Painting Your Way to Wealth: A Comprehensive Financial Guide for Professional Painters

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That would be a different podcast . We're talking about a wealth building . So big , big segue from chamomile tea . Why is that so hard for me to say chamomile tea , daniel ?

So I think of wealth is kind of different from being rich , and in our businesses , we want to use our painting business to help us build wealth for the long term . So when I think of wealth , I think of long term . I think of Warren Buffett . Warren Buffett is making millions in his sleep constantly . He's not actively trading his time for money .

When I think of rich , I think of like a doctor just spending all his time working 80 hours a week to get . He might be making a lot of money , hundreds of thousands a year but he just has no balance in his life and he's just running into the ground and as soon as and he might be spending all that money on fancy cars and big houses and all that .

So he might not have any wealth . He might have a high income , but he doesn't have any real wealth . So I think of I think folks should think of their painting business as a way , an opportunity to build wealth in their life , and so we're going to go through those steps of building wealth .

I just got to give a shout out , like I heard , charlie Munger Warren Buffett's you know one of his closest friends and his business partner for many decades passed away this month and he is one of the wealthiest people in America because he took a long term view of things . He didn't spend everything on , you know .

He certainly enjoyed some luxuries , I'm sure , but he had his priorities straight and he knew how to grow his money and that gave him the freedom to live the lifestyle that he wanted . So that's kind of our goal in wealth building is putting our money to work for a purpose and making sure that we have enough of it when we need it .

So step number one to building wealth is optimizing your income . And if you're a business owner which probably are if you're listening to this podcast you're also optimizing the processes in your business . So , basically , getting your business running and optimize to make money . And so here you know . This is the first step , because you want to get this out .

Investments or anything else , because your biggest asset in your life is going to be your income . How much money can you make ? So that needs to be your focus , step number one , and don't move off of this step until you have a decent amount of money coming into your , your life through your income .

Now , how much that is is different for everybody , because everyone has different standards of living , and so one person might be like they don't have enough money coming into the life until they hit $200,000 . Another person might be $50,000 .

It kind of depends on what your goals are and what your standard of living is and also where you live so many different factors . But step number one is optimize your income and your business and your process and your business . Step number two is saving up cash .

12 months is what we recommend , but this could be just a substantial amount of cash basically , so that's something that goes south , that you can basically fall back on that . Step number three is pay off bad personal debt . Step number four is invest for long-term goals .

Well , buy a tank of gas and drive yourself to work and you'll make a couple hundred bucks that day . So yeah , our income is the lifeblood of our wealth building . It's not the only part of it , but if we have an income , we're not getting any of these other steps .

I had a friend recently start asking me about investing for the long term , putting his money in different assets and fancy tax strategies , and he was asking me for advice and he had big goals for what he wanted to make millions and all this stuff but his income was only at like $30,000 a year .

And I was like , well , before you start worrying about how many LLCs to set up and all this stuff and your tax money strategies , you don't have any tax liability , so focus on your income first . Get that up . That should be your main goal . Don't worry about all the fancy stuff . And the richest people in the world .

Most of them are folks that they focused on one thing , like you think of Jeff Bezos . I mean , he built Amazon . He didn't have 15 side hustles , he built one thing . He focused on optimizing that .

So most you know there's some exceptions out there , of course , but for the most part people build their wealth on focusing on one thing optimizing that income in that business and then later on branch out into other things . But yeah , this one is doing the hard work and getting stepped one knocked out before you know . Moving on to the next step .

the needle the most . You know , if we're wasting 15 , 20% of our of our business profit on unnecessary expenses or inefficient processes , that's going to affect our wealth building tremendously down the road .

It's saving 12 months in living expenses in cash .

We don't want a momentary setback to completely derail our wealth building . So this 12 months of cash , this is not an investment . This is an insurance policy to make sure that we can keep our homes , keep our families warm and well fed , regardless of what things life might throw at us .

So so generally , you know as much as I want to put our savings to work and earn interest or earn profit . Your , your , your emergency funds should be liquid . It should be readily available .

Some people like to use high yield savings accounts , maybe a money market account , as long as you can still get to it , but generally , that that's going to be something that we don't want to tie up in like stocks that we can't sell or real estate that we can't liquidate . We want that to be available in case of a rainy day .

You know events but also just might be something where it's not a global thing , maybe that's a local thing . Something happens . You know in your family that you know God forbid , something happens to your spouse or something like that .

You know that might be a situation where you know you need to have some sort of backup or you get seriously injured and you don't have disability insurance . So you know being prepared for those . Either you know economic events or those just personal events that might happen in your life .

Those are usually pretty expensive and they're usually just for buying things that you can't afford . So that that's what I think of when I think of bad personal debt . But I think you know I'm kind of I lean towards on the personal side , like trying not to have any debt . You know the exception may be having a mortgage .

