Transcript
We’ve got Client C now. Look, I fought the content team, but you know, I’m only the boss in name only. I was overruled on this. As we say, Client C, but this was actually not a client. This was an experience share from a great landlord. We rented from a father-son duo whom we really enjoyed. They were good people. They treated me well when I moved here to Franklin. It was one of the first office spaces we ever rented. We still love that landlord because he was so good to us. Back in Georgia, this landlord was also excellent, especially when the business was not in a super stable place. This family ran up the score and got rich. However, they made some key mistakes that led them down a bad path.
The father in this scenario had created several successful businesses as an entrepreneur and had built significant wealth. He was financially independent and did not have to work. However, he had an adult child, a son, with whom he went into business doing land development. They leveraged everything and put the building we were in as collateral on some of these developments. Unfortunately, the story played out during the Great Recession, and they lost everything. We were in the building when the bank took over. The bank became our landlord for a period of time.
Looking back, I was sad because this person seemed to have won the game. But they made some key mistakes that led them down a bad path. So the question is, how can someone protect themselves when building towards financial independence or when already financially independent? The first thing is to understand the difference between risk tolerance and risk capacity. Risk tolerance refers to how much risk one is comfortable with, while risk capacity is the amount of risk one should take based on their financial situation. For a sound financial plan to work, these two need to be aligned.
In this case, the son convinced the father that everything would be fine, and their risk tolerance seemed okay. However, their risk capacity should not have allowed them to take on such high risk. It ultimately led to them losing the building. It’s essential not to overlook risk capacity and have someone to protect you from potential outcomes. Financial advisors often measure risk tolerance, but that would not have been sufficient in this case.
Another point to consider is not letting adult children put you in a poor financial situation. Starting a business is not wrong, but in this case, they should not have put key assets at risk. They should have only put a portion of it at risk, while keeping a significant portion protected. We all love our children, but we need to be careful that they don’t pull us down through economic outpatient care or taking on too much risk. Establish a healthy financial relationship with adult children. Instilling core financial principles in younger children can also help prevent these issues in the future.
Additionally, having purposeful retirement dollars is crucial. If they had been our clients, we would have advised them to allocate their risk appropriately and not put everything at stake. Portioning off some of the assets for financial independence ensures that you have a safety net and long-term provisions. You can be more aggressive with speculative investments using funds allocated for vacations rather than essential expenses. Having a management team and being purposeful will protect you from blind spots. It’s important to have a plan and purpose for your retirement dollars. It will help you set yourself up for success.
