Feb 8, 2023
Wealth for Life – Own a Business, the Best Asset to Grow Wealth
BRT S04 EP06 (168) 2-5-2023
Things We Learned This Week
• Wealthy use Different Strategies – how they approach investing, business, opportunities, tax strategy
• You’re not going to get rich investing in stock, if you have a $50k / year salary, not saving & investing enough $
• Wealthy own Assets, Business, Real Estate, Stocks
• Tax Strategy needed when you Earn $250K +, more income, more taxes
• Loans – using leverage is the key to Tax Free Income – put more $ money into investments
• Offense / Defense – segment Assets into categories, create income from Assets
Co-Host: Denver Nowicz, President - Wealth For Life
https://wealthforlife.net/brt/
https://twitter.com/denvernowicz
Denver is an advisor with nearly 20 years experience working with clients in investments and insurance, designing retirement plans with a combo of both. He takes us through different strategies for clients to get the best allocations for their money over the long term. It is the Combo Strategy of both Offense and Defense, the synergy of the mix, not ‘All or Nothing’.
Notes
Seg. 1
You get paid for the value you provide, the perceived value Tony Robbins quote.
If you think the wealthy use different strategies than the average person, you are correct.
You’re not going to get rich investing in stocks on a $50,000 a year salary. Not investing enough $. When you earn W-2 income, you pay income taxes. So if you make $50,000 you are in a 22% income tax bracket, and the money you take home is 39,000.
Income tax was created in 1913 with the 16th amendment. Rates have varied over the last hundred plus years being the highest during World War II and getting reformed in 1986.
Here is the link to the current tax brackets - https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets
If you earn $50,000 a year, that breaks down to $1,000 / week, and a little over $4,000 / month. If you want to earn $100,000 a year you need to make $50 / hour, and $2,000 / week, and a little over $8,000 / month.
Do you want to earn $500,000 / year, then you need to make $250 / hour, or $1 million / year you need to make $500 / hour, $20,000 / week, and $83,000 / month.
When you look though at what rich people do, they are often not making their money based on income alone. Often income is just a small portion of it. Most people grow wealth by owning assets, real estate, or building businesses.
If you look at the Forbes list of billionaires someone like Jeff Bezos of Amazon who is worth $170 billion, does not pay himself an income of $1 billion a year.
https://en.wikipedia.org/wiki/List_of_wealthiest_Americans_by_net_worth
He also does not have $170 billion sitting in a bank account. Jeff Bezos salary was usually under $2 million a year, and the majority of his wealth is based on the valuation of his Amazon stock.
Currently he owns about 10% of Amazon, with a valuation of about $100 billion. Jeff Bezos net worth just like the stock price of Amazon could fluctuate based on the valuation.
Jeff Bezos owns multiple assets like the Amazon stock, real estate, etc. What happens is wealthy people buy assets at one valuation, and then over time are able to grow the asset and make more income off of it, while it appreciates.
When they want to get money, typically they will use loans vs not paying themselves a high salary. If you get a loan for $1 billion with an interest rate of 3%, cost you $30 million.
Guy like Jeff Bezos that’s .01% of his wealth. If he were to pay himself 1 billion in a salary, he would then have $370 million in taxes to pay. 3% loan at $30 mil is a lot less than a 37% tax rate - makes a difference of $340 million. The collateral for that loan is his Amazon stock. This is how the wealthy are able to operate without paying a lot of income taxes.
If someone owns a real estate property valued at millions. They can do a cash-out refinance and take the money tax free. Then the real estate property pays back the loan through rental income from the tenants. Study how the wealthy and billionaires operate to learn these tips and strategies.
ProPublica article - https://www.propublica.org/article/billionaires-tax-avoidance-techniques-irs-files
Market Cap of Amazon and large companies
https://en.wikipedia.org/wiki/List_of_public_corporations_by_market_capitalization
Seg. 2
People working in their 30s 40s or 50s are in the accumulation phase. They are investing in stocks and hoping everything just goes up in value. Stocks are considered appreciating assets that go up in value over time, but typically do not give off cash or income in the interim.
You want to look to accumulate harvesting assets, so you can take profits along the way. Take money off the table. Harvesting assets like real estate or businesses or an active strategy where you have to do work along the way.
