When Is It Time To Actively Invest Ep 311

Summary Notes


In this insightful discussion, the host emphasizes the importance of entrepreneurs extracting dividends from their growing businesses to mitigate downside risk, given the high likelihood of business failure. He advises against relying on the slim chances of a future business sale and instead suggests investing in passive income streams, like index funds, to ensure steady, worry-free returns. The host further stresses the paramount importance of investing in oneself to enhance skills and increase income potential, which he argues is the most significant net worth accelerator for most individuals. Additionally, for employees, he recommends focusing on skill development and aligning with company revenue streams to become indispensable and increase earnings. The host concludes by advocating for a strategic shift towards wealth management only when the potential growth from one's investable assets surpasses their income growth.

Summary Notes

Dividend Strategy and Downside Risk

  • Speaker A advocates for entrepreneurs to take dividends out of their growing businesses.
  • The rationale is to decrease downside risk since most businesses fail within five years.
  • Entrepreneurs often overestimate the likelihood of selling their business for profit.
  • Regularly taking money out ensures financial security regardless of business outcomes.

"I'm a big believer in continuing to take dividends out of a business as it continues to grow. And that's because you want to decrease your downside risk."

Speaker A emphasizes the importance of extracting value from a business as it grows to mitigate the risk associated with the high failure rate of businesses.

Entrepreneurial Decision-Making on Investments

  • Entrepreneurs frequently question when to start taking money out and when to invest.
  • Speaker A wants to provide frameworks for easier decision-making regarding investments.
  • The focus is on financial prudence and strategic thinking for entrepreneurs with significant savings.

"These are some of the questions they get most frequently with the entrepreneurs that I speak with, who, depending on where they're at, they might have 500,000, a million, $2 million in the bank, and they're like, I'm not really sure what I should do."

Speaker A outlines the common uncertainties among entrepreneurs regarding the optimal time to extract and invest profits from their business.

Investment Approach and Opportunity Cost

  • Speaker A suggests considering the opportunity cost when deciding on investments.
  • The comparison is between passive investment returns (e.g., index funds) and the potential gains from active investment.
  • Active investing can yield higher returns but requires significant time and attention.

"So if I have $500,000 of net free cash flow that's coming to me, and let's say I've got, I don't know, a million dollars saved up, if I were to passively invest, that I should get about 10% ish a year, right?"

Speaker A discusses the expected returns from passive investments and the importance of comparing these to potential gains from active investment strategies.

Real Terms Net Worth Increase

  • The goal of investment should be to increase net worth in real terms.
  • Active investing might not be worth the time and effort if the net worth increase is marginal compared to passive investing.

"But if I look at it in terms of real terms, just purely on how much my net worth is going to increase, which is the lens that we have to look at this through, which is the opportunity cost."

Speaker A advises evaluating investment decisions based on the actual impact on net worth, considering the opportunity cost of time spent on active investments.

Active vs. Passive Income for Entrepreneurs

  • Active income can decrease disproportionately if attention is shifted from the primary business to active investing.
  • Entrepreneurs should consider opportunity costs when deciding to actively invest.
  • The focus should be on growing the primary income source rather than splitting time for marginal gains from active investments.

"If you're currently making $500,000 a year from your business, do we think it would be reasonable to take half or 25% of your time, time to go chase that when you could probably get your income from 500 to 750,000 in the next year, 500 to a million."

This quote emphasizes the importance of evaluating the opportunity cost of time spent on active investments versus potential growth in one's primary business income.

Risk Management and Wealth Preservation

  • Entrepreneurs should regularly extract cash from their business as a form of downside risk protection.
  • It's important to be optimistic yet realistic about the success and longevity of a business.
  • Diversifying into passive investments like index funds can offer stability and require less active management.

"You should be ripping out cash on a regular basis, because that's downside risk protection."

This quote suggests that regularly taking cash out of the business serves as a safeguard against the potential failure of the business, providing financial security.

The Reality of Business Success and Failure

  • The likelihood of a startup being the final business venture for an entrepreneur is very low.
  • The chances of selling a business for a significant sum are also low.
  • Entrepreneurs must confront these facts and plan their financial strategies accordingly.

"The likelihood that the business that you start is going to be the one that you finish with is extremely, extremely, extremely low."

This quote highlights the statistical improbability of an entrepreneur's initial business being their ultimate and most successful venture.

