This Video Will Save You MILLIONS... The Wealth Pyramid with Sam Prentice

If you have a long time horizon and you do things well, you can build up a nest egg of tens if not hundreds of millions of dollars.

That want to rewire your listeners brain. The ultimate goal of entrepreneurship is to stay in your state of creativity.

Oh, I wish I had known you before I sold my company.

So a $2 million exit is very, very simple. It's very attainable to double click back though on the idea of the $100,000.

Just so you know, we forgot to announce the beginning of the show. We're doing a drinking game. Every time you say double click you have to take a shot. I think we're at 9. No, I'm kidding. I'm hammered.

I like it.

Financial freedom is the goal and you do not need to wait 20 or 30 years to have retirement or a pension give you financial freedom. You can have financial freedom in three to five years. I'm the guy that you come to when you want to start a business that you can grow to a million dollars or have an exit. But the person that I've invited onto the podcast today is the person that I go when it comes to planning for financial freedom. I'm going to be joined by my business partner, Sam Prentice. He's my partner at the Capitalism Fund where we give capital to entrepreneurs who are following my playbook to building million dollar businesses. But he's also the person that I go to when I want to defer taxes or I want to evaluate an investment or I want to see how to structure my money so that I have passive income and a long term secure financial future. Some you will likely have an exit on your business if you work with us inside the 1% or you read my book and build it on your own. There will come a day when it's appropriate to sell your business, possibly for millions of dollars. I know that sounds like a pipe dream to a lot of you who are just getting started, but we have so many stories of people who have done it. And if I had known what you're going to learn in this podcast while I was building my business, I would have paid way less in taxes. I would have had a much more safe and secure and I would had more passive income from the way that I invested the money when I sold my business. I wish that I had heard this podcast when I was earlier in my journey. So the best thing that I can do is introduce you to these ideas to help you build a financial future that allows you to be free. Not in 30 years, but starting today on this podcast, Sam And I talk about his three stage process for building wealth. He calls it the wealth pyramid. That gives you long term security, liquidity, safety and cash flow, while also allowing you to live a great life. Sam is my business partner at the Capitalism Fund, but he is also one of my best friends. So I hope you enjoyed this episode with my dear friend, Sam Prentice. Sam, we've done podcasts before, but I feel like you brought less of yourself to this one. You look a little different since we've done a video podcast.

Oh, man. Yeah, it is funny. We were just sitting here right before this talking about the length of time that's gone by since the last time we did a podcast and just all the different life changes that take place in a few years and. No, it is funny. When I first met you, I think I was in New York, maybe at the Brooklyn Backroom event.

Okay. Yeah.

I was probably 80, 90 pounds heavier. And it was, it was just the right time and place in life where I really, I will tell you for one of the first times I felt a community in the business world that mirrored so much of what I wanted.

My personal life and what you wanted it to be like.

Yeah, yeah. What I want my personal life to look like. And so getting to like plug into a community in that way at that capacity was really impactful for me in that stage. So it kind of like led to a lot of areas of my life you think of health, wealth, relationships, a lot of those, like really being brought to a state that I was very happy with.

So, yeah, so that, that is what kicked off the, the weight loss journey and the fitness journey.

I don't know if it was the exact catalyst, but it was definitely right beside it. And it was, it was a huge supporter in it for sure.

Every time you came to one of our mastermind events, you were just smaller.

It was, hey, there is something to the accountability of seeing the same people every quarter when it comes to, like, how you operate personally, how you operate in your business and how you operate in your, in your health. And so that's very helpful.

That's. That's beautiful. I think total, like from heaviest to lightest, it was about £100. That's amazing.

Good work. Thank you, man. I appreciate it.

So I, I don't know that it's worth going to our total backstory because we're basically BFFs at this point. But, but we met because you. Originally, we didn't meet at the event, but you were a sponsor at the Capitalism conference. When we allowed sponsors back Then and one thing led to another and now we're business partners, which, which is incredible. But something that you taught me, or at least attempted to teach me a few years ago that I didn't listen to, was a methodical way for investing your cash in a way that was predictable, protected, but also had a lot of growth opportunity. And I've learned this lesson the hard way. You and I have had many late night conversations about how entrepreneurs tend to take the same approach into investing that they take into their business, which means that they're confident they're going to win, so they're risk tolerant and they never really build up the nest egg that produces the passive income and the long term wealth that they could if they had things in place earlier. And what has stood out to me recently as I've rebuilt my portfolio and taken more of your advice is how much wealth can be generated. Even if you don't have an eight figure exit, even if you don't have a multimillion dollar business, if you have a long time horizon and you do things well, you, you can build up a nest egg of tens, if not hundreds of millions of dollars. And so what I want to go through today is your, not just your mindset, but the structure that you do things and, and actually how you put people into what you call the wealth pyramid.

I love it. Yeah. And I will say I want to double click real quickly on something that you said in there about entrepreneurs and kind of the way that the brain works and one of the things that entrepreneurs have going for them is that we are naturally creators. And so one of the challenges of what that does when it comes to your wealth management is oftentimes creators are always looking for that next big thing to create, the next piece to go in. And a lot of the strategies for building consistent wealth are not exciting. They're not the big jumps. This is not the big new thing you have to learn. It is simple, it is disciplined and it is consistent. Consistency wins in the long run, time over time over the massive innovation.

In other words, as an entrepreneur, it's about putting your heart and soul into creating a great product and seeing things that other people don't see and being in the daily wins and losses and being good to your customers and giving everything to one thing until it works. And in investing it is not about picking the right stock before it breaks out because eight out of 10 times that doesn't go so well. It's about having a disciplined approach of building something that is going to generate tens of millions of dollars over the long term. So let's just jump right into the strategy because I think if people have the engine behind.

The, their this, the strategy, if they have that engine in that structure, then they can start building this wealth pyramid in a way that gives them the freedom to continue to create, to continue to be aggressive in their business, knowing they've got a structure and a strategy behind them that is going to take care of their generational wealth. So would you walk us through what you call the wealth pyramid?

