Manage Your Business…and Your Wealth
Many contractors prioritize business financial management over personal wealth management. It’s an easy trap to fall into given how competitive the construction and real estate industry can be. Let’s discuss some ways to manage your wealth while you run your business.
Separate the two
Owning a construction/real estate company and managing personal wealth should be two separate but equal priorities. This strategy goes beyond using different bank and credit card accounts. Here are two questions to ask yourself:
1. Am I paying myself first? The answer should be yes.
2. Am I relying solely on the eventual sale of my company to maintain my wealth or fund my retirement? The answer should be no. Your business shouldn’t be a retirement fund!
Paying yourself first — via a salary or owner’s draw from profits — is a critical first step to building personal wealth. Yet many contractors choose to reinvest most or all profits in the business. Although doing so can enhance profitability during good times, the value of your company can erode quickly as risks arise and trigger downturns. Along with market conditions, common risks include subcontractor defaults, estimating errors, productivity drops, payment delays and litigation.
If you haven’t also invested in yourself, your risk of financial loss is much higher when your business faces tough times. Plus, when all or most of your personal capital resides in your company, the likelihood of a quick, clean, profitable sale or ownership transfer is significantly reduced.
Diversify, diversify, diversify
As you know, the construction/real estate industry can be unpredictable. That’s why building wealth outside of the business is so highly recommended, which leads us to our next topic: diversification.
Another common mistake that some contractors make is over-relying on one asset — whether it’s the company, a concentrated (individual) stock or a single piece of real estate. Diversifying your investment portfolio to reduce risk is key to effective wealth management.
As the saying goes, don’t put all your eggs in one basket! Whenever excess cash is available, consider moving profits out of the company and into other investments with different, and perhaps lower, risk profiles.
Further, tax diversification is just as important as investment diversification. When it comes to retirement savings accounts — yes, you need one! — some business owners rely on one tax bucket instead of diversifying across a 401(k) or some type of IRA to optimize their tax savings and flexibility.
Get qualified professional advice on setting up different tax buckets and deciding which types of assets should go in each. The goal is to put the right investments in the right accounts for tax purposes.
Although the benefit of owning stocks, real estate or other property is they can appreciate over time, cash remains an important immediate resource. Try to maintain enough liquid reserves to cover six to 12 months of expenses.
For personal assets, consider adding more conservative and liquid holdings before making riskier investments. This doesn’t mean placing all your cash in a savings account. Other types of holdings that provide higher, more competitive dividends include U.S. Treasury bonds and state municipal bonds.
One long-held best practice recommends “laddering” Treasury bonds, so you have a diversified bond portfolio with different maturity dates. This helps ensure you’ll consistently have money maturing that can be reinvested or used for personal cash-flow needs. And if you need cash before a Treasury bond matures, there’s no penalty for selling it back to the market.
No one needs to tell anyone in the construction industry that accidents happen. More than likely, you’ve invested substantial dollars in various types of business insurance. Make sure you and your family are appropriately covered as well.
These typically include life, health, accident, disability and property insurance. Remember, you can borrow against a whole life insurance policy’s cash value when you need a cash infusion or a supplement to retirement income.
Get started on your estate plan
It’s not a pleasant subject but, if you intend to leave a financial legacy to your heirs, begin constructing your estate plan sooner rather than later. Here’s something to consider: The federal estate tax exemption for 2022 is $12.06 million. When the applicable provision of the Tax Cuts and Jobs Act expires in 2026, that limit is scheduled to be cut in half unless Congress acts to extend it.
Don’t go it alone
Your business probably provides most, if not all, of your income and is your most valuable asset. And that’s something to be proud of — you’ve no doubt worked hard to build your company. Contact us for help managing both your business’s financials and your personal wealth.