plan options today for small business owners that are not complicated and not expensive. Most business owners cannot afford not to establish a retirement plan. Even if you assume that you’ll easily sell your business when you retire and live on the proceeds, it’s risky to assume that it will work out that way. There are also many tax reducing benefits to having a retirement plan. Depending on the type and or size of your business there are many options available to meet your circumstances. Some plans offer more liability protection for the owner while others are less costly to establish and maintain. I can help you analyze the options to determine which plan is best for your situation.

Succession Planning: This is essential for anyone who owns a small business because it is typically the largest asset in the owner’s estate. A proper succession plan will consider taxes, life insurance, passing it to the next generation, buy/sell agreement, and maximizing the sale price to a third party.

Investment Planning for Small Business

Small business owners frequently focus all of their investment money including for their retirement, on their own business. After all, it’s the business they know best.

The problem with investing solely in your own business is one of risk, because for every immensely successful business, dozens more either fail or return only modestly. That’s why we typically counsel business owners to diversify at least some of their investment money. The following are a few suggestions:

•Start with a written investment plan that takes into account your business and will keep your finances steady through rough times.

•Build a cash cushion for your family and your business. Set aside at least three to six months of cash flow in a liquid account, such as a money market fund.

•Resist the temptation to invest only in companies in your industry, or those with whom you do business. If your industry experiences a downturn, both your business and the stocks you’ve invested in could slump at the same time. Similarly, avoid investing only in the stock of small companies or only in local real estate.

•To better diversify, we commonly recommend balancing off your business investment with large company, non regional, domestic stocks, as well as international securities and perhaps real estate investment trusts that invest in other regions and industries. Bonds are another important component of a diversified investment portfolio.

•Use your diversified portfolio as a receptacle account for harvesting cash flows from your business when they exceed your current lifestyle needs.

•The exact mix of cash, bonds and stock depends on your particular circumstances, age and tolerance for risk. The key is to remain diversified. Your business may ultimately provide all the money you need, but the other investments are there in case that doesn’t happen.

Retirement Plans for Small Business

“Too complicated and too expensive.” That’s the response planners often hear from small business owners on the subject of company retirement plans.

The good news is that you have better options today than you may realize. And the reality is, most business owners cannot afford not to establish a retirement plan. Even if you assume that you’ll easily sell your business when you retire and live on the proceeds, it’s risky to assume that it will work out that way.

The plan you choose depends on many factors, including the number of employees you have and whether you want to help them with retirement; how long you have before your own retirement; your tax situation; what you currently have saved for retirement; and how much money you’ll need for the retirement you envision.
A wide array of plans are available to small business owners: traditional defined benefit pension plans, 401(k) plans, profit-sharing, Simplified Employee Pension Plans (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) are among them. We can help you analyze the options to determine which plan is best for your situation.

For example, a 401(k) plan may cost more to administer than a SEP or SIMPLE, but it also provides more liability protection for the owner’s assets. A SEP is easy and inexpensive to establish and maintain, but owners must fund contributions for eligible employees at the same rate they fund their own accounts. In contrast, employees are responsible for funding their SIMPLE accounts, but the owner must match employee contributions up to 3 percent of the employee’s pay or contribute up to 2 percent for every eligible employee.

No matter which plan you and your financial planner choose, start your retirement plan as soon as possible. In the early years of your business, cash flow may not be on your side, but time is. Take advantage of it.

Succession Planning for Small Business

Estate planning—and more specifically, business succession planning —is essential for anyone who owns a small business because typically the business is the largest asset in the owner’s estate. This is not just a tax issue. Without business succession planning, it’s unlikely that your business will survive to the next generation or sell for its true value. This assumes, of course, that succession or sale is a goal.
Here are six business succession planning mistakes to avoid.

•Waiting too long to plan. An ideal succession plan requires laying the groundwork over many years—some experts recommend planning your exit strategy from the day you start the business. How you want to exit the business tomorrow strongly influences how you structure and operate the business today.

•Assuming the children will take over the business. Talk to your children to determine what they really want. Learn their desires as soon as possible in order to pursue other avenues if necessary, such as selling to an employee or partner or finding an outside buyer.

•Dividing the business equally among heirs. Equitable doesn’t have to mean equal, and in the case of a business, establishing an equal partnership among heirs can be a recipe for disaster. As an alternative, determine which child has the talent and genuine desire to run your business, and plan a way to leave your other children nonbusiness assets, such as proceeds from life insurance.

