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Financial Questions Answered

Question: I recently heard someone advise that the best way to be financially responsible is to save one-third of your income, spend one-third and give one-third away to charity. What are your thoughts about this strategy? Also, giving to those in need is important to me. How can I incorporate this into my investment plan?

It is great to hear that you are so charitably inclined! The method that you are referring to is usually a technique in helping younger children begin to think about being charitable.  However, given all the financial demands we have as adults, even generous donors tend to contribute more like 10-15% of their annual income to charity. This is not to say that one cannot give 33% to charity annually, but this decision is best made when it is clear that ALL present and future financial needs (true “financial independence”) have or will be met with certainty (i.e. retirement, education costs, etc.).  

It is also common that once a person has reached the state of true “financial independence” – as determined by a clear investment plan – that annual gifting of highly appreciated securities and/or legacy planning (long-term transformational gifts) become an integral part of that investment plan.

Question: I just lost my husband and am so overwhelmed. We didn’t have a financial advisor, and I don’t know where to begin. Can you help me figure out how to even get started? 

I am so sorry for your loss. Unfortunately, I have had other clients who have been through this situation and/or had the person responsible for the household finances become disabled due to a stroke or other terminal illness. The most important first step is to determine whether or not you and your husband have a financial advisor with whom you have a great deal of confidence in and a high comfort level that he or he can help you through this difficult time. If not, I have found that friends, whom you know are very savvy financially and who have confidence in their financial advisor(s) can be an excellent source of referrals to professionals with whom you can meet.

At the same time, I firmly believe that you need to talk with financial advisors until you find the one who you feel the most comfortable with and have the most confidence in. Any advisor worth considering should be willing to invest a great deal of time understanding your situation before you are asked to make any sort of commitment to them. And, they should explain things clearly to you, including all the costs that would be associated with a potential client-advisor relationship with them.

Question: The presidential race is already full of fireworks. Do elections affect personal finances? Should I be on the lookout for anything specific? 

This is a great question!  While politics grabs a lot of headlines and seems to drive markets up or down in the very near term, over time and throughout history, politics has had very little to do with long-term market results. Overwhelmingly, the economy and earnings drive stock prices far more than politics does.  

At the same time, there is no question that changes in legislation, tax laws, etc. can also have in impact on company earnings, but quality companies and portfolio managers often demonstrate the ability to manage through these challenges and/or change their business or portfolio models as they strive to deliver reasonable results for shareholders.

Question: I have my own business and I’d like to sell it one day soon and retire on what I make from the sale. I’m about ready to kick back and relax and enjoy life instead of working it away one day at a time. What type of investment planning do I need to do to help make this happen? 

This is a very important question for business owners, especially in today’s environment. Today, I actually spend more time talking business owners out of selling their businesses as often, if not more often, than recommending that they sell.  This is especially true when a company has a sustainable competitive advantage, valuable intellectual property, or some other form of a “protective moat” around the business.  

In today’s low interest rate environment it is more difficult than ever for owners to adequately replace their “owner income” and additional perks (automobiles, expense reimbursement, charitable giving, etc.) through an investment portfolio that is created out of the sale of the business.  

While there are certainly circumstances where an outright third-party sale is the best opportunity and/or the owner is receiving an offer that he or she simply cannot refuse.  All too often I have seen that other options which should be thoughtfully considered are overlooked. Some of these include:  transition to non-family management, family succession, management buy-out, ESOP plans, etc. And, while every situation is unique, it is important for business owners to fully understand, and to adequately explore the financial ramifications of, any option that might be a good fit for them before making any decisions that are irrevocable.

Responses were written and provided courtesy of Vaughan Scott, Senior Vice President – Investment Officer with Axiom Financial Strategies Group in New Albany, IN. He can be reached via email at [email protected] or 812.948.8475.

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