Financial Planning: A Case Study

| December 14, 2020 | 0 Comments

If you think financial planning is only for the rich, think again. People from all walks of life can benefit greatly from planning their finances. A recent situation I was involved in demonstrates how a long-term approach is critical, and how you need to be careful where you are getting your financial advice.

Some family members run a dental practice back East. Like many small business owners, they’ve worked hard in their practice, but haven’t been able to put much into personal savings. Several years ago, their broker ‘solved’ their cash flow problem by converting what retirement savings they had into a single annuity that would pay out over ten years. With only five payments left and little in savings, they were worried about making ends meet once the payments stopped.  They asked for my help and I got to work figuring out their finances.

As I looked through their financial information, their biggest problem became obvious. They were carrying several high interest rate loans, and the payments were eating them alive. On the other hand, what savings they had earned next to nothing.

The second thing I discovered was that they had no idea how much they were spending. They’d never done a real budget and usually just payed the most important bills until the cash ran out. To complicate matters, their business spending was mixed in with their personal expenses, buying business supplies from their personal accounts and paying for some household services from their business accounts.

The pandemic hasn’t helped, effectively shutting down their business for the past eight months. But looking at the business expenses for the past few years, they were running at a loss even when the economy was booming. When I asked if they were willing to pay their patients to keep coming to the office, they said no, but that’s effectively what they’ve been doing.

The challenge became clear: we needed to figure out what their real spending needs were, and then deal with the debts. Fortunately, we were able to free up enough cash to eliminate the their debts by next year. That means they’ll be able to save most of the remaining annuity payments to build up some funds for the future.

The next problem was the ongoing expenses of running the dental practice. He should have retired a long time ago, but he just couldn’t afford to. Fortunately, he loves what he does and his patients are dear friends. Since he hasn’t set up his practice to be sold, the options will be limited and the sale value will be minimal. But that will be better than operating at a loss and he’ll be able to spend more time sailing, which is his real passion anyway.

They’re not out of the woods, and the odds are pretty good they’ll either have to sell their home in a few years or look into a reverse mortgage. But they have some breathing room and some flexibility to make better decisions.

What’s really annoying is that their broker didn’t take the time to ask some simple, fundamental questions. It would have taken about two hours to figure out what the real problems were and design a better long-term solution. Instead, he took the big commission check and ran.

Find out whether your financial advisor is really doing financial planning, or just cashing in commission checks. It can make all the difference in the world to your financial and mental health.

This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is director/investment management and an owner of Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management. Brooks can be reached at (858) 755-5166, or by email at Brooks and his family live in Mission Hills.

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