But even if you can avoid that , that would be cool . But you know , especially when we're getting into these higher interest

rates now , you know , having a mortgage I guess a couple years ago or so , locking in like a fixed rate you know 3% or whatever was that that would have been pretty cool . But in this high inflationary environment especially so , that might be an exception . And having like a long fixed , you know , mortgage rates , that might be cool .

But credit cards definitely I would say is not a good debt to have . On the personal side of things it's not really , you know , giving you kind of return on your investment or anything like that , so I would get rid of those for sure .

But we need to make sure that we're making more money than the debt is costing us , and it can be tricky . It can be like I don't take the view that that debt is evil , but I view it as like debt can be debts like electricity . It's very useful , but only if it is applied correctly and safely . It's very easy to get burned with debt .

So I do like what you're saying , daniel , about trying to avoid it if at all possible . Should we talk about , maybe a little bit about like the debt snowball , in case some of us do have some of these bad debts what you know , how the debt snowball method could help us get rid of these bad debts , you know , faster .

So you pay those off first and then move on to the next highest interest rate . The other way that I think Dave Ramsey recommends to basically pay off your lowest balance first .

So you just rank order , like maybe you have a few credit cards that you have debt on and just pick the one that has the lowest balance , pay that one off first and then you get like a psychological win from that and then you go to the next one . So the first course of action you're it's more efficient , you're probably saving more money .

The second course of action is kind of psychologically feels better because you're feels like you're accomplishing more because you're paying off balance is quicker . So I mean , I think either way is good . From my perspective . I think it comes out of the person which way they want to try to tackle that .

towards the next one . Now , when that card's gone , you take that card's minimum payment and your snowball gets bigger and bigger until you're finally until you're finally debt free . But I'm with you . So it's like , as a numbers guy , I love the idea of highest interest rates because I can make out my little spreadsheets , I can calculate the numbers and .

But Dave Ramsey is very , very good at addressing , like , the behavioral side of finances and money . And ultimately we are humans , we are not spreadsheets or computers , and we need to consider what motivates us and keeps us going .

And because if we , if we stop , then it doesn't matter what the interest rates are , because we've kind of fallen off the snowball there . Yeah .

If you work for an employer who offers a 401k or like a simple IRA or something like that , and they offer some kind of a match , that's going to be your starting point . You want to get that match because that match is free money from your employer to you .

If your employer offers a dollar for dollar match up to , say , like 6% , you want to contribute the entire 6% so that you get that dollar for dollar match . That's 100% return on your investment . Even if the investments don't do much , you start off with 100% return . So that's step one get that full match .

But once you max it out , if it's 6% , you're doing all 6% . Jump out of that 401k Because there's much better investment options out there than most company sponsored Safe Harbor 401k plans .

So that's probably the most common scenario that folks listening might have that opportunity .

Your local bank will probably open one for you , or you can go to the internet where you know Fidelity , merrill Lynch , e-trade , ally you name it . If you can't think of a bank , just look at your local sports stadium and that the bank probably has their name on the side of it .

You can go there , but they'll be more than happy to open up a Roth IRA account for you . Now , the reason that I say Roth is because Roth are very special vehicles .

You do not get a tax break in the year that you contribute to a Roth , but what makes Roth special is that as the money grows inside of it , that money grows tax free , and when you eventually retire and go to withdraw that money or , even better yet , pass it on to the next generation , that money will stay tax free .

So for 2024 , the most you can contribute to your Roth is $7,000 , unless you are 50 years old or older . Then you can do 8,000 . And both you and your spouse can have a Roth . So a married couple would be either 14,000 or 16,000 depending on their age , and it's OK if your spouse doesn't work .

You can contribute to their Roth on their behalf with your earned income . So just keep in mind no tax break up front , but the growth on it is exponential . So those are . Those are very powerful retirement accounts .

The next thing we want to talk about is a health savings account and if you're not familiar with health savings accounts , they are one of the most tax lucrative things that has ever come out of Congress . One of the cardinal rules about tax planning is that there's no double dipping .

You can't take the same tax deduction twice unless we're talking about an HSA is one of the only things that allows us to get a tax break when we put money in and the tax break when we take money out . So they work a lot like a Roth does , except I just got done saying that with Ross you get no upfront tax break In HSA you do .

So whatever you contribute to an HSA , you pay no taxes on in the year that you contribute , that money grows inside your HSA and if you pull it out for a legitimate medical expense , that money comes out tax free . So that's your double dip it's pre tax savings and after tax savings .

If you're curious what a qualified medical expense is , the IRS has publication 502 , which goes into a lot of detail , but basically anything that involves doctors visits , eyeglasses , dentists , prescription meds .

There are actually a few things in there too that you might not consider to be typical allopathic medicine , things like acupuncture , chiropractic , that also qualify . So if you have a specific thing in mind , check out IRS publication 502 . But if you pull it out for those types of things , it comes out tax free .

A question I get a lot is well , what if I don't need

the money for medical expenses ? What happens then ? That's kind of the coolest part about an HSA is that if you can build it and then turn 65 and qualify for Medicare , you no longer need an HSA and all that money that's been growing in there comes out to you tax-free .

