You may remember the Barenaked Ladies song ‘If I had a $1,000,000’. It was released in 1992. You would need about $1,850,000 today to have the same buying power as then, depending of course on the inflation rate used in the calculation over the past almost 30 years. A million dollars today is still a lot of money though.
Many of us will have wondered what it would be like to have, or win, a million dollars, especially when we were very young. People of all ages regularly purchase lottery tickets with the dream of winning jackpots exceeding a million dollars and I would imagine, with thoughts of ‘what if’.
So what if … what if you had an extra million dollars in cash? What would you do with it? As I think about this, I wonder if it would make a difference in where it came from. Would you think of it differently if you had have worked hard to earn it compared to winning a lottery? I think it might. Let’s think about having an extra million dollars then but where it came from a windfall-type year. In other words, where the million has been earned. Or maybe a couple of exceptionally good years in a row. What would you do with it?
I talk to farms occasionally about the concept of establishing investment guidelines. Many larger businesses will have them, as required by governance structures such as Boards of Directors. Farms rarely have formal Boards of Directors so no requirement to have investment guidelines, but I think the concept can apply, nonetheless.
Investment Guidelines are the general criteria, established by farm owners and shareholders, to guide investment. Having written guidelines would be helpful in the $1,000,000 what-if scenario. Without guidelines, how would you decide what to do with the million dollars. Note that they are guidelines only. The farm owner(s) or shareholder(s) will still have to make the decisions.
What your investment guidelines might be, and then what to do with the million dollars, will depend on a couple of things – the type of person you are and where things are at on your farm at the time of getting the million. Some will be inclined to save it. Some will be inclined to spend it. Depends on the person and the situation. Neither is right. Neither is wrong. But when farm owners are setting investment guidelines and figuring out what to do with an extra million, it will help to keep in mind that individuals in a family farm business will very likely have differing thoughts on investment and risk. Saving is less risky than investing; for example, where the investment is in something like a guaranteed income certificate where the investment is not at risk. The trade off though, is a lower expected return. Everyone knows that investing in a farm carries substantial risk with it. It is pretty much unavoidable. Can there be an acceptable rate of return on the investment made in the farm business and enough to justify the associated risk? That’s a whole other topic.
Let’s think about organizing what to do with a million dollars into two areas … business and personal/family.
- Either invest in productive assets, such as land, quota or breeding stock, or save the money until an opportunity comes along to make one of those purchases.
- Determine how much working capital you want to set aside to finance operations for the next year or years. Many farmers are actively increasing their working capital as a way to manage the volatility that exists in the business. How much of the million dollars gets ‘spent’ here would depend on how much working capital you have to begin with.
- Try to avoid the temptation to spend it all on equipment. It depreciates. On the other hand, it may be a great opportunity to upgrade certain pieces.
- Paying down debt may be an option. In this low interest rate environment, you may want to look at repaying debt with the highest principal repayment commitments.
- Transition planning is something to consider, even if actual transition may be years away. Basically, look at what can you do at this time to really benefit a future transfer of ownership and management.
Personal and Family Priorities
- Simply decide to spend some of the it. Get some enjoyment or return on the personal investment that you and your family have made in the business.
- Personal retirement plans. Associated with succession planning for the business, what can you do that may benefit your own retirement, even if it may be years out?
- Consider investing in management development. Good management programs and resources can require a significant financial investment. Is it a good time to invest in performance and business management development strategies?
- Education for your children is an option. Costs associated with education are high, especially if it requires moving away from the parental home.
What would I personally do with a million extra dollars? I’ve thought about it. I’m honestly not sure. It would depend on the day, I guess. It’s fun to dream sometimes though. Whatever I did, I hope it would be an intelligent and importantly, an informed decision and not just a spur-of-the-moment thing. Having a set of investment guidelines would likely help.
If you would like to speak to one of our consultants about this topic contact us.