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EPISODE #003

#3 3 Principles to Build Enduring Wealth

Craig Willett:
I’m so grateful that you would listen to our podcast. The response has been tremendous. However, we hope that you enjoy it enough to share it with your friends. Take time to share it with your friends, because we want to grow organically and we hope that you’re benefiting from listening to our show. In order to continue and manage the growth of our podcast, we welcome Annie Virga, my daughter, to the Biz Sherpa team full time! I’m grateful for the skills that she brings. The website, the resources, and the organization that you see behind our podcast is top-notch because of Annie’s talents. In our first two episodes, we talked about two key principles that will enhance the satisfaction you derive from being a business owner and increased market share profitability for your business. In Episode one, we discussed getting to the point where you’re spending 80% of your time in your business doing what it is that you’re most talented at and what you do best. This will bring energy to you and your employees. You will have learned to delegate the things that drag you down. You will also find that you always have key interactions that directly impact the profitability of your business.

In Episode two, we discussed creating your own emotional reward through your company’s interaction with its customers. As you do, you will achieve an emotional exchange that brings rewards beyond the dollars and cents and gain customers for life. As you consistently and intentionally apply these principles, you will begin to experience greater cash flow and freedoms in and from your business. With that improved satisfaction, you will reach a point at which you can begin to build enduring wealth. Our focus today is on the two most important factors in building enduring wealth. The first is developing the habit of saving 20% of your income. Yes, 20% of your income. The second is investing to achieve a recurring income sufficient for your needs, independent of your business. Some may wonder, “Well, if I’m struggling to make ends meet in my business, how can I add to my savings or even build enduring wealth?” Some may say, “But my business gives me the best return on my money. It’s better than any alternative that I can find.” Have you considered that you may become disabled? How about a premature death? My mother was killed in a car accident at the age of 47.

The economy may change and your industry could face a devastating blow, as we’ve seen during this most recent pandemic. Looking at your business and taking time to assess what risks there are to the viability of your business long term, of course, outside of your own ability to manage your business, right? Of course, we never want to be “outmoded” when it comes to business. So, to assure greater success in business, in Episode four, we’re going to talk about adding value so your ability to manage and provide value to your employees and customers is enhanced. As some of you know, I started my career as a CPA. And just nine months after graduating with my master’s degree and holding a steady job with a local CPA firm, I came home from work one day and shared with Carol the idea that I had to start my own accounting firm. She was supportive of the idea. However, I could feel she was wondering if I was a bit crazy. We had just put down what little savings we had as a down payment on a house we bought, and she was pregnant, soon expecting in several months our first child.

With her support, I began to look for an office. I found an office, and as I began to negotiate the lease, the landlord asked me what color I wanted the walls painted. I told him, “Oh, you’re planning on repainting it?” and he said, “Yes.” I said, “Well, do you mind if I paint it? When I was in college, I started my own house painting business, and I’m fairly skilled at painting,” and used that for my security deposit. He agreed. So my little bit of side work during college helped pay off and allowed me to pocket a little extra cash than I would have had when I started my own business. I knew that Carol had grown up in a home in which the employment and income situation during her upbringing were steady and stable. Her father had started working for a bank and worked his way up to become the president.

As I thought about how to provide stability for her and our soon-to-be firstborn child, I thought of something from my study of the Bible. I was intrigued that a young prisoner named Joseph was wrongfully accused and was the only person in all of Egypt who was able to interpret Pharaoh’s dreams. If you remember your Bible stories, the Pharaoh had dreamed of seven fat kine, or cows, and seven skinny cows. Then he had another dream of seven fat ears of corn and seven dry stocks. In Joseph’s interpretation of the Pharaoh’s dream, he explained that the seven years of corn and the seven fat cows represent seven years of plenty and that the seven dry stocks and the seven lean cows represented seven years of famine to follow the seven years of plenty.

