232 | Live Money Coaching: Growing Your Net Worth For Financial Freedom

Hilary Hendershott: I always say the CEO’s job is to be a private detective for profit. You’re always looking for what are we doing that leads to profit down the road. So, the first question you want to get answered is, well, what the hell happened between 2022 and 2023 that I was worth a half million dollars loan last year? But I’m worth nothing now because we just need to repeat whatever happened last year or get rid of what got input in 2023 that brought it down.

 

Thomas: Yeah.

 

Hilary Hendershott: Okay, good. What do you want to share with me either how money’s gone for you up to now or what brought you to this conversation, this opportunity?

 

Julie: What brought me here is that I know that we’re going to be okay financially. I don’t know what it’s going to take.

 

Hilary Hendershott: So, from my perspective, in terms of creating, I use the terms financial freedom and retirement synonymously because they’re the same thing. It just means when your income from your investment or business assets can replace your earned income for the rest of your life. Okay. So, the first thing we do as financial planners, we look at how much our spending on an annual basis to live a life that you enjoy, so you have your needs covered. And so, I would imagine some of your wants. Is that correct? Is it all of your wants or some of your wants?

 

Thomas: Some.

 

Julie: Yeah.

 

Hilary Hendershott: Yeah. Okay, good. So, we look at what are you spending now. And then the next question is what kind of a nest egg is it going to take to replace that income should both of you stop working? And no one ever wants – no entrepreneur I know ever wants to say, “I’m going to stop working,” because it’s part of our identity. It’s our creative outlet. It’s how we fulfill on possibilities, right? It’s power. And fair enough. However, behind the scenes for all of our business owner clients, we’re still planning for you to build a nest egg that can replace your earned income because you’re either going to and this is a fair dose of reality, so forgive me, but you’ll either die or you’ll get sick or you’ll get tired, right? I don’t have any business owner clients who are working into their 80s. I have maybe one in her 70s.

 

Most people around the 50s or 60s start going, “You know what? I’d like to do some other sh*t, right? And the mathematics of that are that it takes about $1 million and a diversified investment portfolio to produce approximately $40,000 a year in income in perpetuity. So, forever. We practice what’s called capital preservation. So, we spend just the earnings in the account. But of course, you’ve seen what the stock market is like. The stock market doesn’t have positive earnings every year but you still have to pay your mortgage and your bills and your needs and your wants. So, we need to be able to spend from the account even when it has negative returns. So, that’s why I could say to you, “Oh, we’ll just treat it like a CD and always spend the earnings,” and you’re going to spend 10% one year but then you’re going to owe the account 10% the next year. That’s unacceptable.

 

So, all of the finance people around the world got together and said, “What’s the amount that I can spend from this diversified investment portfolio every year for the rest of my life even when the stock market’s good, when the stock market’s bad?” And the answer is somewhere between 3% and 4%. Okay. So, when I look at your financials, yeah, we do need to start getting serious about moving money from the business assets over to the personal assets. And I would love to see the two of you contributing to like a 401(k). I mean, that would be the best option. That gives you the most opportunity to save. Have you considered doing 401(k)s in your businesses?

 

Julie: I didn’t even know we could.

 

Hilary Hendershott: Did someone tell you, you couldn’t?

 

Julie: I thought it was for big companies.

 

Hilary Hendershott: No, no, no. You can have a 401(k) with two people. Yeah. There you go. Yeah. So, I can give you resources. I mean, I’m not saying do that tomorrow. That’s not going to be your homework this week. We’re getting ahead of ourselves. But I think right now if what you’re saying to me is you have your needs covered in some of your wants, then the question is, how can we create and extract more profits from your businesses in the form of personal income so that you can not only have a few more of your wants fulfilled on but also save for the future? Does that sound like about like in your mind’s eye, is that how that was going to go for you?

 

Julie: Yeah. Well, let me just say it back to make sure I got it. So, right now looking at what would it take to get us to where we’re covering our needs and some of the wants, comfortable, but also planning for when we do decide we’re done working or let’s just say or tired. Let’s just say when we get tired. So, that’s the first thing. So, that way for that, we can continue on in that same lifestyle.

 

Hilary Hendershott: Exactly. Last year’s taxable income was 276,260. I don’t think you saved a significant amount of that, did you? So, from that amount, there’s only three things you can do with personal income. Okay. You can spend it, you can pay taxes, or you can save it. So, when I look at that number and I don’t see that you’re saving in accounts that are like a 401(k), an IRA, a Roth IRA, I don’t know how much you saved last year. Then you either spent that money or you paid taxes on it. Okay, great. Are you paying yourself regularly from the business? Are you on payroll?

 

Thomas: Yeah. Yeah, like 3,000 a week.