Absolutely. And the reason I love the wealth pyramid, just to double click on one more thing, is the most valuable resource we have as entrepreneurs, as individuals, as humans, is we used to say our time, but I really believe it's our focus because I have a lot of time that I spend that I'm not necessarily declaring a value on because it wasn't focused. So the ability to focus on the most important things is the biggest asset we can have as an individual and entrepreneur. So the beauty of a wealth pyramid.

Is, I'm sorry, we keep delaying the wealth barrier. We'll get there. But when you don't have a good structure behind you, your focus is thinking about what if it all goes away? What if that investment doesn't work out? Oh so and so that I trusted screwed me over. And that takes the focus away from your business, which is the goose that's laying golden eggs. And so you've got to protect your focus to be on the thing that is going to continue to generate cash flow and then you have the wealth pyramid that is building the long term wealth.

The ultimate goal of entrepreneurship is to stay in your state of creativity. That's my whole mission, my whole purpose behind everything we've talked about here. Everything I do in Wealth Planet is to keep more entrepreneurs in a state of creativity to help them keep more of their and keep more of their creativity. And when you're taking your creativity and taking it away from the area or is your zone of genius, which is your business and your audience and your people like doing the service that leads to great creation, you take that away to try to be creative in your wealth planning.

Yeah.

Actually you're actually using that very powerful energy you have in a completely destructive fashion to your own mental health.

Yes. And I've noticed that when I have a structure in place that is going to protect my family for a long time, I have the presence and the energy to do the long term things that actually generate the cash flow in the business. So yes, walk us through the wealth. We call it the wealth pyramid because we're in the Illuminati and it's three phases, essentially, like three buckets. Walk us through those.

I will do it. And this is, this is the goal of simplicity and the simplicity. The simple structure is stable and we look for structural stability when you build our wealth. So the very bottom layer of this pyramid is going to be liquidity. Liquidity is where we store liquid cash, so we always have access to it. Liquidity helps us mitigate risk. It helps us take advantage of opportunity. So we always want to have a base layer of liquidity. If you don't have liquidity, we shouldn't be working on other areas of the pyramid. A lot of people try to build their pyramid in reverse because it's sexiest to go to the top and say, I want to speculate first. But at the end of the day, the most important thing is if you don't have liquidity, we shouldn't be going on to the next step.

Now, I have some questions about that, but walk us through the other two stages and then we'll in deeper.

Layer number two is cash flow. Cash flow is how you actually retain wealth. The as entrepreneurs, it's easier for us to create, and so we create wealth. And honestly, creating wealth is not that insanely difficult. The difficult thing is keeping wealth, keeping and maintaining your wealth. And that takes everything from strategy to tactics to mindset. Now, cash flow is how we maintain wealth. Cash flow is buying ways to make sure that we can replace our lifestyle needs with cash flow. The last section of the pyramid is going to be speculation at the very top. It's kind of like a food pyramid. You know, you work your way up from bottom to top. The top would be speculation. And again, until we have exceeded our cash flow needs to live life on our terms, or we can stay in the state we want to stay in. We don't go into that speculative risk because why take the psychological headache that's needed on that front?

Now, that last piece, the speculative piece, is where a lot of people start. It's picking the next stock. It's betting on bitcoin, it's betting on what you think is going to have the biggest return that's speculative or investing in that startup or when we launched the Capitalism Fund, you were very adamant with our investors. This needs to come from your speculative bucket. Right. This is speculative. And we took small checks, enough for us to seed the first round of investments. And you were really clear about that with everybody that we invested in, because you work with a lot of them. Pretty closely. And you said this comes from the speculative bucket. So let's walk through these in order. You said liquidity is the base of it. When I hear liquidity, I think cash in the bank. I think money that is just sitting in savings. So is what you're saying that you should have a certain amount of savings just sitting there before you go into cash flow and speculative, or do you mean something else?

I absolutely mean that. I mean that you should always have liquidity in place, know where you store it. You know, the structure of the wealth pyramid is not tied to any particular asset class like the types of assets. There's multiple ways to store liquidity. As long as liquidity can be accessed in a relatively short amount of time, it's got barriers from loss where you're not going to lose money in the event of downturns or peril or those sort of things. Liquidity can be stored in a variety of buckets, but you need to have liquidity. You know, we have some favorite buckets that, you know, I recommend and I say make a lot of sense because of whatever reason.

Let's talk about those. Because it's easy to say you should have some cash in the bank. And I would say at the beginning of part of my career, I was overly concerned with just having lots of money in the bank. To me, that was security, that was freedom. But you showed me a few vehicles where you could store liquidity, but you could still earn a return and it could still be tied to the growth of the stock market or other asset classes. So walk us through one or two of those.

So the simplest and least exciting but most way to grow wealth is honestly is using a whole life or an index life type policy. It's a life insurance policy. There's a lot of benefits to what it does, but the primary things is, number one, it's going to earn a return without a risk of downside. So that's important that we're going to help pace inflation because one of the ways we lose wealth is due to inflationary pressure. So helping us pace inflation is important. It's also done in an insulated tax environment. Another way we lose wealth is changes in the tax environment on the assets we purchase. So we purchase something today, the tax game changes tomorrow. So that's a variable that we can cut out by doing this. It's got the ability to be leveraged. You know, there's always benefit anytime you can add the ability to leverage something, whether you choose to or not. It's important because as the Economic environment changes. Access to debt is going to be useful at different points in time. Like, you know, here in the most recent decade, access to debt was very important because of the velocity at which new money was being added to the supply.