In order to survive the seven lean years, Joseph told the Pharaoh that he should store one fifth of all that was produced in the seven good years as a reserve against the seven lean years. One fifth, right, is 20%. So the principle this story taught me is to save 20% of your income against lean years whenever they come. Because you can’t predict when it will be, the principle is to start building your savings now. This is the first principle toward building enduring wealth: Start early and get in the habit of saving. I saved 20% from the first month of my CPA practice to the time I sold it. It allowed me to eventually buy out my initial partners in the real estate development business when they decided to pursue some other opportunities. Not to speak, I’ve used a lot of it to help settle my obligations when the financial crisis happened.

Now you may say, “But I can’t afford to live on 80% of my income.” The benefit to starting early is you never get used to the additional income. However, the principles need to determine what your needs are. I have a saying that I often share with my friends and family, and that is to be sure you have sufficient for your needs, not your wants. It’s a process to go through your expenses, your toys, your possessions, and determine what is a necessity. In doing this, you can discover some areas in which you can save. We all have extra, recurring subscriptions for games or streaming video content that we don’t need. We have other habits like buying breakfast each morning, or going out to lunch instead of making our own lunch and taking it from home to the office. In fact, one of the fond memories I have is a time when Carol was getting near to the delivery date of our first child and she wanted to quit her job.

We thought we could save some extra money and she could come work for me and I wouldn’t have to have a full-time assistant that I was looking to hire. She would, as she showed up each day for work, bring in with her a well-prepared lunch for the two of us. We saved a lot of money during that time. Eating at home is a good habit as well. 30 years ago, Carol and I lived on $25 per week in groceries. Now, in today’s dollars, that’s likely to be about $75. If you think that sounds good, our daughter—Annie—and her husband are living on no more than $90 every two weeks, or $45 a week. They eat well. She’s writing a book or a blog about finance-friendly recipes for newlyweds. You see, they have four years of dental school ahead of them and perhaps four more for my son-in-law, Joe, to become an oral surgeon.

So the concept of saving 20% is a realistic objective. If I can do it, you can do it. I have a bad habit, you see, of not looking at price tags. Believe me, you can do it. For point of reference, if you don’t believe me, I will share a conversation I had with a retired New York investment banker one day shortly before our first child was born. He said that during his career, he and his wife chose to live on an income that didn’t exceed the salary of a school teacher. You see, he was a New York investment banker. In the good years, they had plenty of excess to set aside. In the bad years on Wall Street, they survived just fine unlike some of his partners who had overextended themselves. While I don’t claim to spend my career living on a teacher’s salary, that conversation reinforced my savings plan concept of setting aside 20%. If it worked in the Bible for the Egyptians, it could work for me and for my family.

The second principle is diversifying your investments so that you don’t fall into the trap of most business owners I had as clients. When I would work on their financial statements, aside from the equity in their home, the major—and sometimes, sole—asset aside from cars and furnishings, was the value of the business. You can understand the potential danger there, right? In the last episode, I shared how I lost 80% of our net worth during the financial crisis. I was able to survive financially because I didn’t totally depend upon our development business as our sole asset. Let me talk a little bit about that. I just explained to you how I left the comfort of a stable job just months before the birth of our first son to start my own CPA firm.

It was a little bit outside of Carol’s comfort zone, I could tell, but little did I know that the big test was coming 10 years later when Carol and I returned to Utah from a trip to Arizona to review the development projects there. And upon landing in Utah, looking out the window of the plane, the sky was gray, the ground was melted, and there was snow and mud everywhere. We had just left 80 degrees of sunshine and green grass and palm trees in Arizona, and Carol remarked, “What are we doing here?” Well, that opened several months of discussion about selling our home in Utah and moving the family to Arizona so I could concentrate my efforts on the development business. I was spread fairly thin by traveling to Washington, D.C. to testify in Congress on tax legislations one day, and then heading to Arizona to review the progress of the developments and then back to Utah to spend time serving my CPA clients.

I was getting to know the bellman in the hotels better than our children, as Carol observed one day. Once we were certain of our decision, we told our parents. Her dad, who I love and respect, told us he thought we were crazy to move to Arizona and give up my CPA practice. Well, at that stage, he was retired and his pension was stable and steady, so I don’t blame him. He looked at this as a rather crazy idea that we had. I could tell that there was still a supportive look in Carol’s face, but it was tense with a hint of fear of the unknown. Her father was wise. After all, we had grown our CPA firm over 12 years to more than 700 small business clients. However, the success of the practice had proven my track record and gave Carol a bit of comfort that I could make this new venture work as well.

