Income Maximization vs Cash Flow Maximization – Episode 376

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[00:00] This is an episode I’ve been wanting to do for a while because we’re going to be talking about cash flow and we’re going to be talking about salary and income and a bunch of other pieces. So Kim, are you ready to jump into this? Always. Excellent. Well, this came from a Twitter feed that I read. There’s some people in the finance world and venture capitalists and other business owners that I try and glean some knowledge from, and they had the conversation about pre-tax income maximization. So we’re going to unpack what that means in this episode. So here is the conundrum, the two pieces. Most people are focusing on their salary increase. So they’re trying to do whatever they can to increase that salary, whereas if

[00:50] you look at wealthy people, they’re focusing on their net worth and passive income. So let’s unpack it there and then we’re going to get into the details. Sound like a plan? I love it. So for you, this is your world. This is your wheelhouse, your expertise. We need to open up Kim’s brain and hear. Well, it is a really appropriate time to discuss because I’ve got some adult children that are going into their second job. So they’ve graduated from college, they had their first jobs. Now they’re looking at second jobs. And so this came up quite a bit in our recent family vacation, particularly because there are so many opportunities now for non-salaried jobs. In other words, jobs that create 1099 income as opposed to W-2 income and 1099 income

[01:41] or entrepreneurially oriented income, if you will. In other words, you get paid for results. don’t get paid for time and effort tends to be, or at least have the opportunity to be more tax efficient. However, it does cause one to have to really step up their game in terms of record keeping and paying attention to what might be business expenses and learning more about taxation, et cetera, et cetera. So it’s a whole different ball game than just hanging out with the salary. But what I am interested, Spencer, by your first comments is the mindset that is different from the pre-tax income crowd, like, can I just get my salary higher, higher, higher to the, can I provide more value and consequently earn more crowd?

[02:36] And that’s literally just a mindset. And yet it’s such a critical one. You could call it an entrepreneurial mindset that is available to everybody, even if you still are truly W-2 employee with a salary. Is it that they don’t know how to do it or is it complacency? Where does it sit on that scale? Yeah, that’s a good question. And frankly, I think it’s all of the above. There are absolutely people that truly don’t know how. Maybe their entire network of adults have been, you know, their parents and anybody else that they would have hung around, have been the salaried worker or possibly even hourly. And it’s amazing the difference in language and wording that you hear out of that crowd. And so if you’ve never been exposed to a different way of thinking and looking

[03:32] then you just are what you are and you don’t know what you don’t know. I clearly think that there are others that it is complacency. I mean, I know people in their 50s and 60s that are still in that mindset of complacency and I just want a bigger salary and I don’t want to have to do more for it. And I just find that really, really sad. The good news is I don’t think that’s our listener audience for the most part. So this is a good thing. And it is interesting, though, and something that we can really help our children with, you know, all ages of children to be more about value first and less about entitlement. Yeah, absolutely. You know, there’s there’s a point with this where the two sides, we’ve got two islands that are very separated, which is, you know,

[04:24] going out and being entrepreneurial or or if you’re not going to be entrepreneurial, meaning you maybe happen to be in a career that you love, but you’ve saved your money and now you have an opportunity fund that you want to create more cash flow. And the problem is, is that we see all of these people out there with this extra money that they’ve created. And if you’re focusing on your salary, now you bring in an extra dollar, but now you’re going to be taxed at a higher rate and then your buying power and everything else has gone down. Whereas if you’re adding to that investment in your company or adding to the cash flow or the passive income that you’re creating, it’s a machine that is an avalanche of good.

[05:08] So how have you seen people in your life that were previously salary types that then changed their minds over to cash flow, passive income types? Well, I love that shift. And you said it well, because it is a mindset shift first and then come with it, the tools and the habits and the change of asset focus. And believe me, I remember when I used to be very net worth focused, I’ve always been entrepreneurial oriented income wise, but I was still net worth focused because that’s how people in the financial services industry were trained. Everything was measured by that net worth. And so this is a fun and interesting shift to occur that is so critical for us to get our arms around because net worth doesn’t do anything for you.