•Overlooking the possibility of a disability. Most business succession plans address the owner’s retirement or premature death, but may overlook the possibility that the business owner could become disabled and no longer able to run the business. A good succession plan addresses this possibility.

•Failing to fund the succession plan. If your plan is to sell your business to a family member, partner, employee or outside buyer at your death, disability or retirement, how will they come up with the funds to purchase the business? Loans and cash are two options, but also analyze the pros and cons of using life and disability buyout insurance to fund a succession plan.

•Planning alone. Business succession planning is complicated. The tax issues alone should send you to an expert for advice. In addition, consider working with an outside expert who can lead family meetings and ease family conflicts by providing a knowledgeable, objective perspective.

Insurance Planning for Small Business

Another critical aspect of financial planning and your small business is insurance—what kind, how much and at what cost. The following are a few considerations to keep in mind:

•Liability insurance. The type of liability insurance you need depends on the industry you’re in, and liability laws are constantly changing.

•Property insurance. Review your coverage to make sure it reflects recent building improvements or additional property. Determine if the coverage will rebuild or repair according to current building codes, and if it will cover replacement costs at current prices, or only at a set limit or depreciated value. Also learn what kind of disasters your insurance will—and will not—cover. Consider whether inventory coverage is appropriate for your situation.

•Business interruption insurance. This insurance covers lost income and overhead expenses when a business must temporarily close its doors due to a covered disaster.

•Life and disability insurance. Businesses frequently provide this coverage to employees as a fringe benefit. Small business owners also may need life and disability insurance for business purposes, such as collateral for a loan, to fund a business succession plan or to mitigate the loss of a key person.

•Workers’ compensation insurance. If a business employs three or more people, workers' compensation insurance must be provided.

•Health insurance. Health insurance premiums have become a major expense for business owners, but there are ways to keep costs under control and still offer this important benefit to your employees (and yourself). One example: Establish a less expensive, high-deductible health plan and supplement the plan with a tax-advantaged health savings account (HSA).An employee’s contributions to an HSA are tax deductible, and tax-free distributions can be used to pay for current medical expenses or save for future health insurance premiums.

Tax Planning for Small Business

Taxes are a fact of life for everyone, but for small business owners, the maze of tax regulations can be especially daunting. A solution is to think in terms of tax planning. Business ownership, in particular, provides a fertile ground for tax planning.

Tax planning is a year-round approach that is done in the context of your overall financial picture. The goal is to make sure that a given tax saving strategy won’t undermine your other important financial goals. Take the decision of choosing a business structure, for example. Sole proprietorships, partnerships, S or C Corporations, and LLCs or LLPs have different income tax requirements and tax calculations. New laws might prompt you to consider changing from one business structure to another to reduce your tax bite.While this could be a wise move, be sure to consider non tax issues as well, such as how a new business structure will affect your ability to shield your personal assets from business creditors, take deductions for fringe benefits, and pass the business to your heirs.


Here are a few other tips:

•Keep up on the basics of new tax laws—newspapers, magazines

and online sources provide a wealth of information.

•Expect your financial planner and/or accountant to alert

you to tax planning opportunities presented by changing laws

and regulations.

•Utilize a professional tax preparer.

•Look for areas in your business that present tax savings

opportunities, such as saving in your company retirement account,
timing income and expenses, and using charitable gifting strategies.

•Be cautious about basing tax planning too heavily on what you think
future tax laws might be. The laws may never materialize.
Ultimately, tax planning is less a goal in itself than a means to help
achieve your other business and personal goals. Saving taxes should
complement, not dominate, your financial life.

Debt Planning for Small Business

The flip side of investing money is borrowing. Here are a few considerations to keep in mind when your business has financing needs.

•Determine how much you’ll need. This entails developing a good business plan. Include in the plan a break even analysis, which estimates the amount of revenue the business must generate to cover expenses before even a dime of profit is made. The analysis can help you determine the funding you need to survive until you reach—and exceed—the break-even point.

•Don’t be too conservative when estimating your financing requirements. Some experts recommend adding 10 percent to your estimate to cover unexpected needs.

•Weigh all your financing alternatives. Personal savings, loans from family or friends, credit cards, commercial bank loans, personal bank loans, federally backed loans or private investors. Each choice
has pros and cons; think them through carefully.

•Arrange for credit sources in advance.  Don’t wait until the last minute.