It's like a backup retirement account that is even more tax-advantaged than your standard retirement accounts . So very lucrative vehicle , but there are some requirements around it .

If something is catastrophic , some sort of catastrophic event , you get hit by a bus , you get cancer , that sort of plan , that sort of health care plan , covers you in those instances . But if you just have a cold or just getting a checkup , you usually have to pay it out of pocket for those types of medical expenses .

So a high-deductible health care plan is usually good for someone working age that doesn't get sick a lot . It just covers you just in case something crazy happens . So you can get that high-deductible health care plan and then that will allow you to get that health savings account with that plan .

If you are a single individual with an HSA , you can contribute $4,150 a year as of 2024 . This year that number goes up a little bit for inflation . If you have a family , then you can contribute $8,300 in 2024 . And that's definitely something you want to take advantage of .

If you're a business owner , it makes it easier because you can control what types of health care is available . But even if you work for somebody else , you may be able to qualify for an HSA through your work provided insurance , assuming that's something they offer .

You can get HSA plans through the Affordable Care Act , so we're recording this towards the end of 2023 . We're in the middle of open enrollment . Look for HSA plans , and they do qualify . They do qualify for premium tax credit , that government subsidy that helps you pay for your health insurance .

Hsa plans qualify for that as well , so they're a nice option , all right . And then finally , once you have fully funded your HSA , now we can talk about going back to the 401k or the IRA . So if you work for somebody else and you're not a business owner , then go back to your company's 401k and fund that as much as you can .

As of 2023 , you can put in $22,500 max . So that's going to give you a lot of ceiling for a lot of retirement savings .

If you're a business owner , you're in luck because now you can start your own 401k through your business and you can decide whether you want it to be a traditional 401k where you get the tax break up front , or if you want to do a Roth 401k , where you pay taxes on the money now but the growth comes out tax free .

And if you really want to take it up to the next level , you can look into what's known as a self-directed 401k . Self-directed 401k for those of us not familiar , is a retirement account where you are the custodian . So actually let me work that you're not the custodian , someone else is the custodian , but you have control over the investments .

Traditionally , if you're doing a 401k with fidelity or a vanguard , you're looking at stocks , mutual funds , bonds the typical stuff . Self-directed 401ks allow you to invest in real estate , gold , silver , digital currencies . You can invest in businesses . You can start a business .

You can get what I tend to call checkbook control , where you can create a company inside of your IRA and then you have control of that company's checkbook . As long as all the profits from whatever your investments or ventures are stay inside that retirement account , they are not taxable . So you can see how a Roth self-directed 401k can be incredibly powerful .

Little bit of an antidote for you . I don't know how many of us have seen that movie , the Social Network . It came out a while ago , but it was all about the creation of Facebook . There is a famous investor by the name of Peter Thiel and he invested $500,000 into Facebook when it was still a brand new thing that was just on the college campuses .

But he invested that money from his Roth IRA . His portfolio is now worth more than $6 billion and because he has done that inside of a Roth , he will never pay taxes on that money . This is the platinum standard , but we can all have dreams . Even if we only do 1% that well in our Roths , we will be sitting pretty .

Real estate is an easy pivot for a lot of them because they are often working in homes and they're pretty familiar . They know real estate agents , so they end up getting into real estate .

So if you use your Roth 401k or your Roth IRA to put the money in there , use that money to purchase a house for rental purposes , all those rental payments will go to you tax free . So that's a pretty cool thing .

Obviously , there's things you got to do to make sure it's set up right and managed correctly , but that can be a pretty powerful wealth building tool .

And there's a lot of things we could talk about here , especially if you have a solo 401K and by solo I mean you're the only employee , so you can just max it out , put $66,000 plus dollars a year in there . But you could also use leverage . I know we just got done talking about good debt and bad debt , but you need to be a little careful .

There's some extra taxes and things that go along with it . But if you're wondering , yes , you can get a loan to buy real estate inside a self-directed retirement account and leverage what you do have into multiple properties .

Then , once you build up that Roth IRA or Roth 401K as much as you can and then try to get it as close as you can to paying for a house right out with the Roth money so that therefore it will be 100% tax free with those rental payments assuming it's a rental property , because if you do finance it , you can finance it , but then the portion that you

finance will have that tax shelter , like the cash you contributed into the Roth does .

But there's steps even above that . I just like saying mega backdoor Roth because it reminds me of like a transformer or something like that , but that might be the cold meds talking . Anyway , lots of great options , but these are this like this is where I feel like most people should start .

When you go to invest , matching out of your company's 401K , fill up the $7,000 into your Roth IRA and your spouses if possible , max out your HSA and then go back to either your company's 401K or , if you have the ability to do , a solo 401K . That's gonna give you so much capacity for savings .

in your painting business and in your life . Well , definitely welcome you to join our Facebook group if you go to Facebook type in Grow your Painting Business and send an invite to join that private Facebook group . We'd love to hear your thoughts or ideas for the next episode .