The COVID 19 outbreak and subsequent lockdown have exposed a number of weaknesses in some before-now solid financial situations. The headline on April 21, 2020 on Bloomburg.com reads:
Richard Branson Doesn't Have a Drop to Drink
Despite a $5.9 billion net worth, Richard Branson is strapped for cash. His Virgin Galactic business might be better collateral than his private island.
Here’s the link to the full story:
The focus of the story is that Sir Richard Branson, while worth billions, doesn’t have enough cash to maintain his businesses and lifestyle during the worldwide shutdown of commerce. This is understandable as a big part of his fortune is tied up in an airline, and few people are traveling during the shutdown.
But his situation is an example of a lack of planning.
Many successful business owners do not accumulate wealth in liquid assets. The rationale is that they feel as though they can make more money in their area of expertise. While this may be true, when they cannot practice their area of expertise, then their source of income, and wealth, is shut off.
Granted, the COVID 19 economic shutdown is an extreme situation that hasn’t occurred in the past in over 100 years. But it still illustrates the importance of planning and or liquidity.
How these relates to you and your situation depends of a number of things. But one point of discussion we delve into with people is their residence, and whether to pay the mortgage off or not.
I typically counsel people to not pay it off. My thinking is that if you have the cash to pay your mortgage off, you are better served to invest that money (provided you can service the monthly principal and interest payments) in something that will be liquid and will potentially grow at a rate greater than your mortgage interest rate. Putting aside the potential of growing the account over time, the liquidity aspect of this strategy become really valuable in circumstances like this: when your income is shut off and you still need money to live (and when won’t you need money to live?).
If a large portion of your net worth is tied up in a non-liquid asset such as your house, and you need money, there are two ways of accessing that value: #1. A Home Equity Loan – which might be difficult if your earning power is reduced. #2. Sell the house – which is NOT a good solution.
The same advice holds true for business owners. Develop assets outside your business, especially if your company is privately held (which most are). This helps cushion you AND your business during challenging economic times, and it helps develop an exit strategy for when you decide to get out of the business. Let’s face it, when people know you have to sell, the bidding price is less. Distress sales almost always result in a lower valuation.
If you want to discuss this concept, or any others, give us a call at 330.707.4135. We are here to serve!
Stay safe America!
Securities offered through Securities America, Inc., member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. William R. Pintaric & Associates and Securities America are separate entities.
Written by David Pintaric.
Securities America and its advisors do not provide tax advice. Please consult with your tax professional regarding your individual tax situation.