So let me translate this a little bit because this took me a couple of years to really wrap my head around. But the base of that pyramid of liquidity, one vehicle is to put cash into a life insurance policy 100%. And that life insurance policy is tied to some index, right? Is, are they? Some are tied to The S&P 500. S&P €500, I think. I think mine is tied to a low volatility index. So it's a little bit more conservative. But you could have one that's tied to the S&P 500 and it's going to grow in alignment with the S and P. I think it's capped at a certain point and that's how the insurance company makes their money. Is that, is that right?

It is capped at a certain point. And basically what the insurance company is doing is they're giving you access to the upside of the market without the downside. So when the market goes up, you get up to a certain cap, whether that's 7, 8, 9, 10%. And then when the market goes down, you're going to get a 0% floor. So it makes sure that no matter what your account value isn't losing during a downturn, which is important for.

So if someone has $1 million exit and they put half a million dollars into a life insurance policy that's tied to The S&P 500, that means that if the S and p goes up 10%, the value of their policy is also going up 8, 9 or 10% somewhere in that range. But if the S&P 500 goes down 20% like in a Covid type year, it goes down zero.

That is correct.

So there's, there's a conservative but still tied to the market upside. But no, no, it can't go down in value. But you can still access that cash in a couple of ways. I know you can borrow against it. So you can borrow against your policy and invest it into something else. But what if you just want to cash it out? Is it just as liquid as having it in the bank?

It is. It is within 72 hours as liquid is having in the bank. And that's important is to have like less than a one week liquidity time frame on all of your liquid assets that fall in that liquidity bucket.

Okay. So it's so you could think of.

It.

Glorified bank account. I was just gonna say I'm always.

Hesitant to make analogies because when you're talking about investing, you're airing on this is not legal or financial advice. I'm an idiot on the Internet that you listen to for some reason. Don't listen to anything that I say. But my understanding is it's kind of like a high yield savings account, that.

It'S exactly how I describe it. And honestly, I hate to even get too far into this. When you talk about the structure of wealth, there's a lot of things that are very polarizing when it comes to us taking good steps for ourselves when it comes to building wealth. And so this is not a hell to die on. Because if this is something that doesn't make clear sense on day one to you or whatnot, you can always research, continue to add it to your, to your knowledge base. But you could right now you can go out and get savings accounts that pay 5%. Now, they're not protected from taxes, and so you're going to pay tax on that. So your five might be a net four or whatever it ends up being or net three and a half. But at the end of the day, the hill the dial is not what vehicle you use. It is that you have liquidity, is that your liquidity earns a rate of return that helps you pace inflation, that you can access the liquidity. You know, assets always fall into different buckets. And I use a system called the rating system R A T E S Return, accessibility, tax, efficiency, expense and safety. Those are the acronym rates, R A T E S. And you can analyze each asset in your portfolio to see where it fits. So for your liquidity bucket, what's most important is not really the return. The return. We're only trying to pace inflation. The most important thing is accessibility and safety because you need that money there to mitigate your risk. And you need that money there to take advantage of opportunity. And you need it there in a variety of situations, economic situations. So market downturn is an especially important time to be able to access your liquid capital. Because most of the time what people do is they get in this cyclical environment, the market crashes, your business does less, you know, it's not doing as much revenue. And so you have less money to work with. Your assets are now worth less and you need cash. So you're forced to sell low and then you buy high because you're only having liquidity at the points in time in the economic cycle when the economic cycle is dictating you having liquidity. We've got to get outside of that mode. And that's why the wealth pyramid is so smart, is when you follow it to the degree that I'm describing here, you're always in a position to have the deck stacked in your favor. And as entrepreneurs, we have the ability to stack the deck in our favor so easily and yet sometimes it gets too easy. We decide we want to stack it against us to make the odds better. So this is, this is simple, this is practical, and it gives you a way to have the deck stacked in your favor and win over and over again.

I want to move on to the next part of the pyramid, but the last point I want to make here is I, I would have considered liquidity cash in the bank. And early in my career, from 2006 to 2012, I kept my money in the bank because I was afraid of downside in the markets because I'm in my 20s and I'm making fresh cash. But had I known that you could park it safely and still have it tied to the index, you had a remarkable run up in the stock market from 2008 to now that would have taken that cash in the bank Instead of getting 1%, it would have tripled in value over that time.

Right. And there are some arguments from like a safety standpoint because cash in the bank feels really good until you have SVB come along and there's those sort of things.

Yeah. And so, but then even more important, or inflation.

Yeah. Like, like for example, like in your policy that you have in 2020, I think your number was like 25 or 26% credit. So while having zero risk of down when the world was kind of in turmoil, we were able through From March of 2020 to March of 21, have your policy credit, you know, a six figure credit with zero risk. That's kind of a cool game to play is to say, hey, my liquid money, the money that's normally parked in a bank account is providing with a lot of other economic benefit in a tax free environment. So it's cool.

So this is not a pitch for that strategy. Correct.

But some insurance agents out there are going to be super, super happy with this. Like, oh, this guy finally.

Well, I, I wish I had done that way earlier. Right. So the next piece of the pyramid is your cash flow. So walk us through that.

Yeah. So cash flow. And I use the example and I usually prioritize, especially in the last four or five years, even with the growth in the sector I've still prioritized the real estate sector. And the reason why is even though there's been a lot of growth, it's still a great place to go buy cash flow. You're getting to do it where you can buy it with debt, which is attractive when we continue to print money into the supply. You can buy cash flow in the form of you're getting rents from your tenants and whatnot that are paying, which is, you know, bringing you actual cash in your pocket net over your mortgage payments or whatnot. But you're also building long term value because as your net cash flow in this property, you're building up, the appreciation is also building, you're building. The principal amount is being, you know, reduced, the principal pay down on the loan is being reduced by the tenants paying the rent. And we're getting pretty significant tax benefits. Those tax benefits are starting to sunset now. But there's still, I mean, real estate will always be very, very tax favored asset to go buy cash flow with. So I use that for my cash flow bucket.

Are there any other assets that fit that?

