The Three (3) Pillars of Financial Health

This is all about the foundation of financial success: wealth strategy. My key purpose here is to draw a clear, unmistakable distinction between wealth strategy and what usually passes for "financial planning."

To be blunt, conventional financial planning is based on a scarcity mentality. Professional financial planners will ask you what is the minimum you can retire on. They will help you list all the expenses you can do without when you are older. In other words, they will plan for you to retire poor!

The financial methodology behind this is all about savings, not investment. The driving idea is what people call "the miracle of compound interest". The real miracle is that anyone can retire at all on the basis of compound interest alone!

True wealth strategy implies that you intend to retire rich, not poor. That is to say, as the years pass your net worth should continue to grow and when you stop working it should be greater than it is now. So should your income. For most people, that isn't going to happen merely through saving, nor through compound interest.

There are two keys to a strategy that delivers real wealth: one is leverage, and the other is the velocity of money. In this email, I can only introduce these core ideas. You will find an increasing amount of information about leverage and velocity of money at Wealth Strategy U.

Meanwhile, here are some key points to start with.

The concept of leverage is widely known, and widely misunderstood because it is generally equated with "OPM" — other people's money. Using OPM is just one important example of leverage. True leverage covers just about every area of business and life. When you fully understand and use leverage to build wealth, you will be making effective use of other people's money, time, ideas, skills, labor and professional advice.

Leverage is intimately connected to velocity of money, which is the principle of keeping your cash on the move. This is the very opposite of the savings mentality, which allows money to sit in one place accumulating a meager flow of compound interest. When you apply velocity, you actively seek new ways to deploy your capital, always with an eye to leverage.

This portion is about tax, but in a special context. Usually, people think about taxation separately from their wealth building activities. Tax is seen simply as a negative to overcome on the path to financial growth.

This is a costly mistake. Approached correctly, taxation can be one of your most powerful engines of financial growth. The right strategy can accelerate the increase of both your business value and your personal net worth. It is no exaggeration to say that the right tax methodologies can literally double your return on investment and your overall wealth.

How is this possible, while remaining strictly ethical and within the law? The answer is simple to state, but takes a tremendous amount of learning and effort to apply. To begin with, you have to understand the immensely complex US tax laws inside and out. More than that, you must keep current with the endless changes that Congress brings to the Internal Revenue Code. I am talking here about a level of expertise, and a commitment to continuous learning, that far exceeds that of the average CPA.

I will give you an example. Recently I was at a convention where many CPAs were gathered and I asked one of them, "What percentage of your tax planning has to do with deferring taxes from the current year to a later year?" I was expecting the number to be high, but still I was shocked by the answer: "One hundred percent of the tax planning we do is deferral." Let me explain what is going on here. Like most CPAs, that CPA is deferring his clients' taxes year by year with the expectation that when they retire, they will be at a lower tax bracket than they are today. In other words, he is planning for his clients to retire poor.

With all due respect to my CPA colleagues, that's insane. Why would anyone want to retire poor? We know from years of testing our methodologies that you can multiply your net worth over a few short years, by the correct application of leverage and the velocity of money (see my last email). Your tax strategy should be designed for you to retire rich - in fact, richer than you are today.

What is needed is a strategy that does not defer year by year, but installs permanent tax savings. This is where exceptional knowledge of the Internal Revenue Code comes in. You can only achieve such savings by understanding the law in all its curious and anomalous details. You have to figure how the Code is actually designed to help you reduce taxes. Specifically, this means more than knowing about individual tax laws; you have to master the ways different laws interact. It's like a good doctor who knows more than which drug to match with which disease; he or she also understands how various drugs affect each other.

In the field of taxation, don't settle for fixing your annual symptoms...look for the permanent cure!

In this final portion, I would like to introduce some fundamental principles about business strategy. If you don't own a company in the conventional sense, with buildings and employees, please stay with me for a moment. Even though your "business" may simply be a one-person professional practice, or a real estate or stock investment portfolio, the same principles apply.

What does it take to grow a business? The answer may seem obvious, yet the principles I will share here are very rarely applied. I know this from my experience counseling hundreds of business owners over many years.

You must know where you stand now, and where you wish to go.

Simple, huh? Here is what is missing in 99% of privately owned businesses I have encountered. The company may have revenue targets (a surprising number don't even have that.) What is missing is a valuation target. What do you want your company to be worth to a potential buyer, and by when? Never mind if you have no intention to sell: valuation is the best way to "keep score" because valuation places your business under the toughest possible scrutiny.

Perhaps you are one of the few owners who has a ready answer to this question. Perhaps you do have an exit strategy such as a sale or IPO, and you have a figure in mind for the company's worth, with a future date.

Then let me ask you this: what is the value of your company today? I'm not asking for your guess here, but for an actual recent valuation, by an expert. Of course, valuations are not cheap, and you might ask why you would invest precious resources on what seems like an academic exercise. You have no intention to sell right now, so why spend on a valuation?

Here is the reason. You have a destination in mind - a certain valuation by a certain date. To reach your destination, you need to know where you are starting. Only a present-day valuation will reveal to you the true distance of the journey, and the ground to be covered.

Once you have conducted a valuation of your business, the next step is what we call an "evaluation". This is an analysis of strengths and weaknesses in every area of the business: products, operations, management, marketing and finances. To achieve the optimum future valuation, you will probably need to address issues in all these areas. More than that, you will need to create a step-by-step plan of action that carries you through the period from now to your target date.

The theme of valuation is remarkably rich in the insights it can open up for any business. In this email, I have simply introduced the idea and hopefully caught your interest in the possibilities.

If you interested in learning how to increase your cashflow in your real estate, I am presenting a FREE! teleseminar on Monday April 21st titled "How to Uncover the Hidden Cash Flow in Your Real Estate". Registration is free and more information can be found on our website under the seminars tab.

Author: Tom Wheelwright

Tom Wheelwright is not only the founder and CEO of Provision, but he is the creative force behind Provision Wealth Strategists. In addition to his management responsibilities, Tom likes to coach clients on wealth, business, and tax strategies. Along with his frequent seminars on such strategies, Tom is an adjunct professor in the Masters of Tax program at Arizona State University. For more information, please visit http://www.provisionwealth.com

Keywords : Financial Planning; Wealth Strategists, Tax, CPA

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