Episode 1 - Wealth Building Strategy

Welcome to the Painting Business Finance Podcast, where it's my mission to provide you with the strategies, tactics, and tools to making your painting business more profitable while creating more wealth for you and your family. So, are your finances on track to provide for yourself and your family? You know, there was a Bankrate survey that concluded that only 65% of Americans— excuse me, only 35% of Americans are actually saving enough for retirement. So that is dismal. Only 35% of Americans are saving enough. Now, as a business owner, you have the opportunity to take charge of your finances in a way that most folks do not because they're employees and they don't really have that control like a business owner does. So don't get caught up in the other 65% of Americans who do not save enough for their future. Now, how do you know if you're saving enough, you know, and then when you, when you're actually saving this money, where do you put it? What strategy should you be using to build wealth? This is— we're gonna touch on some of these questions. We're gonna basically dive into a strategy, a wealth-building strategy, on becoming financially free. So before we get into that wealth-building strategy, let's define what we mean by being financially free. So being financially free means that you can basically maintain your lifestyle without earned income. Now, earned income is basically income from a job or working in your business actively. So in order to be financially free, you need to have a substantial amount of money saved and invested in order to live off that passive income or that interest from that invested money. So a quick rule of thumb to determine if you have enough saved to be financially free is to basically take up the amount of money that you need for a year period to be happy and to live off— enough money to live off of for a 1-year period. Take that amount, so let's say it's $30,000, which you've decided that you need to live off of, and that meets all your needs. All you need is $30,000 a year. Now, to determine how much you need to save to be financially free, you basically take that $30,000 and multiply it by 25. So $30,000 times 25 is $750,000. So in order to be financially free, you'll need to save $750,000. And this is called the 4% rule. Basically, that $750,000 will give you, uh, if you invest it into index funds or something with a comparable return on investment, you should be getting about $30,000 per year. That's assuming a 4% return on your investment. So that is financial freedom, basically having enough money saved up so that you don't have to work if you don't want to. So now that we've defined financial freedom, let's take a look at a wealth-building strategy that will get you to financial freedom. Now there's a book called The Business Owner's Guide to Financial Freedom by a CPA. His name is Mark Kohler, and he lays out a 4-step strategy for business owners to take control of their financial future. And he basically recommends that each step be completed completely before moving on to the next step in the strategy to prevent any kind of inefficiency to occur while striving towards your goal. And his strategy, this 4-step strategy that we're going to cover, it's very similar to what certified financial planners or financial gurus like Dave Ramsey recommend. There's, there's just a little bit of a nuance with his because he's actually focusing on small business owners specifically. And the 4-step wealth— so the 4-step wealth building strategy is this: step 1 is to optimize your business, step 2 is to pay off bad debt, step 3 is to save 12 months of cash reserves, and then step 4 is to invest for the long term. So let's dive into each of these steps here. So the first step is building wealth. The first step of the building wealth is to optimize your business. Now, what does that mean? Optimizing your business involves setting up systems in your business and ensuring there's at least a reasonable, reasonable amount of profit in your business. So the first component of Setting up systems involves documenting your procedures so that you can delegate work. So documenting your procedures could be basically listing out step by step how to do certain things in your business so that you don't have to do everything in your business. That's a super important step when you're building your business because I'm sure most of you listening to this don't want to be the only person in your painting business. Some of you do, and that's fine, but some of you want to actually grow and to hire other people if you haven't done so already. And what you need to do in order to do that effectively, you gotta have those procedures documented so other people can step in and have some kind of resource to look, to look at if you're not there guiding them. And then the second component is profitability, is ensuring that your bottom line, how much you're making in your business, is comparable to the average painting business of a similar size. Um, one way to see if you're hitting what an average painting business, uh, hits in terms of profitability is to look at something called benchmark data. Um, there's a lot of companies that aggregate data, uh, and you can kind of compare your numbers to what other painting businesses usually do. So we'll do— I'm actually going to do a separate episode just on that alone. But that's the other part of optimizing your business, is ensuring that you have the system set up, but also ensuring that you're hitting at least average profitability. Okay, so once you've finished that first step, you can move on to the second step. And the second step is paying off bad debt. Bad debt is considered to be unsecured or badly secured. It's personal debt. It's like credit card debt, car loans, student loans, or personal loans. And this type of debt is usually very expensive, meaning that the interest rates are usually pretty high, especially on credit cards. You