Magnifying the Impact of Your Wealth | AWM Insights #168
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Episode Summary
We frequently bring up the three uses of money (Spending, Saving, and Gifting) and how we help our clients expand their wealth and impact through each use.
We implement a thoughtful and proactive approach to tax planning and management that helps our clients keep more dollars in their pockets. This is a year-round job and not one that can be done effectively just before Tax Day.
From there, we help our clients with the money that does stay in their pocket to build an investment portfolio that achieves their goals and priorities, while expanding their wealth.
We also work with our clients to identify the causes that matter most to them and leverage the gains in their portfolios to make charitable gifts while reducing their future tax liabilities.
Our integrated process magnifies the wealth of our clients while protecting and achieving the priorities and goals that matter most to them.
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Episode Highlights:
0:00 Intro
0:40 Maximizing net income to fully capture your human capital and magnify your impact
2:53 How Gifting can reduce your future tax liability
6:05 How to think about Lifestyle spending when it comes to your net wealth
8:32 Investing excess funds to expand your wealth
10:15 How do your stock investments generate passive income?
11:53 Text us!
+ Read the Transcript
Brandon Averill (00:02): All right, everybody. Welcome back to another episode of AWM Insights. We're excited to continue down this path, really talking through the net worth formula, a construct that we use to talk to you guys, clients, quite often about how do we actually just think about wealth and how can it be formulaic? Obviously lots of nuance, lots of detail into the execution side, but hopefully just gives everybody a really good idea of how we think about things.
(00:27): And so we started out very high-level human capital, how do you generate income through your ability to generate income and the different types of that. So your physical capital, your intellectual, your social, and really arriving at this gross income. Okay, these are the dollars that come in the door.
(00:49): And then we spend a little bit of time on tax planning. Why it's so important that that's integrated, that it's part of your team, you're not outsourcing it to some other firm. How important it is to have that relationship so you can do really proactive tax planning throughout the year, not one point in time, and make sure that we're ultimately getting to that really effective net income and maximizing that as much as possible.
(01:15): And so as we turn away from, okay, great, we've minimized taxes, now we've got this net income, what the heck are we going to do about it? And we often refer to this as the cashflow game. And when you really think about it, we've talked to most of you about this listening, but it's all about really a couple uses of money. Four, to be specific. You can either owe money, we talked about one way you owe money with taxes, but you've got debt payments, et cetera. You're going to owe somebody something, so you got to spend it in that way.
(01:53): Two is spend, your lifestyle. We've got to eat, we've got to put shelter, food, clothing, shelter.So how do you spend that money? Occasionally you're going to mix in a chain or something like that, but how do you spend it? How do you save it? This is an important thing obviously, and we'll get into this, is what makes the entire cycle of this net worth formula continue to go.
(02:16): And then share. We think that we're meant to be here to be a blessing to others. Most people that are listening to this have been able to accumulate a good net worth, et cetera. And there's something really gratifying about being able to give back, whatever that looks like to you. So we're going to dig in a little bit more around these four uses of money today. And so really where I'd love to start off is where I just kind of ended there.
(02:44): Justin, I'd love you to hit on how we think about sharing. This is a concept, it's a beautiful thing, but it's also, once it's gone, it's gone, right? And so how do we start to talk to clients about that? What are some of the strategies that we can think about here?
Justin Dyer (03:01): I'm going to focus a little bit more on the tactical or logistical side to your point. I think there's a lot of moving parts, how you share and what you give to or share with, that's unique to each and every person. And we certainly like to have those conversations and really, like you mentioned, encourage that. We're all very, very fortunate here, and sharing that, if you will, with an entity or an institution or community, however you define that, is really, really impactful and is often a big priority.
(03:37): But from a logistical kind of tactical, technical standpoint, there's actually a substantial amount of, let's call it value add or optimization you can do here. It ties in a lot with both the tax conversation that we've had in weeks past, but also the investment conversation.
(03:56): The simplest place to start and think about is no one should ever be giving cash. Especially, I shouldn't say no one, our clients should never be giving cash to charities. It is a way of losing out on a tax benefit, but also minimizing the impact in which you can have on the institution, charity, otherwise that you're trying to influence or give to.
(04:22): The reason being is 99% of the time you're going to have positions in a portfolio that are appreciated, meaning they're sitting at a gain. And essentially what you can do, I think we've touched on this, but I want to reiterate it. It's a really powerful and really simple process to take, is take your highly appreciated securities and donate those. Hopefully you're using a donor-advised fund in which to facilitate that giving or donation. Certainly if you're one of our clients, you likely are, and that's just another efficiency step in this whole process.
(04:59): But by donating appreciated securities, you're getting two benefits right off the gate. You are basically eliminating that gain ever hitting your tax return because you're not selling anything, you're actually donating those securities. There's no sale or capital gain triggered on that. And then you're also getting the deduction for the value of the security.
