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