When I ask you to picture the wealthiest 1% in the world, who comes to mind?
What if I told you that YOU are part of that elite group? 😳
Even if it sounds completely insane, it may very likely be true!
Many of the farm owners we know fit the financial criteria to be part of the top 1%. (We’ll tell you the exact criteria in just a minute.)
But if so many farm owners are in the top 1% — or even the top 10% or 20% — why don’t they feel like it?
Why do they spend their days stressed about money and losing the family farm…
Working themselves to the bone, 7 days a week…
Yet still have barely any money in their bank accounts?
There’s this disconnect happening because most (or all) of your wealth is likely in non-cash assets — land and equipment, mainly — rather than your bank account.
Even if you own $100 million in land and you’re running the farming business on it, if your business isn’t turning a profit or paying you a salary, you might not have a cent in your bank account.
Most farmers are asset rich (which makes them wealthy on paper) but cash poor. So it doesn’t feel like money at all.
I don’t know about you…
But if you’re part of the wealthiest 1% of the world, I say you deserve to feel and live like it!
You should ENJOY your money and all the fun things that come with it…
Feel calm and at ease, knowing you’ve got a solid financial net beneath you…
And know that you’re building a legacy of dependable wealth for future generations.
Whatever your cash situation right now, I guarantee there’s a way to leverage your assets better to live a richer life.
Today’s blog post will explore the 3 options in front of you to make the most of your wealth (whatever level you’re at), so you can start living like the rich business owner you are on paper.
Are you part of the top 1%?
According to The Conversation, an individual net worth of $1,295,825 AUD makes you among the world’s 1% richest people. If it’s you and your partner at home, that’s a combined household net worth of $2,591,650.
(Note: That amount is wealth, not income).
Net worth is the total of every asset to your name — bank balances, property ownership, farming equipment, share portfolio, superannuation balances, etc. — minus any debts.
Basically, if you sold everything and levelled any debt to your name tomorrow, how much money would you have? ← That’s your net worth.
According to ABARES statistics the average farm owners net worth in Australia is in the order of $5.8 million, mainly in land, livestock and plant and equipment.
Are you in that bracket?
If so — you’re in the top 1% wealthiest people on the planet. (May I get you some caviar and champagne to celebrate?)
Even if you’re not in the top 1%, I bet you’re hovering somewhere above the wealthiest 20% of all people on the planet. That’s such a powerful place to be!
So what should you do with that wealth, in order to make the most of it?
The 3 wealth benchmarks you should be seeing on your farm
If you’re in the top 20% (and I’m willing to bet you are), we have certain benchmarks we like to see our farm owners hitting.
These are signs of a healthy business AND a healthy personal life. (Because you deserve to live a rich life for all the hard work you put in day in, day out!)
Every farm business is different so these benchmarks aren’t exact. But they’ll give you a rough idea of where you want to be tracking.
If you’re NOT hitting these benchmarks, don’t worry. We’ll give you 3 options in a minute for how to improve your situation.
Benchmark #1: Your business should be returning to you in profit (after paying yourself a commercial wage – see Benchmark #2) at least what you could lease your land out for (currently around 3-5% of asset value).
The market lease rates in Australia at the moment are around 3-5% of land value — so that’s what you could make if you stopped farming and leased your land to someone else. Other than being paid the lease payment, there is no risk to this strategy.
To determine if you’re hitting this benchmark, you need to calculate your Return on Assets Managed (ROAM). This is a financial ratio that tells you how your profitability compares to the assets used to generate that profit.
Here how to calculate ROAM:
= Net Profit
Note: Net Profit is your income, minus all your expenses (excl. tax, leases and finance costs). The expenses include allocating a proper wage for all owners and family working in the business (see Benchmark #2).
For example, if you had a Net Profit of $100K last year and your Asset Value is $2M…
= $100K = 5%
If you’re not currently seeing 3-5% return on assets managed (ROAM), you might as well be sitting on a beach somewhere and leasing out your land — you’d make the same amount of money and be taking on less risk!
(If you want to learn more about the healthy financial farm benchmarks like ROAM, click here to download our free cheat sheet!)
Benchmark #2: Pay yourself (the principal owner) a salary of $115K and full-time family workers $70K.
Too many farmers don’t pay themselves a proper wage. You’re highly skilled and should be paid accordingly!
$115K (incl. super and on costs) is the bare minimum for what you deserve as the farm owner. Often our farm owners enjoy salaries much higher…but $115K is the minimum you should be seeing on a healthy farm business. If you had to pay someone full time to manage your farming business and run it well, this is at least what you would have to pay.
In a similar vein, full-time family working in the farming business deserve to make at least a $70K salary (incl. super and on costs), to compensate them for all their hard work.
A healthy farm business can easily work salaries like this into their operating expenses.
Benchmark #3: Keep your Equity Percentage around 80%.
Equity Percentage measures the value of ownership in your farm (land, plant and livestock) and is basically the breakdown of assets YOU own, versus how many are owned by the bank or other lenders. A healthy farm business owns the majority of those assets — around 80% is ideal.