There are, yeah. So cash flow, anything? We're looking at cash flows, we're looking for something that has a high degree of predictability to it. Because the reason you build a wealth pyramid is because psychologically you want to be able to focus your energy as an entrepreneur on creating in your business or creating in your life or whatever it is. The goal of the wealth pyramid is to remove the mental junk around money. And this is a really important thing is we can talk tactics and we'll talk tactics here as long as you want today. But the most important thing that we're doing is we're actually putting you in a position to succeed as an entrepreneur and to live life on your terms as an entrepreneur. Because without having a structure to follow, you won't do that.

So if part one's goal is to build up a base of reserve so that you can succeed during a recessionary environment or an economic downturn or a hard time in your business and be safe and grow for a long time, then the goal of the cash flow piece of this is to replace whatever income you're dependent on to pay for your lifestyle.

That is correct. And that's where I wanted to give that framework before I answer the question of what all fits in that bucket. Because it's really important to be very, to have a lot of discretion when it comes to picking these assets. Because there's two factors to this. Number one is doing things that will work over Time and number two is doing things that you understand and, and have a high likelihood of belief are going to work over time because if you don't understand what you're doing with your money when it comes to your cash flow, you will never feel secure that that cash flow will be there in the future.

Yeah.

And so tactically there's some things like buying real estate. The benefit of buying real estate is it's a, it's a commodity, it's a hard asset, it's something we can actually go put your hands on. That's a real thing that's there. It's also, from a risk standpoint.

You do really poorly in real estate. You risk 40% on either side of the swing. You're not risking 100% at one time. So we're making smaller moves in our risk profile when we buy things like real estate. So that's an important thing because we have a high degree of likelihood that the money we put into real estate is going to not only retain value, which is important, it's also going to provide the cash flow we expect from it.

So if we, and there's a diff, there's a different level of ability to perform when your cash flow is taken care of through something that you're not controlling and it is relatively stable. So the point and the goal is to make the money in your business, fill up the base level of the pyramid of safety possibly tied to the market, save long term upside. And then as that that bucket is full, you start dumping some money into things that are going to cash flow. And after a couple of years, and in some of the models that you run in like four or five years, you can predictably replace whatever income you're making in your business or making. If you know a high paying job, you could theoretically have that cushion after a handful of years if you're putting money into that, that real estate bucket or that, that cash flow bucket. I know this is the sexy part of it and you're always hesitant to oversell something, but what types of returns should someone look for in that cash flow bucket?

Oh, this is, this isn't sexy. This is the, this is the boring stuff.

Okay.

This is because there are, there's, this is a challenge that entrepreneurs face as we always look for the next big thing. It's simple. Your, your real estate, your dividend paying stocks, debt, private debt, those sort of things, these are all places where you can go and you can earn 6 to 10%. And honestly I usually use the number of 6% is kind of the, the number that I put a range on is if we can target 6% cash flow from our real estate or a dividend paying stocks or those sort of things. If we're able to target that sort of cash flow at a 6% number, we get the benefit of our equity base continuing to build and our cash flow is enough to where we can do reasonable plane and off of a 6% number.

Yes, 6% is lower than I thought you were going to say because, because.

If you sell, sit here and I tell you to go earn 10%, then you're going to need to get 11 and then 12, and then 13, 14 and 17. Then somehow we're sitting here with a 30%, you know, real estate offering like this is the one I must have because as entrepreneurs, we don't want to be the one who missed out on something and then we feel dumb. So I'm trying to give entrepreneurs permission to not feel dumb when they do the things that let them actually keep their wealth.

So you're laughing, but this is actually really serious. And so for anybody who's listening to this and you right now are worried that you're not doing the smartest thing because you're invested in boring real estate that earns 8% and is going to have upside down, then smack yourself and give yourself permission.

No, that's, that's, you just said also have upside. That's, that's the important kind of kicker here. Because what you're saying is like I, I have, I have investments in at T stock. At T produces, it has like a 6 or 7% dividend which is very high, but it's also appreciating it. It's not right now, but, but it can appreciate. So real estate's the same and, and what you would recommend people put in this bucket is the same where it's going to produce some sort of coupon dividend cash flow. But it also has asset value that can go up.

Correct.

And when you combine those, now we're looking at 12, 13, 14% in some cases if you're, if you're in real estate like apartments over recent years, that has been an extraordinary return over, over the last handful of years. So the 6% that you're saying is what, what you can expect to receive on a quarterly basis or a monthly basis, depending on what the asset class is.

And I think the distinction I would make, there's a reason I didn't even talk past that about the total returns overall is because I want to rewire your listeners brains as to what we're looking for because the percent return, the total return, that creates confusion and it doesn't make you feel wealthy. I had this conversation with a client the other day. He had a $20 million exit. We were having this exact conversation about why he doesn't feel wealthy today. A year later and he is wealthy. He's actually worth more now than he was before. He's building out his wealth pyramid. We reduced his tax burden down probably four or five million dollars.

I remember you whittling that away.

All sorts of awesome things happen. But it doesn't necessarily feel wealthy. And the reason it doesn't feel wealthy is because what makes us feel wealthy is cash flow. Cash flow makes you feel wealthy. And if you don't have that cash flow built up, then all the other stuff is just numbers. And it actually can turn to be an enemy and it's psychological enemy.

You're afraid to lose.

Earning 14%. Where is it? Can I get to it? At the end of the day, when you have cash flow that's consistent coming in, that you have a high degree of likelihood that you can depend on, that's what makes you feel wealthy.

Yeah, that, that, that's beautiful. I do want to echo, I think that the asset value is important for entrepreneurs to understand because it gives them permission to be able to do these conservative things. So, for example, I ran the numbers recently and said if I gave myself a 50 year time horizon, and of course no one wants to wait 50 years, but if I gave myself a 50 year time horizon and I invested just 100 grand a year, 100 grand a year, long term, didn't touch it into the most boring asset ever. S&P 500. Given average returns, what is that compound into over 50 years? Answer is $100 million. If I were to put 100 grand a year, every year for 50 years, I've invested a total of $5 million. But it's compounded into $100 million. When I saw that number, it gave me permission to be conservative.