[06:06] It’s a scorecard if you want it to be, but other than that, it’s a number on a paper. And I find that these two things go together. So to bring the first part of our discussion forward, people that are really, I think overly focused on the taxes often then are also overly focused on that net worth. And again, this is just frankly, in my opinion, old style thinking. I am amazed how many people I talk to that let the tax tail wag the financial dog. Oh, I don’t want to sell that stock because I’ll have to pay taxes. Yes. You made a profit. That’s part of the deal. Oh, I don’t want to earn more income because then I’ll have to pay taxes. Whoa, taxes are a percentage of income. They’re not all of it.

[06:55] Or just the various comments that I’ll hear IRA money. I only don’t want to take it out because then I have to pay taxes on it. That is freeing up the money. And that’s the price that we pay for freeing up the money and getting it to do what we want it to do, not what the financial institutions or the government tell us that we should be having our money do. So all of that’s on the tax side. Yes, it is on the tax side. Now there becomes a certain level of complexity. And I think that’s where a lot of people shut down, meaning once you pass certain income thresholds, then your tax brackets go up. And at that point, we see that some people can pull back. They can be a little bit scared because of the complexities of that.

[07:40] Yes. And this is a perfect point to bring up on tax brackets with your statement because of the idea of marginal tax. And this is a tough one to describe verbally. It’s way easier to show in pictures, but I’ll give it a shot and you can just Google it if you Google tax brackets, you will see that as you earn more income, the brackets, so think bracket one, two, three, four, if you’re going up on a scale, do have a higher percent of the income in that bracket that gets taxed. But so many people think that once they cross over a particular bracket, like from three to four or four to five, that all of their income is then now taxed at that higher bracket. And I don’t know why people think this.

[08:32] I guess probably at some point I used to think this. I don’t remember, but I remember learning about the brackets and getting really clear on the concept of a marginal bracket, which is the last of your brackets and how different that is from, I think what is most commonly spoken of. And so, you know, maybe this is the CPA’s domain and maybe their language has caused so many people to think of this in what is often like an average tax rate. So taking all the brackets and averaging them, that’s not accurate. Average is a really tricky thing. I mean, average is correct for mathematics, but it’s pretty much not correct for anything else. It’s not correct when you average interest rates. It’s not correct when you average tax brackets.

[09:18] It’s not correct when you average hot and cold, you know, you can’t hang out with one foot in boiling water and one foot in ice water and say, well, on average, I’m okay. So anytime you’re looking at anything financially, you have to really watch out for averages and people want to average things. And it’s really dangerous. Absolutely. It’s dangerous. I mean, we’ve seen it happen where in the, in the markets right now, uh, with the crazy corrections, uh, we’ve gone through and we’ve seen the markets be at the highest and we’ve seen them drop and then come back up and we’ve seen people lose fortunes in just a short amount of time. And then we’ve seen people make fortunes in a short amount of time.

[09:58] So it’s, it’s completely overwhelming and confusing. And your stockbroker would say, well, you averaged out. Okay. No, that is not accurate. Exactly. Besides the gray hair or the hair I lost or whatever else that would be is exactly. So if we go back to the premise of the conversation and the question, which was how do we get a person’s mindset thinking in terms of passive income and cashflow, and I think as you mentioned very carefully and clearly listeners of this podcast, they have a lot of things in common, meaning there tend to be very responsible people, they’re prosperous thinkers. There are people that are already thinking of various ways to bring in that passive income and create cashflow.

[10:52] Um, but maybe what they’re needing is a little additional boost, or maybe this is an episode that’s perfect for one of their friends to listen to. So how can we add a little bit more Kim? Well, I think just the, the acknowledgement that the mindset shift is necessary and then what, right? Then you’ve got to go into learning mode. And so if you’re looking at any asset, so net worth, obviously assets minus liabilities, any asset that you have, and of course this is easier if it’s not an IRA asset, or if you’re over 59 and a half, then IRA is fine, but so for the younger crowd, any asset that you have is a lump sum of money, typically might be a piece of real estate, but let’s just go with the easier example.