 

Hilary Hendershott: Okay. That’s right about 150K a year. Okay. Perfect. Yeah. So, when you run a business, it sounds like you know but you can take money out of the business in two ways. One is payroll, two is profit distributions. Profit distributions avoid the double taxation, the self-employment tax but it’s really neither here nor there. When you run a small to medium-sized business, you could say for conversational purposes the amount of your payroll income plus the profit left in the business, plus your profit distributions that you took that year, that’s the profit in the business. Now, of course, you have to pay yourself a market wage as a CEO or you don’t really have a business. You have a hobby, right? So, I’m glad you’re paying yourself well.

 

So, I think that’s a term a lot of business owners don’t get right is understanding that the profit left in the business at the end of the year, you could consider that your income. Now, if you don’t take it out of the business because you’re going to reinvest it in something for next year, fair enough. But at least mentally account for it as a reinvestment because that’s your, you know, profit is like the magic from running the business. Now, I understand you’re in the middle of a thing right now. I’m not making any prescriptive recommendations. I’m just giving you ways to think about it because otherwise you just have a job that pays you $150,000 a year, right? I mean, in a business, in theory, every dollar you borrow, you should be putting into the business with an expectation of earning an ROI. So, the mindset of a CEO is very different than the mindset of a person who’s growing his or her net worth in a personal ecosystem.

 

Thomas: Yeah.

 

Hilary Hendershott: You know, if you were wage earners, I mean, and many of my clients are wage earners, there is no way, except for asking for a raise to raise the ceiling, financially speaking. And so, it all comes down to it’s a trade-off between how much you spend today versus how much you save for tomorrow. And with business owners, there’s a little bit more magic in it. There’s like more ways we can turn the dials. And then I think the other thing that I see is almost replete with business owners. And I do see it with you too is you’re so focused on growing, developing the business that there is, I don’t want to say lack of focus, but just a distraction from the task of growing your personal net worth. It’s like, “We’re busy, Hilary. We have kids. We run businesses.” Right? Like, didn’t even know she could have a 401(k), right?

 

And not only that, but you probably don’t realize what that could provide for you. Nobody’s really out there talking about how to get rich slowly. We’re all sort of, especially entrepreneurs waiting for the big payoff. But if you’re in a business, painting doesn’t scale. So, the only way to make real money in painting is to own the market like Walmart. The Waltons are some of the richest people on the planet because they eke out a profit margin on every little trinket that gets sold at Walmart. And then that family gets to take their portion of that profit, but they own the market like Walmart owns the space. But like a piece of software, you develop it once and you can sell it an infinite number of times. But that’s not the case with painting, right?

 

And so, the question is, how can we get to be compensated very highly during his working years? Because from an exit perspective, it’s not as likely for you as it is for a software company engineer that there’s the potential of a multiple seven-figure exit.

 

Thomas: Right. Yeah.

 

Hilary Hendershott: Great. So, if it were up to me with you, my question would be, how can I get to $250,000 a year as fast as possible? Because that gives you a meaningful amount of money to be able to spend, pay off your debts, but then really begin to save seriously for the future so that we can get your money compounding. In my world, you’re really young. Most people don’t come for financial advice until their mid-40s. And the first thing I have to do is tell them it’s okay that they didn’t start saving in their 20s. So, you have a long time. You have plenty of time to save and get the exponential growth happening in your wealth. And if you’re going to work as long as he does, then so do you. Because it’s all about time between now and when you need to annuitize that nest egg or turn it into an income-producing asset versus a growth-y asset, a growing asset.

 

A growth-y asset is just something you’ve plunked into the market, into a strategically built portfolio, and you’re just going to let it ride. You’re just going to let it sit there for years and years and years. And then so according to economic mathematics, if your stock market portfolio earns 10% per year, it should double in value every 7.2 years. So, it’ll go from 2 to 4 within 4 to 8, 8 to 16, 16 to 32, 32 to 64. That’s exponential growth. And you can make that 200,000 or whatever like you can add zeros. But that’s the math of exponential growth. So, that’s what we want to get working for you. I definitely have clients who earn more in their investment portfolios in some years, in good years. And we do suffer through bad years, but in good years, they’ll earn more in their investment portfolio than they do from their Silicon Valley executive role.

 

I mean, I’ve got clients here earning just $900,000 a year, and they live in a three-bedroom, one-bathroom house. I mean, I’m not even kidding, right? So, the incomes have to be high but I do like it when they earn more with me than they do from their job. So, my focus would be let’s get you two set up to be doing that as soon as possible. Tell me what this business does and how it makes money.

 

Julie: So, we work with women in eight countries and we create work around the world. So far this year, we’ve created over 12 years of work with a woman, and we work with women here so women here can start their own business. It’s a direct sales model so they can start their own small business and make money, whether it’s a little bit or a lot.