know, credit cards can be 15, 20, 25% in some cases. So very expensive. So if you have— once you finish Step 1 and you have bad debt like credit card debt, personal loans, student loans, even car loans, the recommendation is to get rid of that as quickly as possible. Now, the reason why some people are curious about the car loan piece because it is secured. Car loans are not that great because the second you drive the vehicle off the lot after you purchase it, especially if it's a new car, it depreciates significantly in value. So it's easy to get underwater on a loan, meaning that the loan balance is higher than what the car is worth. So that's not a good place to be in. So getting rid of a car loan, paying it off as quickly as possible is usually a good strategy. And to dive in a little bit deeper on paying off bad debt, a common technique, and I believe Dave Ramsey talks about this, is called the debt snowball. It's basically listing all your your debt from the smallest debt like this to the largest debt at the bottom. Just put in a list and to put all your available funds, your extra money, toward paying off the smallest debt first and then working your way up until you go all the way down the list and pay off all your debt. And it's a The reason why it's recommended to do that way is because it's psychologically rewarding. You're knocking out your debts step by step and you're getting those small wins up front to keep you motivated to continue to pay off your debt. So that is step 2, paying off your bad debt. Now once you've completed step 2, then you can move to step 3. And step 3 is to save 12 months of cash reserves. 9 months saved on the personal side and then 3 months saved on the business side, meaning that you need to have 9 months of personal expenses in your— in a bank account or somewhere accessible, easily accessible, and 3 months of business expenses saved in a business bank account, something that— somewhere that it can be easily accessible. Now this is a little— if you're familiar with the traditional advice, usually certified financial planners, they recommend somewhere between 3 and 6 months of cash reserves. Now the reason why Mark Kuhler recommends more, and I also recommend more than 3 to 6 months, is that, well, for painting businesses specifically, painting businesses are exposed to a substantial amount of risk. As you know, the painting business has a lot of seasonality, so the summer is usually super busy, and then once the winter comes, people, they're not thinking about painting their house. Weather gets bad, you're not able to paint exteriors, that kind of thing. So you have that that flux throughout the year. So you need to have some cash put away to carry you in the slower months, right? So that's one type of risk. Then you also have the fact that the painting industry is subject to an economic downturn. For example, in 2008, the demand for house painting went down substantially because getting your house painted is sort of a luxury. When folks are going through a difficult economic time, that's a lot of the times the last thing they're thinking about is getting the house painted. So you're exposed to that risk there. You know, if there's a substantial economic downturn, your painting business will likely suffer. So you need to be prepared to that— prepared for that. And the way you can prepare for that is to save money. And save money that is easily accessible. Now, just to dig in a little bit to what I mean by easily accessible is it needs to be like in a bank account. And maybe if it's an emergency fund, maybe save some in a safe in your house if you have a security system. You know, be smart about where you're putting your money. Especially if it's in large amounts. But it needs to be easily accessible. And the reason why is because if something bad happens, usually sometimes you're not able to see it coming, and it's something you can dip into your emergency fund, that cash reserve. So I've seen, you know, money market funds are good because they're similar to a bank account But they usually give a little bit better interest rate. For example, I think Capital One 360 has a money market that does 1.6% interest, which right now interest rates are pretty low for bank accounts. You know, usually something under 1% is normal. So you want to have your money accessible and 9 months of cash reserve for personal, 3 months for business. And what I mean when I say 9 months of cash reserve, basically take your monthly expense, whatever, how much you ever spend in expenses in a 1-month period and multiply that by 9. And that's what you need to save on the personal side and then 3 months on the business side. And I, just to give a few caveats, if you're married and your spouse has a separate job, like they don't work for the painting business, they have a separate job and they earn a substantial amount of money, you might be able to get away with having a lower amount that you need to save on your personal side. It might be, you know, you only need to save 6 months or so. So that is something to keep in mind as well. Okay, so that is step 3, saving up 12 months cash reserves. The last step of the wealth-building strategy is to save for the long term. And now this could mean putting money in the stock market, index funds, or putting money— buying real estate as an investment property. Now it's important to note here, and I've kind of mentioned it throughout, but you shouldn't start on step 4 until you've completed all of the 3 previous steps. Now, the reason why is because you wouldn't want to start putting money in index funds, for example, that only get like an 8% return on average if you have credit card debt that's charging you 20% interest because you're losing money there, right? So it's important to actually— and then the other, just to take the cash reserves, you wouldn't want to put all your money into Let's say you're putting money into tax-deferred retirement accounts, which is a great