I like it.

Conservative meaning the S&P 500. Over time it tends to go up. Like over time is probably not going to go to zero. So that permission of saying, okay, I can park this way and think about it conservatively, it allows me to think really long term and plan for a future very long ahead. And now if I think about the next level up in the pyramid of real estate, it's exactly the same. If I can park money away in there and have 6% and not even thinking about the Appreciation or the tax deferment. Now it's starting to get kind of sexy. So by thinking conservative, I can actually build a giant pool of money that sets me free, both financially and mentally, for me to go kill it in business.

Right. Okay. So that is awesome. I like the simplicity of that. We're going to take it a step further, put it into the wealth pyramid, and then you're going to see how that actually stacks the deck in your favor to take simplicity to protect you in a variety of different situations. And so the last part of the wealth pyramid is speculation. That's the very top level of it. Speculation is things that we buy today and hope to sell for more tomorrow. It's very straightforward. That's just the definition of speculation. So think of things that don't cash flow. So land currency, bitcoin, angel investments, like all these things that we know fall into speculative buckets where we're rolling the dice, we might win one out of six, but if we have, you know, consistent money that's going to it. We can roll the dice multiple times. But you don't play that speculative game or need to play that speculative game until after you've built the other two levels. Because at the end of the day, you're going to win from the other two levels and you're going to psychologically be a big, better speculative investor when you're doing it from a position of strength and cash flow than from a position of need for it to perform.

That's so true because.

So.

So earlier it was last week, I made a bet on PayPal.

Yeah.

So I have kind of my list of companies I'm targeting. PayPal hit the entry point that I think is relatively safe. Again, not investment advice. Don't listen to anything I say. I'm an idiot on the Internet. I bought PayPal last week, and because I know I have my cash flow and upside protected, I don't have to Worry about if PayPal goes down a little bit more or if it makes a big jump, which is what you're saying makes you a better speculator, because chances are I'm going to hold that for years. And when you're holding something for years, you have a much better chance of it succeeding than if you're dependent on that money going up or down a little bit every day.

A long horizon heals a variety of mistakes.

Amen to that.

So, but yeah, to double click back, though, on the idea of the 100,000.

Just so you know, we forgot to announce the beginning of the show. We're doing a drinking game. Every time you say double click, you have to take a shot. And.

Really?

Yeah, that's.

Is this the first or third time or where are we at?

I think we're at nine. No, I'm kidding. I'm. I'm at third count. Yeah. So I'm hammered.

I like it. Oh, dear. So, that being said, the idea of the wealth pyramid is if you look at this and say, okay, about the s and P500, I was going to take $100,000 a year from my business or from my cash flow, wherever it was, and plug it into this. That same concept could be applied to, you know, your wealth pyramid. And I usually work with people who are near exit. And so we're using a lot of tax plan to try to keep more of your money. Then once you exit, you invest it and try to keep more of your investments. A lot of this game is played about trying to keep more of our money. But if you were to flip that script and say, okay, well, if instead of exiting a business, you know, maybe it's just a good cash flow business, and I don't need to exit, I'm going to go choose to take the cash flow and just start using that to funnel into my systematic wealth pyramid. That's actually a great way to do it because we keep the most predictable or I guess the most comfortable asset for most entrepreneurs is their business is also the highest ROI is pairing your cash with your own time. So you now say, well, this is bitten off more cash than I can reinvest into my own business. Take $100,000 a year. You plug, you know, what would that be? You probably plug $30,000 or $20,000 into your liquidity bucket. You plug 70 into your cash flow and 10 into your speculation. You have a very simple model to follow behind that. So every time you're adding new cash flow in assets, it's important to have liquidity added at the same time, because if the cash flow ever gets interrupted, you need to have a cushion for your life. You have a cushion for the asset sometimes. Like, for example, take real estate. A tenant moves out. You have repairs to be made. You have to have liquidity cushion to make sure you haven't run that cash flow down to the wire.

Yeah, so. So what you're saying is, in my, in my experience, an entrepreneur who has a $2 million exit, like, that's, that's.

This big goal for 1.51. What? Go ahead.

What did you say?

For 1.51, 4.400,000 liquidity, 1 point.

Wow, you have right there. Okay, so what I was saying, somebody has a 2 million dol dollar exit for them in their mind. It's like, great, I can fill up the wealth pyramid right now, and now I'm financially free for life, assuming that the cash flow bucket is now replacing their income. But another way to do it is to take that business that's making four or five hundred thousand dollars a year in income. And over four or five years, you fill up the wealth pyramid. And now you have the same amount of financial freedom as if you had sold the business. And now we have some options.

Absolutely.

We can scale the business, we can sell the business, we can borrow against the business. There's all kinds of really interesting things that we can do now. So you don't have to have the exit in order to have the same financial freedom as the exit. It's just one of the potential options to fill up the three levels of the pyramid and then have your investment strategy take care of you.

And this is where investing your business, all these things, there's part art and part science. Because at the end of the day, if you're getting a significant roi, there's a time to diversify and a time to concentrate. You diversify to mitigate risk, which is what the wealth pyramid is meant to do. It is meant to help you keep more of your money. The concentration is meant to build wealth. So in theory, if you're getting a very high ROI in your business, there may be a point in time when you're choosing to continue investing in your business, knowing the risk that you're taking in concentration. Because the ROI is so outsized, it makes sense to do so. And that's honestly, it's one of those ones where that's where I say it's part art and part science, is some businesses are not necessarily meant to have that kind of scale, in which case maybe that is a better cash flow business. You keep it, you own it as a lifestyle business. The lifestyle business pays for your wealth pyramid. The wealth pyramid builds you a predictable diversified lifestyle that you can depend on for this point going forward. Boom, entrepreneur and state of creativity. And maybe the next business is what unlocks and has how you change the world.