 

Hilary Hendershott: It’s a direct sales model. So, you have levels of people in the US selling products that are being made by women in India, Ecuador, and Guatemala. Okay. And so, it’s like blankets and jewelry?

 

Julie: Yep.

 

Hilary Hendershott: Okay. And how many women are currently selling in the U.S.?

 

Julie: About 30.

 

Hilary Hendershott: How long has the company been in existence?

 

Julie: 12 years.

 

Hilary Hendershott: Oh, 12 years. Okay. So, you’re at like stasis. Are you planning to change anything, expand anything big? Put new energy resources into any particular aspect of the business?

 

Julie: I mean, I’ll answer this way. I don’t know if it will answer your question, but the only thing that we have to do at this point is bring on more salespeople. The fact that we’re only at 30 is a real breakdown, and the people who are on have been around for years. So, the only way to do it now is team build. So, like what efforts we’re putting in is all around team building like recruiting.

 

Hilary Hendershott: Okay. Great. So, what would be really great is if at the next call, we can explore the details of who is selling effectively, where they are, how you found them, their psychographic traits that make them great at selling. In other words, do they live in an urban environment, a suburban environment, a rural environment? How many parties are they doing a week? Why are they so motivated to sell? I mean, there’s lots of things they could sell. Why do they want to sell your thing, right? So, I want to get really honed in on where your best people come from and how we can find more of them.

 

Julie: There’s a company that’s like us that has major connections and partnerships and almost exactly like us, except we’re faith-based that’s like almost the only differentiator, which is sort of a big one but they’re doing something that I have not cracked.

 

Hilary Hendershott: My guess is they’re doing more rah-rah than you are.

 

Julie: They are. And they’re doing a lot of partnerships and PR and all that stuff.

 

Hilary Hendershott: This is the beginnings of your profit-generating activities deck. I will share with you my own PGA deck next time.

 

Julie: What does PGA stand for?

 

Hilary Hendershott: PGA stands for profit–generating activities.

 

Julie: Okay.

 

Hilary Hendershott: And we used to call them key performance indicators. I would recommend that you go listen to Episode 209: The Three-Step Formula For Increasing Profits In Your Business: The Profit Pyramid. So, we need to figure out what your company’s profit pyramid is in order for you to effectively report on it. But of course, in any PGA deck, you’re going to have this standard business numbers. So, I would love to get a deck going like this for you, even if it’s just either a spreadsheet or a Word doc in the beginning because there’s a lot of working pieces to your business. So, I want to know where the women are, who are creating the products, and how they’re getting paid. Who buys the supplies? Who buys the materials? When does that get paid? How do the manufacturing women get paid?

 

If you have direct sales, you probably set teams so you would want graphics of that, showing how much money those people are making. So, we can figure out what’s the top-line revenue and how is it disappearing before it gets into your bank account. More importantly, how can we make more of it show up in a bank account?

 

Julie: Yeah, that’s the most important one.

 

Hilary Hendershott: I don’t have the mindset about direct sales that a lot of people do because I think that it’s so great specifically for single moms to have a product that they can sell, that they don’t have to develop, bring to market, pay for manufacturing, hold inventory, right? It’s like a built-in part-time job with freedom and time freedom and geo freedom, and all that. So, I’m a big fan of it but the models that are working are out there, right? And they all do these huge conferences and getting people together, building relationships.

 

Julie: I hear what you’re saying, I do. Yeah. I mean, also I just want to add like what also we have that I love is like I get to create all of that you said that’s a bonus for it. And I think that can be said about any direct sales company. And just like I love our company because we’re also making a huge difference and we go and we meet the women. We travel together. We’re going to Vietnam together in April. And travel’s my number one passion. And I get to do that with people. And I don’t know if there’s any more for me to be talking about there since that’s just such a natural thing that I want to talk about. I mean, that’s who we usually attract is somewhat adventurous people. But my point is that there’s so much that I love about this business, and I just like really want to make money doing it.

 

Hilary Hendershott: It takes a certain fortitude. It takes an energy, it takes a reason, a why, right? So, that energy has to come from somewhere. I mean, 30 people certainly isn’t appropriate for a big conference, right? I’m just saying there would have to be some substitute for that, some source of energy for the company. And that’s how I think of the VP of Sales. You created your own energy to create the company. So, that energy came from somewhere, right? You mentioned other revenue streams. Do you have time for that?

 

Julie: So, here’s something else I’m proud of is I’ve really gotten so many systems that I used to be working 80 hours a week, and now I probably work 35. So, not like I want to be taking on a whole bunch more but also like, I’m really committed to getting some of the stuff I do not like, like marketing off my plate. I have somebody in place for that. She’s just contract. It’s like over the years it’s going to cost me like 7,200 or something like that, plus my sanity.

