Linda Davis Taylor
Dec 9, 2015 · 5 min read

12 Ways To Manage Your Family’s Wealth Like A Successful Business

When it comes to money, transparency is indispensable. There must be a thorough and detailed process for handling everything from compensation policies to accounting practices. Keeping expenses low and trust high is a winning combination for preserving wealth. Healthy businesses are careful about their finances. Healthy families should be too.

There is no shortage of guides available about how to manage money, and the amount of products and services offered to investors by the financial services industry has never been greater. From 1990 to 2012, the number of mutual funds alone increased from 2,395 to over 7,000. But many families still fail to achieve their financial goals. Success means having a plan and sticking to it. For families to successfully manage their wealth, here are a few tried and true habits that never go out of style.

1. Make sure your financial house is in order. This is what healthy businesses do. Great companies can weather downturns and operate profitably even when economic times are bad. Families need to have their financial safety nets in place to sustain themselves through the inevitable ups and downs that occur in every family. Families, like great businesses, need to have sound financial practices and pay attention to shareholder value. Successful business owners want good dividends but they also invest for growth. They plan for tomorrow, not just today. “

2. Have cash for the unexpected. “Cash is king,” is a familiar saying in business. Warren Buffett counts cash flow at the top of his list of criteria when analyzing investments. It’s also what pays the bills. Successful firms make sure they have enough liquidity to operate with an adequate financial cushion. Families, too, should be prepared for the unexpected.

3. Listen to the elders. Save for a rainy day. A penny saved is a penny earned. The early bird catches the worm. Often it’s family members who pass on such pearls of wisdom. Translated into financial lessons, these “intergenerational communications” help build practices that defer gratification, build capital, encourage hard work, and instill a sense of appreciation for what has been earned.

4. Start early. Counting on winning the lottery just isn’t a good bet. It’s smarter to count on low-risk strategies like earning and saving. Financial advisors recommend having a “long time horizon.” What this means is that the earlier you start, the more you can accomplish and accumulate. Later in life, capital will be more important, dividends will be more relevant, and financial security will be more likely.

5. Live within your means. Going into debt to fund living expenses is a road to nowhere. Living beneath one’s means makes saving possible. Saving creates capital to invest. The “sage of Omaha,” Warren Buffett, practices this habit himself.

6. Invest wisely. Though this is easier said than done, the numbers don’t lie. Over 30 years from 1983 to 2013, the Standard & Poor’s 500 Index achieved an annual return of 11.1 percent, while investors in equity mutual funds earned only 3.69 percent. For a $10,000 investment, this gap amounted to over $200,000. For the 20 years between 1993 and 2013, investors also fell short, earning just over 5 percent on average each year, while the index earned over 9 percent. This meant a shortfall of over $31,000. Don’t be distracted by noise in the markets, stay true to long-term goals.

7. Stay the course with your goals for financial sustainability. Setting financial goals and sticking to them sounds like a logical way to deal with money. The growing field of behavioral finance seeks to explain why emotions and psychology cause us to make irrational decisions that take us off course. It’s tempting for investors and advisors alike to be swayed by how the markets are performing in the short term. Just as with the other parts of a family plan, successful investing requires a long-term strategy. Investors face tempting distractions that can cause them to lose focus as well as money. If the financial tactics become disconnected from a family’s goals, members will ultimately suffer.

8. Don’t lose focus with every hot new idea. The allure of large gains is an elusive pursuit. There’s always a hot idea that promises a way to get rich quick. More often than not, such efforts prove to be futile. It’s better to go for quiet, tried and true, long-term compounding. It may seem boring, but it works. If done well enough, the investor can afford to purchase many other exciting things. Making decisions based on short-term market movements is like a whipsaw. It can be painful both ways. Even the experts can’t win at timing the market. Getting distracted by what the market is doing today can cause mistakes tomorrow.

9. Following the crowd can take you right off the cliff. It’s tempting to jump onto the bandwagon for a popular new product when everyone else is too. Trendy may be fine for fashion. But it’s not always wise for investing.

10. Lean against the wind. Consider the contrarian’s point of view.

11. Time is your friend. Investing early gives the money more time to grow through the magic of compound interest.

12. Using the wrong map leads to the wrong destination. Many people seem to think the financial markets should cooperate with their own personal economic or political viewpoint. It is hard to be right on those factors and then have the markets cooperate with your opinions. It seems better to think that the market went up 8 percent compounded over the last 200 years, albeit not in a straight line, and plan accordingly. Just like a successful business, stay the course to have a financially sound family and share your wealth with future generations.

© 2015 Linda Davis Taylor, author of The Business of Family: How to Stay Rich for Generations

Author Bio:
Linda Davis Taylor,
author of The Business of Family: How to Stay Rich for Generations, is the CEO and Chairman of Clifford Swan Investment Counsel in Pasadena, California. A participant in a fourth generation family business, Linda is a frequent speaker on wealth transition, family governance, and philanthropy. In addition to her investment counsel career, she has had over twenty-five years experience in senior leadership positions at Emory University, Claremont McKenna College, Amherst College, and Scripps College. Linda has served as a trustee for numerous educational and non-profit organizations and is a co-founder of a private foundation. She and her husband are the parents of two adult daughters.

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