In the process of moving, I announced the sale of my practice to devote my full time to my real estate development business that I’d started in Arizona two years prior. When I made that announcement, one of my banker friends who is a great source of referrals to my professional practice said to me, “Craig, a real estate developer is only as good as his next development.” I kind of blew off his comment, confident that I had started two developments already and they were progressing well in Arizona. As with most good comments, they take a while to settle into my sometimes hard head. In fact, it settled in well on the day that we were packing up our home into the moving van. I was standing out in the front yard later in the evening, and a trusted neighbor drove by and he stopped to say his goodbyes and he made a comment to me looking at our house, “Craig, it could take a long time for a house like this to sell.”

You see, I had just put it on the market. I didn’t want to upset my client base before I announced the sale of my practice and completed the tax season that year. We had another home already purchased in Arizona I’d move into. I thanked him for saying his goodbyes and unlike some other well-intentioned free advice I’d been offered without asking for it, I made the walk to the front door and his words began to ring in my ears and it struck a chord of fear. I thought to myself, “I hope the house sells soon. I want to be able to adequately provide for the needs of my family.” As I walked up the stairs, I reviewed in my mind the contemplated discussion Carol and I had had, and not wanting to disappoint her or the family ever by not providing for their needs.

I soon found myself next to my bed on my knees before going to sleep that night and asking for God’s help in selling our home and helping me make the transition and provide a stable and steady income for my family. It wasn’t three days later when we were at the swimming pool in Arizona that my phone rang. It was the realtor asking me how to turn off the alarm. He had been showing the house to a family for four hours. Well, so much for praying. The house sold in a matter of days. I share this story with you because quietly during that walk from the front yard and up the steps and hearing my neighbor say it might take a long time for our house to sell, in my head, rang the words of my banker friend that “a developer is only as good as his next development.”

I made a quiet commitment that night to God and to myself that I would labor hard and that I would replace the best years of income that we had enjoyed as a CPA by a recurring income separate from my developments that would allow me not to be subject to our only prospect of future income being our next development.

The second principle to building enduring wealth, in addition to saving 20%, is to diversify the investments that you have in stocks, bonds, real estate, rental properties, or other investment vehicles you choose into an income number that recurs on a monthly basis that you determine as sufficient for your needs. Then you work to invest outside of your business in that income stream. While determining what is sufficient for your needs is an extensive exercise in and of itself, determining what to invest in to have the income and cash flow you seek is equally important.

So what did I do? Well, it so happened that in my career as a CPA, I was able to witness firsthand the results of good and bad decisions by others. One good decision that I took note of was the clients who lived a good lifestyle all had businesses that were successful, but in addition to the business, they had accumulated rental properties over a number of years that provided supplemental income that made it so that during slow years in the business, they didn’t have to worry about making ends meet, and the value of their real estate investments had also continued to climb throughout their lives. So since this stood out to me above all other investments—keep in mind, I still had cash reserves and the stock and bond portfolio—I chose commercial real estate investments.

As a developer of office buildings for sale (remember my “Own for Less than Rent” concept?), I decided that I would keep 10% of my developed properties as rentals. I figured how much I would have to borrow and how much I could rent them for and what the resulting net cash flow would be. Then I determined how many units I needed to be able to provide my number in recurring cash flow on a monthly basis. Well, I hit that number after about five years in the development business. As the real estate market continued to boom, I more than doubled my number of recurring cash flow. You might say that by keeping the buildings, I did not diversify. On the one hand, you’re correct. I was still concentrating a lot of our net worth in commercial real estate. But the difference was that these were not speculative buildings. They were leased in many cases to national tenants on five to ten year lease terms.