Here’s how to calculate Equity Percentage:
= Market Value of Your Farm — Farm Debts
Market Value of Your Farm
For example, if your farm is worth $1M, you owe $200K on your mortgage and have $100K in other debts…
= $1M — ($200K + $100K) = $1M — ($300K) = $700K = 70%
$1M $1M $1M Equity Percentage
(If you want to learn more about the healthy financial farm benchmarks like Equity Percentage, click here to download our free cheat sheet!)
It’s okay if your Equity Percentage is lower than 80% from time to time, as long as the business profitability can sustain it and you have a clear plan to return it to a higher level. It shouldn’t be way higher than 80% though, as this has the potential to create a lazy balance sheet and means you’re missing out on other income-producing activities.
As the chart above shows, most farm owners’ equity levels have increased dramatically recently because land prices have gone up. If you aren’t taking advantage of this (and the low interest rates right now) to build wealth over time, you may be missing a big opportunity.
Maybe you’re hitting all three of those benchmarks already. If so, you can click out of this blog post now because you’re already killing it! Keep up the good work, mate. 😉
But more likely, you’re lagging behind on one, two, or all three of those benchmarks. That’s okay, and most farm owners are in the same boat.
The next step is to explore your options, whatever your current financial position. You’ve got this big asset base and you’re highly employable and skillful…don’t accept a situation where you’re not living like a wealthy person!
3 options to ENJOY your high level of wealth
1. Sell everything (if you love farming don’t do this…)
Let’s start with the most controversial option, shall we? 😏
You’ve always got the choice to make a clean break: sell all your assets, pay off your debts, and enjoy the money left over.
This may be the best option if you don’t have a strong business, don’t have a passion for farming, aren’t interested in learning about business, and/or you want to leave the industry.
(If you don’t have a strong business but DO have a passion for farming, reach out to us at Farm Owners Academy — we can help!)
Most of our farm owners want to stay in farming. But don’t discount this option without considering it first! It’s powerful to explore all the opportunities in front of you.
This option might be for you if:
- You’ve lost your passion for farming and want a clean break from the industry
- You don’t have a strong farm business and don’t want to work on it
- You’re passionate about something else (work or personal) and want a big lump sum of money to fuel that passion
- Your children don’t want to stay in farming and would rather have money than inherit the farm ← this is why communication in succession planning is so important!
2. Lease your farm
Another option if you’re not passionate about farming is to lease your farm. This is a great choice if you’d like to do something different but you don’t want to sell the farm and lose it entirely.
Like we said above, the current market lease rates in Australia are in the order of 3-5% of land values — which means if you leased out your land to someone else, they’d pay you 3-5% of the value of those assets to do so.
So if you’re not currently making 3-5% ROAM from your farm, you may want to seriously consider this option because you’d probably make more money NOT working on the farm than you do working now!
Farm Owners Academy members Tim and Cheryl are doing a version of this and it’s working out incredibly well for them — click here to read their story.
Seriously, it’s up to you:
You can get up at 4am and slog all day in a roasting-hot paddock for 16 hours…or you can sleep in until 10am, put your sunscreen on, and lounge on the beach until dinnertime…and at the end of the day, make the same amount of money.
This option might be for you if:
- You don’t want to work in farming day-to-day
- You’re not ready to sell the farm
- You’re currently making less than 3-5% ROAM and are not committed to improving your business performance
- Your kids want to take over the farm someday but you don’t want to work it now
3. Run your farm business better
Most of the time, it’s not lack of wealth that’s holding our farmers back; it’s lack of education about how to USE that wealth.
If you’re not hitting the benchmarks above, don’t want to sell your farm, and still want to work in farming, your best option is to learn how to make your business more profitable.
…And that starts with an education in finance — the language of business. Once you understand how money truly works, you’ll be able to make the most of the assets you have to generate as much profit as possible.
That’s exactly what happened when Farm Owners Academy member David got serious about finance and business. He had his most profitable year on the farm AND worked 50% less — all because he knew how to leverage his assets in the smartest, richest way possible. Click here to read David’s story.
This option might be for you if:
- You love farming and want to stay in the industry
- You want to work on the farming business every day as your job (note: we said working ON the business, not IN the business; they’re very different things!)
- You believe in the potential of your farm and of you as the farm leader — and you know with the right education, you could do better
So there you have it — 3 great options for high net-worth farm owners who don’t feel very rich right now:
- Sell everything (and enjoy the money)
- Lease your farm (and enjoy the money)
- Transform your farm into a profitable business (and enjoy the money)
There’s no right answer, only what’s right for YOU.
So take some time to think about what you most want out of your farm — both today and in the future — and explore all your options to make the best choice for you and your family.
As always, we’re here to help! If this blog post piqued your interest and you want to learn more about making the most of your farm, let’s have a chat. Just send us an email at firstname.lastname@example.org and we’ll get it sorted.