Yeah, I mean, we've, we've experienced this as this at the fund where if you have an entrepreneur who does not have something stable providing for their life, they start to sabotage the business.

Absolutely.

They start to try to take money off the table too quickly or they take risks that they shouldn't take because they have no other liquidity, no other cash flow, no other savings. And so the business becomes the thing that has to provide for everything. And that is a horrible mental state to build a business that cash flows.

It's a very healthy relationship.

It's stressful for everybody. It's stressful for the business. It's stressful the customers. It's stressful for you and me as investors. And so we have to have that. That foundation of wealth in order to free you up to be able to go kill it in the business. I want you to tell a story or two about working with a client and how you advised them to actually take the money from their business or from their exit, how you allocated it in order to structure their life in a way that set them free.

I love that. So, yeah, and there's a lot of stories I could share. I think I was doing the math on this with someone the other day about, like, the total number of tax dollars. I don't want to say this on video, I don't think, but there's a. There's a good number. It's. It's a. It's a relatively high figure number of tax dollars that we've reduced of.

Why don't you want to say that on video?

I'm not sure. We'll see.

You think Biden's gonna come knocking on your door?

You know, you never know. Like, I'm in Austin now, and Austin's about to swing blues. We gotta be careful.

Well, we should comment here that, you know, our mutual friend Tom Wheelwright says that the tax code is a book of incentives. The government says, this is what we want you to do, and if you invest in these things, we will reward it in the form of tax benefits. And so it's not like we're doing anything crazy or hidden. You're just doing things that are incentivized in the tax code because they provide investment for certain areas of the economy, without a doubt.

And the things that are incentivized are actually really cool. So, like, I mean, this. This planning has led to, you know, probably close to nine figures of dollars that have gone into charitable functions that were important to the entrepreneur's heart and mission and those kind of things. It's like, you think of things that really make a cool impact, is the tax code is actually built to incentivize you, stacking the deck in the favor of being good to your fellow humans. And so that's a really cool. I don't know.

Or at least politicians Interpretation of what is good for fellow humans. So, so when you're working with somebody, one of the first things is how do we protect this from a 40.

Tax bill, the lowest hanging fruit when it comes to building your wealth is not taking steps backwards.

And that's just all meaning a 40 bill.

A 40 bill to taxes. The very first thing we look for, the first waste we look for is just paying tax unnecessarily. So it's like, hey there. And it's, this can be accomplished through the terms of your sale. This can be, you know, through your purchase agreement. Like how that's structured can actually make a relatively significant difference in the amount of tax you pay at the time of sale, the entities you own it in, the, you know, any kind of charitable intent you're going to have regardless the timing of when you invest in other assets, what other assets you invest and what you buy. There's just a whole long list of ways that you can, with, you know, relatively low tax risk, can reduce a tax burden to a much more reasonable place. Yeah, so that's the first place we look is because it's the lowest hanging fruit, lowest risk, highest reward sort of thing. And there's a time sensitivity to it because you only have like a year from the time you exit to be able to do this planning. So it's important to prior to exit to make that plan and happen. And I advise like a year before you should start those conversations so that when you hit that time, most entrepreneurs hit, hit exit and it's like, okay.

Well now, yeah, what do I do now versus how do I keep my money?

Right. So six months before the level of.

Oh, I wish I had known you before I sold my company.

It is, it's one of those ones where the level of stress you experience post exit will be way lower because your, your variety of tools, the gamut is much larger when you are doing it pre X as opposed to.

So this is just a quick plug for the capitalism fund because I, I genuinely wish I had met you before I sold my company. Right. I would be a lot wealthier, I would have paid less taxes, et cetera. And one of the cool things about, we have, we have one brand that we were talking about at the gym this morning. That is if, if, if, if nothing goes catastrophic of a $15 million exit, possibly more than that. But right. Right now, that brand is on track. We invested it when it was doing $500,000 a year and we've watched him grow it quickly and has been, you know, some us, mostly him. But he'll, he'll have a $15 million exit, pretty predictably.

I agree.

And, and one of the benefits of being part of the fund is not just the fact that we gave him some capital, we made some introductions for him, we gave him some mentoring, but also the fact that when he goes to exit, he'll, he'll keep 30% more money.

Not without a doubt, unequivocally. I mean accurate.

I mean, because, because we'll be so ahead of that. We'll know that he's going to exit. I mean at this rate, he'll probably exit in 2025.

Maybe sooner, who knows. But we'll know eight to 12 months before that becomes the scenario. And so we can get out ahead of this and structure it in a way to where he is. Not Instead of paying a 4 million or 5 million dollar tax bill, it's going to be a lot less. And so there's a baked in benefit to having a team that is looking at how you're building your business. In addition to the capital and the advice, we do damn good work. Sam Prentice. All right, so we were starting to go down the road of walking us through an example of a story of how we allocated capital from a profitable business or an exit. So we're obviously tax planning is the lowest hanging fruit. What do you advise? Give us some, like if you can pick, if you can pull numbers from an example, that would be helpful.

Let's use this as the example. And this is a little bit more of a larger sized exit. And so, but everything is of course scalable. I will say there's some strategies you don't use at smaller dollar amounts because it just doesn't necessarily fit as well. But like for this one, it was a $20 million exit. So 20 mil. One of my favorite clients, he a podcast listener. Yes, podcast listener probably. So he'll be around there as well, I'm sure.

But I mean he started listening to the podcast.

Oh yeah.

Started the business by listening to this podcast that you're listening to right now. Started a business, got plugged into our community, had a 20 million dollar exit. So I think stories really do exist for those of you who are listening in the car right now. So was he.

I think the timeline is, is maybe five years ago the business was not even an idea to. Wow, maybe six. But no more than six years ago, the business was not really even an idea.

We do good work, man.