Investment Strategies for Entrepreneurs

  • Entrepreneurs should prioritize saving and investing in passive vehicles like the S&P 500 or index funds.
  • Keeping six months to two years' worth of living expenses in cash can provide peace of mind.
  • Passive investments can also serve as collateral for loans, which can fund new ventures or investments.

"You take this money out and you put it into the S P, or you put it into an index because it is passive and you can put it there."

The speaker is advocating for the strategy of investing in passive index funds that do not require ongoing management, freeing the entrepreneur to focus on their business.

Liquidity and Access to Capital

  • Passive investments are not entirely illiquid and can be leveraged for loans.
  • Banks may offer loans against passive investments at a certain loan-to-value ratio, providing entrepreneurs with access to capital.

"You can take loans against those assets at 60 or 70% loan to value."

This quote explains that passive investments can be used as collateral for loans, giving entrepreneurs the flexibility to access capital without selling their investments.

Time Allocation and Business Growth

  • Entrepreneurs should invest almost all their time and energy into growing their main income source.
  • Money should be invested in truly passive assets, avoiding time-intensive activities like real estate flipping.

"You should be investing most of your time and energy, or almost 100% of your time and energy, in growing your income, growing the main vehicle you have, but extracting the money and putting it into a low brain vehicle, that's not active, that's passive."

The speaker advises that entrepreneurs should focus their efforts on their primary business while ensuring their investments are passive, to not detract from their main income-generating activities.

Opportunity Cost of Attention

  • Speculative investments can distract from main income sources, slowing net worth growth.
  • The focus should be on the best use of one's attention to maximize financial progress.

speculative stuff that you want to get into, it's probably taking up way more of your attention than it should be, and it's actually going to make your main income suffer, which means your net worth will grow more slowly than it otherwise would.

The quote discusses the negative impact of speculative investments on primary income and overall net worth, emphasizing the importance of managing one's attention to avoid such pitfalls.

Supporting the Podcast

  • The host runs the podcast without ads or sales, relying on audience support for growth.
  • Audience engagement through ratings, reviews, and sharing is crucial for reaching more entrepreneurs.

Real quick, guys, you guys already know that I don't run any ads on this, and I don't sell anything. And so the only ask that I can ever have of you guys is that you help me spread the word so we can help more entrepreneurs make more money, feed their families, make better products, and have better experiences for their employees and customers.

This quote explains the podcast's ad-free and sales-free model, requesting audience support to help spread the podcast's message and benefits to a wider entrepreneurial audience.

So the single thing that I ask you to do is you can just leave a review.

The quote is a direct request to the audience to leave a review, emphasizing the simplicity and importance of this action for podcast support.

It'll take 10 seconds or one type of the thumb. It would mean the absolute world to me. And more importantly, it may change the world for someone else.

The quote highlights the ease of leaving a review and the significant impact it could have, not just for the host but potentially for others who discover the podcast.

Investing in Skills

  • Investing in self-improvement and skills is critical for increasing income potential.
  • Initial investments should focus on enhancing skills to yield higher returns in the marketplace.
  • Developing valuable skills, such as selling, can significantly increase one's earnings.

All right, now I'm going to put this special note out here for employees. If the primary objective of the employee, in my opinion, is to increase how much your income is, and so all of yours, and this goes for entrepreneurs, too, the initial parts of your investment should be growing to increase your skills, because that increases your basis, that increases your basic income that you can continue to yield from the marketplace based on your skill set.

The quote advises both employees and entrepreneurs to prioritize investing in their skills as a means to increase their income, emphasizing the long-term benefits of such an investment in the job market.

And so this is where I think people, they step off over dollars to pick up pennies. If you were saving $500 a month, and there's nothing wrong with that, but I would be actively investing that 500 or 1000 or $2,000 a month in the beginning into making my skills more valuable.

This quote criticizes the short-sightedness of saving small amounts of money instead of investing in skill development, suggesting that the latter can lead to much greater financial gains.

Because I know that if I do that in two years, I might quadruple my income. Because that's the thing, is that your ability to earn is one of the greatest investments.

The quote expresses confidence that investing in skills can lead to a significant increase in income, highlighting the high return on investment that skill development can offer.

That's not just a billionaire saying, it really is. If you develop the skill of selling, which might take you two years, you can go from making $60,000 a year to $250,000 a year or $500,000 a year, which puts you in the top 1% just by earning that one skill.

The quote provides a specific example of how acquiring a skill like selling can dramatically increase one's income, placing them among the top earners.

And so if you can develop that skill, it is worth the investment. And most investments in self improvement are so disproportionately low that it is worth the investment.