[11:36] And so then your question might be, instead of looking at this as a lump sum, what could you do to turn it into cashflow? In other words, the asset, instead of being a lump sum is now a quarterly or even monthly payment that people would refer to as mailbox money or call it, you know, automated credit money, since I don’t think people send checks to mailboxes anymore. So if you can turn an asset into cashflow, you have so much more control over that asset, you have so much more flexibility and freedom. Frankly, there’s a potential that there is even tax benefits in the transition of a single asset into a cash flowing asset, not always, it depends, but the control and the flexibility are so much more

[12:26] valuable, plus the shift in mindset. And when we have cashflow, and I really almost prefer the word cashflow as opposed to quote passive income, because I don’t think I’ve actually, eh, that’s not true. I know a couple places where you could put an asset and it would truly, truly generate passive income as in you don’t do a thing, but they are far and few between. My adult son just bought a house and he’s renting out a bunch of it. And it’s going to be fabulous cashflow for him. It is not passive income. He’s worked so hard getting that house ready to be rented. And so that’s a good example of the difference between those two. But I’m in a way we’re splitting hairs maybe, but it’s just acknowledging that you’ve got some skill, take the skill, take your

[13:20] time, take your ability to learn and put those dollars to work for you. Because that is what money is for. Money is not designed to sit in an account and just exist. Inflation, number one is going to destroy it. And so that’s an important reason right there. If there’s nothing else to get assets moving, to get assets creating cashflow so that you’re no longer as subject to the ravages of inflation as assets that are sitting there. And if you look at what banks and brokerage houses and large insurance companies do, none of them are focused on their net worth statements. They’re not trying to build up a big account and just let it sit there. They are absolutely taking that quote asset or that quote net

[14:11] worth and turning it into cashflow. That’s what they’re doing all the time. But then somehow they’re telling us that we should just deposit our money and let it sit. Like something’s wrong with that. We should be doing what the banks do. Not what they say. Absolutely. So true. You mentioned one key thing in there, which is time. And I think that the time is the variable that will depend on what you do with the capital that you have. So right now we’re at historic low rates for loans. So if you want to go buy a business, SBA loans are incredibly low right now. If you want to go buy some real estate, go ahead, go get loans. They’re great. If you are looking to do other things, it’s fantastic. But some people just don’t have the time.

[14:59] They don’t want to do that. So maybe they want something that is more passive. And that’s why, you know, you mentioned often on the podcast about alternative investments, things that aren’t going to require you to go in and take the phone calls to go out and fix the toilet or whatever else that may be on the rental house. So I think that time is that variable. And you mentioned the principles of prosperity, which is, you know, banks aren’t going to sit there. They’re going to actually have flow to their money and they’re going to continue to multiply it. So how would you address the time principle? Well, it’s interesting. Some people have time and that’s truly their asset. And so that’s awesome.

[15:38] Figuring out how you can make the best use of your time, what your gifts are, how you can bring value, which then could potentially earn more income or cashflow. So that’s an aspect of time. Furthermore, we can all figure out how to leverage things. And so if you’re leveraging your time, that’s one aspect of it. You’re leveraging your money. That’s another aspect of it. And I think it’s also really critical to look at our habits of how we spend our time, because I’ll hear from people, oh, you know, I don’t have time to do that. I’ve really been working on not allowing myself to say that because I’m super busy. I could easily say, oh, I don’t have that time or I’m running out of time or whatever, and yet I have realized that that’s not valuable.

[16:28] I need to reclarify my priorities. If I’m choosing not to do something, I need to get clear on why. Why am I procrastinating on this? Should I not be doing it? Can somebody else do it better? Can I trade? Can I pay somebody to do it? Should I just cross it off the list? Because clearly it’s not enough of a priority to do. So these are all things that just for me personally, I’m working on right now to help make sure that I am using the best of my time. Now there’s nothing wrong with free days. There’s nothing wrong with taking a Sunday to chill, but let’s be clear that that’s what we’re doing and love it and go all in and get all the good benefits from taking those free days. This is a Dan Sullivan word, midnight to midnight, no business

[17:15] activity because then we’re rejuvenated and then we’re ready to go back to providing value, which then creates cash flow. Love it. So this episode was the pre-tax income maximization versus passive income maximization. And I think what we’ve ended up with is the cash flow and prosperity maximization principles inside of this turned out pretty well. How fun. Thank you, Spencer. Yes, absolutely. And it was a pleasure. And I think that this is a conversation that listeners are looking to find additional ways in uncertain times. What you have to do is you have to break free from the noise from all of the other pieces and go back to the principles that work. So we appreciate you being a loyal listener on the podcast.

[18:07] If you do have questions, especially questions right now with all the volatility, please send those in to hello at partnersforprosperity.com. Thank you for listening to the Prosperity podcast to take control of your money and have it work for you. Visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.