3 Key Steps for Financial Success: Part 3

Saturday, May 1st, 2010

from a monthly column by Guy McPhail, One Smart Guy: Wealth Building Tips For Entrepreneurs & Individuals

May 2010

How close am I to financial independence and what should my action plan be for getting there? These are two common questions I’m asked by new clients at my wealth management firm. When you lack a road map for implementing your plan, you can’t answer either question.

Do you know how close you are to achieving financial independence and having the ability to stop working if you wish? Are you a quarter of the way there? Ninety percent there? Are you taking the most direct route? If you were planning a trip from New York City to Washington, D.C. you’d recognize that going through Ohio would not be an effective route. You need to select a sensible path to achieve your financial goals and set landmarks to help track where you are in your journey. Unfortunately, that’s not as simple as going to Mapquest.com.

Working with your wealth advisor — who should also be a CPA — map out exactly how far along you are today on the road to financial independence. Together, you should identify and write down what actions you need to take to build your wealth to achieve your goal. These should be steps that are specific to both your personal financial situation and to that of your business. Your action plan should include counsel from your wealth advisor about what things you need to look out for — at home and at work — that may be a drain on your financial future. A competent advisor should counsel you on how to plug these drains on your wealth.

One Road Map landmark for the business owner

Owners of privately held businesses have an additional factor that affects building their road map. A key required element for building a financial planning road map for a small business owner is knowing what to do with the business upon retirement and how to do it. When an employee retires he leaves the business he worked for behind. Not so for the owner of a privately held company. Selling or passing on the business is a key landmark within the road map of a business owner. But if he hasn’t made a decision about the fate of his business any financial planning work he has done remains incomplete.

So, with these clients I listen to learn their wishes. Some may want to sell. Others may want to leave part or all of the business to one or more family members, some of whom might be too young or inexperienced to run the company at the time of the owner’s retirement. All of this needs to be looked in to. In some cases, estate planning and establishing trusts may become part of the business owner’s financial action plan and road map.

The first step, however, is to determine a valuation for the business. Surprisingly, many small business owners do not know what their businesses are worth. So, one of the first action steps I recommend to them is to get a valuation done on their business.

Once a valuation is completed and we know what the business is worth I can combine that asset value with the other assets of the business owner to determine where we are along the way toward having his wealth meet the amount needed to achieve and maintain financial independence. From there we can run some numbers to determine the next steps he needs to take to reach, and then maintain, his financial independence wealth goal.

Would the business owner want to sell his business immediately if it made him financially independent or if he would rather stay in the business because that is part of his life that he enjoys? This, too, affects how we build the road map and the landmarks we establish as guideposts to track how far we are on the wealth building journey. So, if the owner wishes to stay in the business longer, for example, I may come up with ways to pull cash out of the business, while he continues to be the majority owner, to get him to his wealth goal. Whatever strategy we choose to use to pull cash out of the business and into his personal finances would be listed as an action step in his financial plan.

New second home changes Road Map plans, but that’s OK

A couple who was two years away from achieving financial independence according to their financial plan decided they wanted to buy a second home in another state; a condo on a golf course that was selling at half the price it sold for three years ago.

Before going ahead they came to me to learn how far off track this home purchase would take them from what we had worked out together in the financial planning road map they were following with me for reaching their specific accumulated wealth sum.

Running the numbers I was able to show them how it affected their journey. The down payment, new expenses and diminished contributions to savings was going to put them off achieving their financial independence by six years instead of two. The couple was able to accept the change in their road map and, if the real estate market recovers during those years and they can convert some of their equity into cash flow, they may be able to reduce the number of years it will take to achieve financial independence.

As a wealth advisor we look at every significant financial decision clients have to make to see how it could affect their journeys toward achieving their specific dreams and goals. But we couldn’t do this if a client lacked a financial plan and a road map for achieving it.

Steps to Success

To recap, here are three steps to put you on a clear road toward wealth management success:

To recap, here are three steps to put you on a clear road toward wealth management success:

  1. Establish goals and determine your specific numbers.
  2. Put your financial plan in writing.
  3. Construct a road map in your financial plan that guides your wealth building journey and tracks your progress. (This includes creating a timetable to complete the action steps necessary for the business to achieve your needed numbers.)

By following these steps you won’t fall prey to practical financial planning obstacles and you’ll become more successful in your efforts to build and preserve your wealth both at your business and at home.

Guy McPhail, CPA, CFP®

President of Zdenek Financial Planning (www.zdenek.com) and a personal financial planner, Guy McPhail is nationally recognized for his expertise in cash flow management and financial planning for small business owners.

A Certified Financial Planner® professional and a Certified Public Accountant (CPA), Guy manages the personal financial planning area at Zdenek Financial Planning, providing clients with strategic analysis and support in the areas of cash flow management, business management, tax planning, estate planning, retirement planning, stock option strategies and investing.

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Guy McPhail, CPA, CFP®, is president of Traust Sollus (formerly Zdenek Financial Planning, LLC).

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