This is all about the foundation of financial success:
wealth strategy. My key purpose here is to draw a clear,
unmistakable distinction between wealth strategy and what
usually passes for "financial planning."
To be blunt, conventional financial planning is based on a
scarcity mentality. Professional financial planners will
ask you what is the minimum you can retire on. They will
help you list all the expenses you can do without when you
are older. In other words, they will plan for you to retire
poor!
The financial methodology behind this is all about savings,
not investment. The driving idea is what people call "the
miracle of compound interest". The real miracle is that
anyone can retire at all on the basis of compound interest
alone!
True wealth strategy implies that you intend to retire
rich, not poor. That is to say, as the years pass your net
worth should continue to grow and when you stop working it
should be greater than it is now. So should your income.
For most people, that isn't going to happen merely through
saving, nor through compound interest.
There are two keys to a strategy that delivers real wealth:
one is leverage, and the other is the velocity of money. In
this email, I can only introduce these core ideas. You will
find an increasing amount of information about leverage and
velocity of money at Wealth Strategy U.
Meanwhile, here are some key points to start with.
The concept of leverage is widely known, and widely
misunderstood because it is generally equated with "OPM"
— other people's money. Using OPM is just one
important example of leverage. True leverage covers just
about every area of business and life. When you fully
understand and use leverage to build wealth, you will be
making effective use of other people's money, time, ideas,
skills, labor and professional advice.
Leverage is intimately connected to velocity of money,
which is the principle of keeping your cash on the move.
This is the very opposite of the savings mentality, which
allows money to sit in one place accumulating a meager flow
of compound interest. When you apply velocity, you actively
seek new ways to deploy your capital, always with an eye to
leverage.
This portion is about tax, but in a special context.
Usually, people think about taxation separately from their
wealth building activities. Tax is seen simply as a
negative to overcome on the path to financial growth.
This is a costly mistake. Approached correctly, taxation
can be one of your most powerful engines of financial
growth. The right strategy can accelerate the increase of
both your business value and your personal net worth. It is
no exaggeration to say that the right tax methodologies can
literally double your return on investment and your overall
wealth.
How is this possible, while remaining strictly ethical and
within the law? The answer is simple to state, but takes a
tremendous amount of learning and effort to apply. To begin
with, you have to understand the immensely complex US tax
laws inside and out. More than that, you must keep current
with the endless changes that Congress brings to the
Internal Revenue Code. I am talking here about a level of
expertise, and a commitment to continuous learning, that
far exceeds that of the average CPA.
I will give you an example. Recently I was at a convention
where many CPAs were gathered and I asked one of them,
"What percentage of your tax planning has to do with
deferring taxes from the current year to a later year?" I
was expecting the number to be high, but still I was
shocked by the answer: "One hundred percent of the tax
planning we do is deferral." Let me explain what is going
on here. Like most CPAs, that CPA is deferring his clients'
taxes year by year with the expectation that when they
retire, they will be at a lower tax bracket than they are
today. In other words, he is planning for his clients to
retire poor.
With all due respect to my CPA colleagues, that's insane.
Why would anyone want to retire poor? We know from years of
testing our methodologies that you can multiply your net
worth over a few short years, by the correct application of
leverage and the velocity of money (see my last email).
Your tax strategy should be designed for you to retire rich
- in fact, richer than you are today.
What is needed is a strategy that does not defer year by
year, but installs permanent tax savings. This is where
exceptional knowledge of the Internal Revenue Code comes
in. You can only achieve such savings by understanding the
law in all its curious and anomalous details. You have to
figure how the Code is actually designed to help you reduce
taxes. Specifically, this means more than knowing about
individual tax laws; you have to master the ways different
laws interact. It's like a good doctor who knows more than
which drug to match with which disease; he or she also
understands how various drugs affect each other.
In the field of taxation, don't settle for fixing your
annual symptoms...look for the permanent cure!
In this final portion, I would like to introduce some
fundamental principles about business strategy. If you
don't own a company in the conventional sense, with
buildings and employees, please stay with me for a moment.
Even though your "business" may simply be a one-person
professional practice, or a real estate or stock investment
portfolio, the same principles apply.
What does it take to grow a business? The answer may seem
obvious, yet the principles I will share here are very
rarely applied. I know this from my experience counseling
hundreds of business owners over many years.
You must know where you stand now, and where you wish to go.
Simple, huh? Here is what is missing in 99% of privately
owned businesses I have encountered. The company may have
revenue targets (a surprising number don't even have that.)
What is missing is a valuation target. What do you want
your company to be worth to a potential buyer, and by when?
Never mind if you have no intention to sell: valuation is
the best way to "keep score" because valuation places your
business under the toughest possible scrutiny.
Perhaps you are one of the few owners who has a ready
answer to this question. Perhaps you do have an exit
strategy such as a sale or IPO, and you have a figure in
mind for the company's worth, with a future date.
Then let me ask you this: what is the value of your company
today? I'm not asking for your guess here, but for an
actual recent valuation, by an expert. Of course,
valuations are not cheap, and you might ask why you would
invest precious resources on what seems like an academic
exercise. You have no intention to sell right now, so why
spend on a valuation?
Here is the reason. You have a destination in mind - a
certain valuation by a certain date. To reach your
destination, you need to know where you are starting. Only
a present-day valuation will reveal to you the true
distance of the journey, and the ground to be covered.
Once you have conducted a valuation of your business, the
next step is what we call an "evaluation". This is an
analysis of strengths and weaknesses in every area of the
business: products, operations, management, marketing and
finances. To achieve the optimum future valuation, you will
probably need to address issues in all these areas. More
than that, you will need to create a step-by-step plan of
action that carries you through the period from now to your
target date.
The theme of valuation is remarkably rich in the insights
it can open up for any business. In this email, I have
simply introduced the idea and hopefully caught your
interest in the possibilities.
----------------------------------------------------
Tom Wheelwright is not only the founder and CEO of
Provision, but he is the creative force behind Provision
Wealth Strategists. In addition to his management
responsibilities, Tom likes to coach clients on wealth,
business, and tax strategies. Along with his frequent
seminars on such strategies, Tom is an adjunct professor in
the Masters of Tax program at Arizona State University. For
more information, please visit
http://www.provisionwealth.com
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