The more you plan ahead for those times when you have extra income from improved commodity prices, the more confident you feel when making decisions about how to best use the money.
Having extra income for your farm or ranch is a blessing given the fluctuations in commodity prices. When the day comes, though, you feel uncertain about how to best use the cash. Should you pay off debt, invest the money, or put it in savings?
In the bigger picture, all three options offer valuable benefits to your operations. Yet, on a smaller scale, each option also has risks and disadvantages. This is why making the decision is so challenging for farm and ranch operators like you.
The best approach is to have a strategy ahead of time based on where you want to be in the next 10 years. Then, when the day comes, use real-time data, such as market trends, interest rates, stock performance, the size of your emergency fund and tax obligations, to make a confident decision. As you work with your advisors, you’ll also want to take into account your own risk tolerance.
Market Trends in Commodity Prices
You are the best expert for market trends in farm commodity prices that affect your operations and cash flow. Through your experience and expertise, you know when the improvements in commodity prices are short-term or more stable. As another resource, the US Department of Agriculture offers current information on the commodity market through its Agricultural Marketing Service.
When you anticipate a dip in commodity prices relatively soon, consider how lean you operate. Having money in savings may carry you through the more difficult times.
If you already have a healthy savings set aside for operations, then it is worthwhile to evaluate all three options.
Debt, Investment, and Savings Interest Rates
Interest rates play an important role when you are deciding if you should pay down debt, invest, or save extra income. No one likes having debt, but there may be more value in savings or investments. The choice is to save on interest and pay down debt, or have an emergency fund that accrues interest.
Look at the interest rates for all three options when you have extra income, as well as how long it would take for you to see a good return. Your time horizon and when you may need access to the money is important to consider.
If your debt has a significantly higher interest rate, use the extra income to pay down the balance.
Savings and investments come to the top of the list when they offer higher interest rates. A high yield savings account, certificates of deposit or other FDIC insured account could be good options for you.
Return on Investment and Market Performance
When you are considering using extra income to pay down debt or start investing, pay careful attention to current market trends. Investments can build your assets, but they also carry risks. You want the extra cash flow to benefit your farm or ranch rather than put you in a less desirable position.
Another consideration for when to pay off debt or invest is how long it takes to see a good return. Paying down debt may get rid of the debt years before expected and save money on interest. Balance that against how long your money needs to stay in savings or an investment to see a comparable return.
What if your research reveals that all three options have similar returns? That’s the time to consider the tax obligations.