Owning stocks is a passive strategy, you do not really control the outcome. 99% of financial advice typically is to buy stocks. Stocks are easily accessible, liquid and you can buy and sell them with no problem.
The top 1%, the wealthy, typically own businesses and real estate. Stocks are a paper asset that you want to buy low and sell high. To build financial stability you need income streams, you need assets that go up, and you need to have a tax strategy.
Cash is an asset that typically is depreciating overtime. But there is power of having cash on hand so you can take advantage of buying opportunities. You have to be tactical and how you use cash.
Instead of just keeping the cash in the bank, you could buy treasury is at a 4% return which are easy to sell if you need to get money for a buying opportunity. This is a bond strategy with liquidity.
It is more work to have active investing strategies. Important to have a team of advisers helping. There’s an irony in a fiduciary standard, as the industry is biased to stocks and this is not the only way to build wealth.
Assets Show:
Seg. 3
Businesses are usually the largest asset class of the wealthy. Options are starting your own business, buying a turnkey type business, like a franchise, or buying an established business thru acquisition.
Businesses might be physical like a traditional brick and mortar store or a digital businesses which are online businesses.
When you’re earning a high W-2 income you are punished by the tax code. If you want to make more money and grow your business you improve the systems and then invest in different types of assets.
Digital businesses are very good because they have low overhead, low expenses. Examples would be an educational course, consulting or a mastermind group.
Once you start earning over $500K to $1 mil+ , you need to be thinking very carefully about tax strategies. You want to figure out ways to redirect capital from the IRS to better assets that assist you.
Examples could be charities, or real estate. Active tax strategies, find good accountants and asset protection attorneys who can create a proactive strategy.
If you own a business that can make an extra $50,000 a year in income, that is the equivalent of owning a $1 million stock portfolio giving off 5% a year in dividends or owning a $1 million property giving 5% in rental income.
To have a good tax protection do you want to get away from W-2 income, create businesses with write offs with LLCs and expenses, and also mix in real estate.
Seg. 4
Offense /Defense - segment assets into offense and defensive structures. Most people go all offense, but they need defense to create present or future cash flow. Also tax protection as part of defense.
You want to own non-correlated assets, assets that move differently from each other, this helps depending on what faze of a market we are in. Use financial leverage to create more wealth.
The example would be buy a $500,000 house, but you put 10% down or $50,000 and then borrow $450K. You put $50,000 down to control a $500,000 asset. This is financial leverage. Typically a mortgage is leverage of about 4 to 1.
An example is you make $100K a year and you can get a mortgage for $400,000. For people with incomes over $200,000, they can get exposure to better strategies.
Loans are the key to tax free income. You want to use leverage and arbitrage to build wealth. Get tax free money from loans to for income. The arbitrage example is like a bank - you borrow at 3% but earn a return at 6%, and get a 3% arbitrage for using other peoples money, a.k.a. loans.
Denver‘s best strategy is the 3 to 1 Tax-free Matching program. It is created under the umbrella of insurance, has low costs and fees of 1% a year.
Using leverage, it can create 6 to 10x more income vs saving on your own. Can also give you 6 to 7 figure savings in taxes. An example is if someone saves $20,000 a year in taxes, multiplied by 20 years = $400,000. This is an efficient way to use money.
Most people chase ROI with their own money, buying things like stocks and adding a lot of risk. The wealthy operate differently. They put money in a safer and larger asset using leverage, or other peoples money.
They chase a safe return with a larger amount of money. Then the money grows larger and faster. 3 to 1 Tax-free Matching program has no loan docs, no collateral, and no signature guarantee.
Client puts in money over 5 years to fund and then the bank matches 3 to 1. So if a client puts in $100,000 a year or $500K over 5 years, the bank that matches $1.5 million. Now you have a total of a $2 million asset growing safely for the next 15 years.
If you always chase rate of return, you’re on a hamster wheel and it’s difficult to grow wealth. You need to have defensive assets. You want to grow and keep wealth.
Think about principal protection, not losing money. Banks like this strategy and will lend on it because insurance is safe and conservative. Banks already put a lot of money in insurance every year
This also uses option strategies so it works in up and down markets. It locks in gains on good years, and stays flat in bed years. This is another way to not go backwards, and keep your capital. By using options the money is not directly in the market, just linked to it.
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