 

Hilary Hendershott: I might tell you my hunch is so in a typical corporate structure, you would have the CEO and then the VP of HR, the VP of Sales like operations, technology, all that, right? Would you run the company, you’re all of those things until you officially delegate that role. You don’t need a VP of HR but you do need a VP of Sales. My sense is you’ve gotten too into the VP of Operations role because it doesn’t take risk and because it feels like it has to get done.

 

Julie: Yes.

 

Hilary Hendershott: When you’re done with those tasks, you don’t have the energy to be the VP of Sales.

 

Julie: Yeah. One, it’s scary and it’s risky.

 

Hilary Hendershott: It’s risky. It’s risky and you hear no. You get rejected. You get accepted but you also get rejected. I would bet if instead of hiring a $7,200 marketing person who is not going to communicate your heart to the world, sorry, but they’re just not. And maybe keep the $7,200 marketing person. I mean, I’m not saying I’m against that person. I’m saying rather than delegate marketing, which you cannot do effectively until you have a really well-oiled machine that’s already working. If you spend the first four months of 2024 being this VP of Sales for Monday, Tuesday, and Wednesday and then did the other sh*t on Thursday and Friday, like I just made that up. Maybe it’s the first half of the day or whatever, that I think you would be shocked at the numbers that would show up.

 

So, when you show me your debts, that’s interesting and it definitely is an obstacle. I, as your profits consultant, want to take on with you. It’s just also ancillary to the business. It’s not revenue, sources of revenue, sales, costs. It’s none of those things. It’s just debt that you took on before now, right? So, we got to work on filling the coffers. We need to get lots of money coming in to the top of the business, and then we can tweak the cost and everything. But I mean, that debt has to get paid off. It’s just that if you’re paying $17,000 a month to debt, imagine what your life is going to be like when that debt gets paid off.

 

Julie: Dude, I know. That’s why I’m here.

 

Hilary Hendershott: Does that resonate with you if I say you’re distracted doing VP of Ops stuff?

 

Julie: Yes. That’s completely.

 

Hilary Hendershott: Can you take on an intern and teach that person to do…?

 

Julie: Actually, yes.

 

Hilary Hendershott: Great. That’s awesome. You’re a little bit in bootstrapping mode. It’s going to take us a couple of weeks to figure out there’s a number at which you actually experience more freedom, less anxiety, less sense of failure, less grief and sadness, right, where you get your needs and many much of your wants fulfilled on. But it has to be the bridge because if you keep taking on debt, whether it’s business debt or personal debt, you’re dead in the water. So, it has to be like a bright line. And by the way, I’m glad you used the word era because I didn’t say out loud to you is if we do this work together effectively like so that it actually produces the results you want, this is the beginning of a new era. Like, you won’t think the same about money when this is over, right?

 

But I see you two taking on debt for both personal and business reasons. And if you’re going to grow your net worth, that is no longer an acceptable tool. Because if you put your debt on ice, your FICO score is screwed for a few years. So, you become not debt-worthy but also if you come out of it and just take on more debt, then you just start the cycle over again. So, it is a mindset. It’s a brand new era. Well, we got to figure out the ratios and the things that are turning the dials in your business. You probably already know them. You just don’t know that that’s what you should be looking at, like a decoder ring. So, the first is to put an end to the era of taking on debt. The second is to start the era of wealth-building. So, every dollar not spent is saved.

 

And to become two people who as a couple are committed to building net worth, I would say in order to retire fully, the two of you need at least $3 million earmarked for retirement. And I know that because we’ve already talked about your personal spending. So, I kind of have a sense of what you’re spending. You could make it with 2 million, but let’s start with one, right? Let’s get to 1 million in positive personal net worth. And once you’ve built that skill set of growing and preserving wealth, you’re off to the races. Really, you can do anything as business owners. If you were wage earners, it’d be a little different but as business owners, in my opinion and my experience, you can author your life. You can write your ticket. Because you’re like doing your best to run these businesses but building your personal net worth hasn’t been in the forefront yet. Yeah.

 

So, tomorrow, what I’m asking for right now is more of an energetic shift like a willingness, a commitment, a drive from the two of you. Like, no, we’re not going to do that. We’re going to do what builds our net worth. And once you’re looking with that rudder, they say context is decisive. The whole world will occur differently to you. What do you think?

 

Thomas: I like it. Yeah. I mean, that context has not been at the forefront at all.

 

Hilary Hendershott: Yeah.

 

Thomas: You know, it’s an idea but it wasn’t like anything conscious.

 

Hilary Hendershott: Yeah. And it probably comes from your childhood like either nobody ever told you that that could be a thing or nobody ever said it should be a thing, or you just didn’t see people doing it. Like, it was an inherited way of being about money. And especially when you got into business, it’s like, “Oh my God, I’ll save money when I’m making more,” and unfortunately, that threshold never gets crossed. You have to decide. So I’m glad you like it, that’s a good start.