(05:21): There's some nuance to that, and that's kind of specific to each and every individual, but high level, those are the double whammy benefits. And so that's where the share piece can really dovetail both into the tax equation that we've talked about, but then also the investment side of the ledger as well. And that's the save piece, which you mentioned that this is where the virtuous cycle really takes hold over the long-term. Certainly you should be spending in the present day to meet your priorities, but then you should also be really thoughtful and plan ahead for the future and make sure you're saving enough and then allocating those assets in a way that both meets your present day priorities, but then is thoughtful for your future priorities.
Brandon Averill (06:02): So I think that was really helpful and really hitting on, okay, great. We've found it in our hearts. We found the organizations, the people, the communities, et cetera that we want to support. We're really strategic in how we go about it. So we're squeezing the most juice out of this lemon that we possibly can.
(06:19): And then moving on to the two other areas of money, uses of money, where if you use them in this way, again, they're gone and they're no longer productive for you, and one will be owing. So we talked about owing taxes as I hit on. The other thing is debt. And I think one thing I'd like to hit on here is just how we think about debt. I think a lot of people think about debt in some way of a trade-off. Like, "Hey, I'm going to take out this mortgage and my interest rate is 6%. I can take that money and go invest it for 8%."
(06:53): And one thing we always try to remind clients is what you're doing there is you're switching risks. If those risks were lined up, they would actually offset each other and there's no real reason to do that. It doesn't mean that we never do this, but in general, what we're really trying to identify is, hey, what is the best use of the dollars that you have and are coming in? And let's not play this game around, okay, we're going to take more risk or less risk. Let's deal with what needs to go out. So money potentially goes out for the owing.
(07:24): Then there's spending. We all have to spend money. We all like to spend money to a certain extent. But how much to spend? This is a question we get a lot, and I think at the end of the day, what we're trying to do is certainly maximize the last use of money that I'll have you hit on, which is save.
(07:43): But you also want to make sure that you are reaping the rewards of what you have built. And so from a spending perspective, one rule of thumb if you're a client listening you've certainly have heard us talk about, is 40% of your gross income. That's something that we really start on, especially with our athlete clients and really work off of. It's a great kind of, I won't go too in depth into it, but it's a great ratio to start to essentially build a lifestyle that may be sustainable over long periods of time.
(08:14): But again, you're going to spend money, it's gone. It's no longer a productive asset for you, which leads us to the very last use of money and that's saving. And so I'd love for you to hit on that, Justin. At the very basic level, we get to this and we're able to now throw a good chunk of our income into the save bucket, that 40% of gross income we're saving. What does that mean?
Justin Dyer (08:38): Well, we then take that and invest it is the short answer, but invest it in a really, really thoughtful way. We talk a ton about matching your investments with your priorities. Again, going back to what we think the whole purpose of money is, money is a tool to be used to meet your priorities.
(08:59): We then take the money you're able to save and invest it to match those priorities in a very custom, really detail-oriented way. We want to make sure protective reserves, kind of rainy day fund, if you will, is covered. That's unique to each and every client. Then we can put money at risk into public markets, first and foremost, for longer-term priorities or potentially generational excess reserves. At that point in time, private markets probably is starting to come into the conversation, and we're going to dive into public markets versus private markets. We've spent a lot of time on each one of these topics in the past, but we will tackle these from an investment standpoint, from this multi-generational wealth formula as well.
(09:45): But essentially what's left over, hopefully it is an amount that is giving you a high level of likelihood to carry out long-term success, ideally multi-generational wealth growth. It's put into this really well-defined customized portfolio. And then at the end of it all, it's generating what everyone I think defines in their own way, but it's passive income.
(10:09): An investment portfolio should be thought of because it is 100% passive income. You, clients, anybody with an investment portfolio is managing that in a quote unquote, passive way, and it's generating assets or income for you to use year-in and year-out over the long term, ideally if everything's right sized and well calculated.
(10:35): And like I said, we'll jump into that in great detail and kind of slice and dice public markets, private markets, and then how to think about the passive income virtuous cycle. Because you can take some of this too and go reinvest in your human capital, which is where the repeatability comes into play here.
Brandon Averill (10:51): And I think that's just a great place to leave us off here. And it goes right along with my, I love one of my favorite zingers of all time is passive income. Everybody thinks like, oh, I need a rental real estate property for my passive income. And there's nothing wrong with rental real estate to be clear. We like it. However, there is nothing more passive than putting your money into the public stock market where you do absolutely nothing. There are no plumber calls, et cetera. But that does generate really reliable income over long periods of time.
(11:23): And you hit on this, the whole kind of cycle starts over. We get this passive income, taxed differently, kind of filter all the way back through. And that's the beautiful part of this multi-generational wealth formula is if we can really get this thing spinning, well, it just never stops, and it's a circular motion. So we'll hit on the investment side and how do we actually generate that passive income in the next couple episodes. But hopefully this has been helpful just to talk about very high level, what are those four uses of money? How do we effectively think through those?
(11:57): But until next time, own your wealth, make an impact, and always be a pro.