And then to completion you now have, you know, a year and a half post exit and so the exit was 20 million.

And located in California. So the tax rate there is higher. So we've talked about tax rates a little here. Capital gains is 20ish percent. California has another 13% luxury to be located there. So tax tip number one is move out of California.

We tried that one, ran that by. It was. There was not like a marital concern consensus on that game plan. So the powers of me was outvoted by 1 to 2. So I'm just kidding. But that being said, so what it led to though is we went in and we looked and said okay, here's your exit. And so we took, you know, a couple million of that and actually put it into. It was a way to defer taxes. And it's basically like a stock market type account. There's you know, one of one of the contacts that was there. So we were able to take 2 million off the top, lower it down.

I don't understand. You took 2 million and put it into a defense deferred stock account.

Yeah, like it's basically it lets you defer the tax until you receive the cash out of it.

Oh, okay. What is that called?

There's a lot of different names for. It's a type of trust. Oh, okay.

So okay, so the one that was.

Used there, they have a proprietary name for it. So I want to say it specifically, but there's a lot of ways where you can have deferred sales trusts that are put in place.

I learn something from you every day. Okay, so this is not my favorite.

One because it requires it to be put in the market and then someone else has to manage it for you. Okay. And so what we concluded with the client though is he said I want to have some market exposure in addition to the other strategies that are here and I don't want to manage it. So why not let them manage it and see what happens. If you want to know that in the last couple of years is done about flatline. So is what it is noted. So that's that. No, we did a. We did a charitable structure to reduce some taxes and other, you know, good batch into that charitable structure. Another 5 million of the charitable structure and that is, you know, coming again off the tax burden from the top. And so that allows you to benefit of charity in the future but have those dollars available for you to, you know, utilize on today's, you know, on your balance sheet today.

That makes sense.

So you can do transfers between. So those are some of the tax planning things were done. There's a few other. But Then really after that, the primary things we looked at was investing and allocating into real estate. You know, this particular one had a fact pattern where the person who exited the business was married and one of them was able to be a real estate professional, which meant that all the real estate losses created were going to go offset their tax burden. Really attractive. Made a lot of sense. So what that looked like though is we took $20 million exit, we took one and a half or so, I'm doing this math on the fly. One and a half or so went into insurance and that would be year one. It's going to probably end up being about 6 million total goes into insurance. And then we're going to have, you know, six to eight is going to go into real estate and then you're going to have a small portion of speculative beyond that as well. The speculative right now has gone into some primary home purchases, some other lifestyle assets that were wanted, they were good for taxes, that are about break even on cash flow and you know, our appreciation type assets. So for example, went and bought like an Airbnb. And so about an Airbnb was the dream, the dream location on the mountain. Ski in, ski out. It's a legacy asset that's there for the family. You get to go there and get to enjoy it.

And he's never invited us.

That's true. That's valid. It was a very heavy snow season this last year.

We're going to send some text messages after this, Sam. So. So over time, six will go into insurance to be that the liquidity that will be tied to the market.

Correct.

And then you had, was it about six that goes into real estate investment? So that's going to produce even. It produces 6%, then ends up being hundreds of thousands of dollars a year in passive income. And then the rest is freed up into the speculative, which he uses for an Airbnb or a nice house or the things that he wants to or.

Any other speculative, whether it's angel investing or crypto or whatever other plays that are so.

So if he starts another business and it becomes cash flow positive, he's already got his wealth pyramid pretty much set. Can he now just dump more into the speculative and have play money?

You absolutely can. And what you'll see will happen over time is like, you know, right now is one of those ones where as you exit, you're not going to place everything immediately right away. So with that, like I'm giving you, the overall numbers of ye will be placed, but you don't necessarily want to exit business number one and go rebuy all your assets at the exact same point.

Yeah.

So it's almost as if your dollar cost averaging into the economy when you go place money into real estate that makes. So I think we've only placed you maybe a million and a half or 2 million in the long term cash flow and type real estate. But you have that money earmarked to be able to eventually place all of that.

I got you. Now walk us through a smaller example. You've told me we have lots of stories of people from the community who had had 2 million dollar exits. And then, and then they come to you. Right. I'm think I'm thinking about one person in mind right now. I think he had a 2.1 million dollar exit and then he started working with you to place that. It's a smaller, more easy to understand number for people who are just getting started.

So practical. That's actually so in my mind when I think of trying to demonstrate the wealth pyramid concept, I take a 2 million dollar exit because that's something that's relatively attainable. So it takes you 12 months to get to 1 million. So it takes you 24 months to get to 2 million and buy the book.

That's right, 12 months to 1 million on Amazon.

I have, I've avoided writing a book because I've heard you say so many times that you know, you write a book to quit saying things.

Yeah, that backfired.

I already like, I try to avoid, I feel like every time I say what a wealth pyramid is, I just like, I'm like surely this is, you know, this is unnecessary because I'm. Surely someone's heard this before, but it is what it is. But that being said, there is. I forget what I was.

$2 million.

Yeah, thank you. There we go. That's perfect. $2 million exit. So a $2 million exit is very, very simple. It's very attainable. 2 million bucks. You take 400,000, put it into your liquidity bucket. You take 1.5 and put it into your cash flow. You take 1 and you put it into your speculative. What that creates is a very clear path to a hundred thousand dollars of cash flow of you. If we do it through real estate and other things, very tax efficient cash flow. A $400,000 cushion bucket which is enough. If you live on a hundred thousand dollars a year, it's enough to have three years of cushion with some on top of that. You got a lot of cushion built into. Just protects you in so many ways. And like what that would look like is your $400,000 is going to grow it 4, 5, 6, 7% each year because it's still growing because it's in a liquidity bucket that's not doing zero. So we're pacing inflation and it's continuously growing. Your, your cash flow bucket is going to be providing for your lifestyle at 6.1% where cash flowing $100,000 a year. But you're also growing that bucket, that 1.5. The 6 or 7% you receive on the cash flow doesn't account for all the other stuff you wanted me to talk about earlier, which is the back end money you get when you refinance or sell.