These tenants, despite the bottom dropping out of the real estate market as a result of the financial crisis, continued to pay rent. Some struggled and a few went out of business and defaulted on their leases. Eventually, the recurring cash flow number returned to a little more than 40% greater than my original cashflow number. The principle is to pick a number sufficient for your needs and design a well-thought-out investment plan in addition to your savings plan. The key to your recurring cash flow and enduring wealth plan is finding what you feel comfortable investing in after building cash reserves. You need to commit to regularly investing in building your cash to achieve that number. It could be dividend-paying stocks, bonds, real estate, or a host of other opportunities. There are financial advisors and financial planners who can help you find what you feel comfortable with.

To help you with this process, I have a resource associated with our podcast today. The resources can be found on our website at www.bizsherpa.co under the tab, “Resources.” Let’s take a minute and talk about resources before we move on. Consider this: You might be like me and find that resource exercises are a bit goofy and that may be. I’m not one that physically likes to do those, but I have them on the website as a reminder of the mental exercise we go through during these podcasts to apply what you feel you need to change as you listen to the podcast. It should help you enhance the enjoyment you get from your business and make your business more profitable, allowing you to build your wealth. I shouldn’t admit how I feel about them. Right? A number of our listeners have shared with me quite the opposite. They say the icing on the cake is to have a resource to help them solidify what they learned during the episode.

It’s a tool you can use in the quiet moments of planning your day and reviewing your goals and objectives to be sure you are focused on making the changes that will bring you greater success for the efforts that you expand to build enduring wealth. So today’s resource, “Getting to Your Number.” Step one: Start saving. Don’t look at your expenses yet—only look at your net income from last year—multiply it by 20% and divide that by 12. That’s your monthly savings amount. Step two: Set up a savings account, not linked to your checking account and preferably, at a separate financial institution. Be sure it’s a savings account only. Don’t order checks or a debit card for it. Set up instructions with your business bank to automatically draft 20% each month and put it into that savings account.

Step three: Determine your number. Look to see what is sufficient for your needs. To do that, look at past spending habits; Look at what is truly necessary and streamline your spending so that you can not only save, but that you can find a realistic number you can live comfortably on if that was your only source of income independent from your business. Step number four: While you’re building initial cash reserves during a 6-12 month period by saving 20%, start to research what investments you want to make to generate your recurring income number. For this, you may want to consult a financial planner, a financial advisor, an investment advisor, a CPA, or your attorney. Step number five: Have fun saving. It’s contagious and liberating. Step six: Have fun investing. Knowing you’re taking the time to build a secure source of income is reassuring and the process should bring a deep sense of purpose in securing your future and knowing that you’re building enduring wealth.

These steps take discipline. Some of you may be well-disciplined and you don’t need to have the rigorous steps that I suggest by having automatic transfers. You may be able to do this without setting up such a rigorous step. Once you get into this habit, you will find it fun and fulfilling. Now, if you hit a bad spot in business, and sometimes you need to feed the goose that’s laying the golden egg, so to speak, and plow some money back into the business, be careful to set limits. If the goose dies, don’t let your savings go with it. Remember, I closed my business and I poured a lot of money back into it before I did. Some of it, I think I regretted until today.

Of all the things I would hope that you would take from today’s episode, it is to start today saving 20% of your income. My father was a real estate broker. Imagine that, right? He always said the best time to invest in real estate is today. I say the best time to start setting aside 20% of your income is today. The second thing that I hope that you take from today is that you find the number unique to you for monthly recurring income, then research and find sources that recur in your income, and make the right investments for you and your savings and watch them grow. In my case, this took five years to hit my number. Be careful, there will always be somebody who has more than you do, someone willing to take greater risk than you’re willing to take. Be wise to do what is right for you.

Have fun saving and get started on the road to building enduring wealth today. I am grateful that you have taken time to listen to our podcast. I hope you find the content beneficial to your life and to your business. We want to inspire you to the top. If you’ve liked some of our episodes, please give us an honest rating. And even more importantly, share our podcast with your friends! We want to grow organically, and in order to do so, we rely on your word of mouth through your social network. If you have benefitted in some small way from some thoughts that you’ve had during our podcast, please do me a favor and share that fact with your friends. Also, we are now on YouTube at BizSherpa.co.

This is Craig Willett, the Biz Sherpa.

Speaker 1:
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