strategy, especially if you're trying to lower your taxes, which we'll talk about that in another episode. But you don't want to do that if you don't have any cash reserve, if you don't have your cash reserve established. Because if something bad happens, there's a downturn in the economy and business dries up, you're not going to have that, that safety net established for yourself. And you might have to pull that money out of retirement early, which in a lot of— in pretty much all the retirement accounts that have some kind of tax advantage, like IRAs, 401(k)s, SEP IRAs, they all have penalty if you withdraw money early, and that's usually 10%. So you got to be careful with that, and that's why you want to save— you want to save— finish step 3, establish your cash reserves, before moving to step 4. Otherwise you might— something might happen and you're going to have to backtrack, and it's going to be inefficient, and you're going to lose time. It's gonna, it's gonna hurt you. So, but once you're in step 4, you know, invest for the long term. There's a lot of different strategies you can do in step 4. Usually an easy way, and this is in a good book if you're interested in this step 4, it's a book called A Simple Path to Wealth. And I'll put it, I'll put it in the notes here. And the author actually talks about just putting money away in simple index funds. And just so you're tracking what an index fund is, basically it tracks against a group of stocks. So you're not invested in any specific stock, it's a group of stocks. For example, there's a Total Stock Market Index Fund, which basically tracks the entire stock market. So as long as the stock market's going up, it's going up. And I think that's what in The Simple Path to Wealth he actually recommends— the author recommends to invest in that stock, that index fund, for the long term, because in general the stock market in its history has just gone up you know, 8 to 12% every year, so on average. So that is one strategy where you're just putting money away into index funds. So you can— there's a lot of retirement tax-advantaged accounts that you can put this money into, which we'll go a different episode, we'll talk about those. And then you also have— you can start a self-directed IRA or self-directed a retirement account that allows you to invest in real estate. And real estate is a good option for painting business owners because they know how to make a house look good, and they're usually in touch with their local real estate market and sometimes even have relationships with realtors and property managers. So, you know, there's a lot of synergies there for a painting business owner. So if you're in step 4, if you're about to be in step 4 of this wealth-building process, and maybe you have some— you don't— you're not interested in doing the stock market route, or maybe you are, you just want to diversify, real estate would be a good a good route to go. So without digging too much into the different tactics, um, that— this is, um, which we'll do in future podcasts, is go into some of these specific tactics. But this is the overarching strategy for building wealth and those 4 steps. And this strategy is a good general guide, and it helps you to pick out what strategies are to employ at the specific time in your life. Because you look at, okay, what step am I in, in my wealth building process? And, you know, for example, if you're in step 2, then a good tactic to use in step 2 is the debt snowball because you want to pay off bad debt. If you're in step 3, saving cash, that's pretty straightforward. You might go into different tactics of saving cash, you know, where you're going to put it in terms of, is it in a bank account? Are you putting a portion in a safe in your home so you have some, some really liquid cash available. Maybe you're in a hurricane-prone area, you want to have some cash on hand, that kind of, those kind of things. So it's different tactics. If you're in step 4, you have a lot of different tactics on saving for financial freedom that are at your disposal, but you just want to make sure that your tactics align with what step you are in the wealth-building process. And as a final note on this wealth-building strategy, you should be concerned on— at all steps, there's a few things you should be concerned about, or at least things that should be on your radar. One is tax planning, the other is asset protection, and the other is estate planning. Now obviously these three subjects are pretty involved, but what I'll just say is that you should consider looking at each of these subjects throughout your wealth-building process. So you should be planning for taxes at all 3 steps. You should be concerned about asset protection at all 3— all 4 steps of the wealth-building process. And you should be concerned about estate planning for all 4 steps. Now, depending on what step you're at will determine how concerned you'll be. For example, in the first step, optimizing your business, if you're not making a lot of income, you probably won't have to worry about tax planning as much. But once you start getting into the steps 2, 3, 4, tax planning is probably going to play a bigger and bigger role. Same thing with estate planning. Initially, you might just be okay with maybe having a simple will, but when your life becomes more complex, get married, have kids, estate planning might be a might— and as your assets increase, estate planning might become more of a bigger thing to be concerned about. Asset protection, if you have a business, that should be something you definitely want to consider taking a good look at, especially when setting up your business to ensure that you're limited on your liability. But all those topics are definitely something we'll cover in future podcasts. At this point, we'll, we'll leave it at that. And I hope this podcast was useful to you. Check out the show notes for the things, the books I mentioned, and I look forward to speaking with you next time.