Right.

So that might add another 6 or 7% on that side. So you think about this like 7% doubles every decade. And so this is really simple math to think about as your 1.5 is going to 10 years later, your 400,000 will be 6, your, you know, 1.5 will be 3, and your speculative will be, who knows, I mean, probably still around the same hundred thousand dollars.

Well, assuming that you go and make more money in another business or whatever you do, you can grow that as big as you want, knowing that the wealth pyramid is continuing to compound.

Correct. And so let's just say, for example, that the individual only needed to live on 80 of that hundred with the excess 20. So if you need 100, it just is what it is. The only money you're ever going to use to grow that is going to be on the 1.5 grows to 3, and you can take that cash out or when the speculative bucket comes through, but say they only needed to live on 80 of the hundred, then you would take the other 20 and have the option of either a, I put it back into my cash flow and liquidity section, or I can take that and use it every year. I have 20 grand to go put into some sort of speculative adventure. And when one of them hits, then I take that, I can dump it back in and keep refilling the bucket. But when you refill the bucket from the ground up, you create consistency and predictability and you're able to keep playing the game over and over again.

I think one of the most valuable things for people to take away from this is that regardless of where you are or what your situation is, you're four to five years away from having real financial freedom. If you do this well, like if you build one good business that does modestly well and you have a modest exit of a couple million bucks, and you put that into a proper structure, you have predictable. You should have financial freedom for a very long time.

The download I have real quick here is that as entrepreneurs and there's different states, and so what I would hope if we could accomplish anything from today's podcast is to put entrepreneurs in that state of creativity. So if you're the new entrepreneur who's just getting started knowing that this is the direction of where you head is going to put you in a state of creativity, because you want to go create, because you create that wealth so you can do these things. If you're midway through the journey, there's actually kind of that anticipation of like, okay, what does that next chapter look like? So this is going to give you a little bit of a way to ease the transition. And if you're either there or have gone through this transition from business owner to investor, that transition, there's a lot of psychology behind that as well. It's all because we're going to a new chapter. So going from not being an entrepreneur to starting a business is a new chapter. Going from starting a business to running a business is another chapter. Going from running a business to exiting a business, all these chapter changes. The more we can have someone go ahead of us and shine the light three or four steps that is completely and utterly invaluable because it gives you that confidence, that encouragement, and kind of that piece that lets you enter back into state of creativity.

I mean, when I, again, like early in my career, even though I was making hundreds of thousands of dollars a year, I was always afraid of it going away because I just had one thing, and it was a cash flow business and I was sucking it away into a savings account, right? And then I made stupid investments with it. And so I, I did not know this structure. I didn't prepare for success. And so I was always dependent on the business doing well. And I was stressed to high heaven. Whereas if I had prepared, I could have been in a state of creativity much earlier in my career, done a lot more good, been better to my customers, been more creative with products. And that's just, that's, that's a state that I'm only entering into now, without a doubt.

And it's, without having that plan. It's so difficult as we spend a lot of time as investors or business owners, entrepreneurs, chasing and trying to catch up for what we, we tell ourselves is a mistake. And the mistake could be as simple as not having everything lined out when you exit it, which is unrealistic in the first place but a lot of unrealistic expectations on it. But so finding like the more prep you can do every time you, you pull the string a little bit on that ball of twine of information, you pull the string a little bit to be slightly more prepared. It's going to give you that chance that when you exit you'll be in the position to execute confidently, to stay confident, efficient, optimized with the way that you interact with your money. And that's the position I want every entrepreneur to be in.

Yeah.

And it takes, it takes both education and also it takes. And a lot of this is, a lot of this is mindset like it's probably 30% tactics and 70% mindset when it comes to good wealth management.

Well, I'm the guy that you come to when you want to build the business that you ultimately sell to fill up the wealth pyramid. Sam is a good guy to call when you're ready for that or as you're building the wealth pyramid. Are you taking clients right now or you do you have any selfish requests of the audience? Do you have a place that people can find you or do they have.

A spot through me that an option that's perfect.

I get that a lot. Hey, who's that tax guy? Hey, who's that? Well pyramid guy. I. I'll send you to Sam.

I do, I do boutique planning and honestly. So here's, here's the take with this is if, if the exit is going to be sub, you know, a couple million bucks is it there's really most of your planning is going to be pretty simple which is like a one call at a time. So I have a private client service that I use. It's called the My Wealth CEO service and that's where I help clients both do tax planning but also build out wealth pyramids and those sort of things just help with overall I could hire a CEO for your business. You hire a CEO for your wealth wealth. Same idea. I take that it's on a private like retainer type basis. It's relatively inexpensive for the space but it gives me a way to work with higher end clients on a more intimate basis. So I do take clients for that on kind of like a one off basis. But it's not something I broadly market right now.

Well, I'm marketing it for you. Is it mywealthceo.com mywell CEO okay. Well Sam, obviously you've become a dear friend, somebody that I'm very thankful for and I appreciate you sharing today.

Likewise. Good man.

No matter where you are in your journey right now, you're only a few years away from financial freedom. If you do things right, build a good business, even if it's modestly successful, in a few years, it can be an exit or be profitable enough for you to start building the wealth pyramid. And after a few years of filling up those buckets, you have long term financial freedom for life. If you're at the beginning of your journey, the first, first step is to build a business, a profitable business that you can grow and maybe sell someday. And whenever you're ready to start your road to a million dollar business, it's just a hundred sales a day, which is four products, 25 sales a day each at $30. We can help you do that inside our mentoring program called the One Percent. Go over to capitalism.com1 and fill out the form and we'll get you started on the road to 1 million. Thank you so much for watching. If you enjoyed this, this, let me know. I'm ryan@capitalism.com. i'd love to hear from you. All right, see you on the next episode. Take care.