An important element of creating wealth and building financial security, is having an emergency fund available.
An emergency fund is a stash of money put aside to be used in times of emergency, such as illness, the loss of income, or unexpected expenses.
In farming, this could mean having enough funds aside to support you and your family if there were a natural disaster, such as drought, flood, or fire, such as we have seen in the last few years.
It could be used to purchase new machinery if something broke unexpectedly, or to cover costs if something were to happen to a key member of your family.
To read last weeks blog on balancing farm debt and business growth, click here.
How to build and Emergency Fund
There are several ways you can build an emergency fund for your farm.
The first way, which is particular to the farming industry, is a Farm Management Deposit.
If you’re able to use them, they can be a mechanism for you to put money aside in the good times and help minimise your tax where appropriate.
In the past, the downside of the farm management deposits have been the low interest rate. If you’re in a debt situation and you need to fund the farm and management deposit via debt, obviously there’s also a cost of debt involved.
Now, with interest rates going up, you need to consider the variable between what you’re paying to draw down on your loan, and what you get for that farm management deposit.
Some banks provide an offset to minimise the cost to you. So, emergency funding is one way of doing it is that way.
Another way we can create an Emergency Fund is to set money aside in an off-farm investment. Putting money into an off-farm investment can be done in various ways and via different structures.
When it comes to off farm investments like real estate and shares, there are things like investment bonds that can be utilised, which are a good vehicle for setting money aside.
To learn more about how you can do this, join our webinar on the 22nd of February 2022.
Your options will vary depending on your situation
Access to money needs to be considered, particularly when it comes to superannuation where you’ve got preservation laws and taxation implications associated with withdrawing money early.
So that’s not a bad thing to consider when it comes to emergency funding for your farm in terms of having these sorts of things ready and available to you, doing that progressively.
If you’ve got a sound wealth management strategy in place, and you’re putting money into superannuation into other off farm investments through different structures, like family trusts, etc. That can also down the track. If it’s not required for emergency funding. There’s flow on benefits whereby, ultimately down the track, you could use it to pay down debt if required.
You could use it for a succession planning vehicle to help with those off farm siblings down the track.
So, emergency funds are good to have for when things change, particularly with seasons and things like that. But also, as I say, there are flow on effects to having those emergency funds available to you as well.
If you’re interested in learning how you can build your farms emergency fund through Lifesolver’s Farm debt Destroyer strategy, join our free webinar with Grant Hackett, ex-olympic champion, now CEO of generation life, on Wednesday the 22nd of February, 2022 at 12 PM.
Cheers,
Matt.