This quote reinforces the value of investing in skill development, highlighting the relatively low cost of self-improvement compared to the potential returns.

Even if there are courses that you only get a handful of things from, you are still, as yourself, an asset more valuable.

The quote suggests that any learning or skill acquisition, even if minimal, adds value to oneself as an asset in the marketplace.

And so at the end of the day, you are the source. You're the source of where all the money comes from. So it's like when people don't invest in themselves. It makes no sense to me.

The quote emphasizes the individual's role as the primary source of their income, making the case for self-investment as a logical financial strategy.

I've spent every dollar I possibly could, gaining access, getting mentorship, getting coaching, getting programs, buying courses, buying books and doing that stuff because I'm the source, right?

The speaker shares their personal experience with investing in self-improvement, reinforcing the message that such investments are valuable because the individual is the source of their income.

And if I can improve me as the machine that generates all the flow of income, then the rest of the stuff becomes easy, right? And so, first and foremost, you have to invest in that.

The quote likens the individual to a machine that generates income, arguing that improving oneself simplifies other aspects of financial growth.

After you have an excess of that, then start pulling the dividends out of the business that you have and investing those things that are passive, not active.

The quote advises that once one has sufficiently invested in themselves and has excess income, they should then invest in passive rather than active income streams.

And then at the point where your net worth from your investable assets, what 10% of that net worth growth would be, is in excess of what you make per year, then at that point, it makes sense to start shifting your perspective towards managin

The quote suggests a financial milestone at which one should start managing their net worth growth more actively, specifically when the growth from investable assets exceeds their annual income.

Growing Wealth vs. Growing Income

  • Focus on growing wealth rather than just increasing income.
  • Two main strategies for employees to increase their value in a company.
  • Tying oneself to revenue streams is crucial for demonstrating value.
  • Different approaches for various roles within the company to generate more revenue.

"g wealth and growing wealth, rather than growing income. Now, like I said, two employees. Number one is increase your skill basis, meaning continue to invest in gaining skills so that you could become more valuable in the company."

This quote emphasizes the importance of skill development as a means to become more valuable within a company, which can lead to wealth growth.

"The way you do that is by tying yourself to revenue streams. That means you find ways to generate the company more money, period."

The speaker is suggesting that employees should connect their roles directly to the generation of revenue, making their contribution to the company's financial success clear.

Increasing Skill Basis

  • Invest in acquiring new skills to become more valuable.
  • Show how personal contributions directly increase company revenue.
  • Retention and expansion of customers are key metrics for customer-facing roles.
  • Sales, marketing, and lead generation are focal points for front-end roles.

"Number one is increase your skill basis, meaning continue to invest in gaining skills so that you could become more valuable in the company."

This quote explains that the first employee strategy for increasing value is through skill enhancement.

Tying to Revenue Streams

  • Employees should demonstrate how their work leads to increased revenue.
  • Customer success roles focus on customer retention and satisfaction.
  • Front-end roles focus on sales, marketing, and lead generation.
  • Employees should aim to improve deal closures and lead flow independently.

"If you're in customer success or customer service fulfillment, then it's going to be, how can I send as many customers as possible? How can I retain these customers?"

The speaker is outlining the objectives for customer success roles, which involve increasing and maintaining the customer base to impact revenue.

"If I'm on the front end side. So it's going to be sales, it's going to be marketing, it's going be to acquisition based."

This quote indicates the revenue-generating responsibilities of front-end roles, which include sales and marketing efforts.

Financial Strategy for Employees

  • Keep living expenses low and invest excess income into liquid assets.
  • Focus on increasing primary net worth, which for most is their income.
  • Once net worth growth from assets surpasses income, shift focus to asset growth.
  • Invest in truly passive assets to continue focusing on main income generation.

"And if that is the case and you're rubbing against that cap, you should keep your basis for living as low as humanly possible and plowed as much of that money as possible into a highly liquid asset."

The speaker advises that if an employee hits an income ceiling, they should minimize living expenses and invest heavily in liquid assets.

"And so if I can consolidate this video into a single statement, you should, it's my opinion, spend the majority of your time on the vehicle that will increase your net worth the fastest and for most people, it is going to be increasing their income."

This quote summarizes the video's main message, suggesting that individuals should focus on the method that most rapidly increases their net worth, typically through income growth.

Investment Timing and Strategy

  • Begin by investing in personal skill development for higher income returns.
  • Transition to passive investments when they can outpace income growth.
  • The shift in focus from income to wealth growth should be based on net worth growth exceeding 10% of current income capacity.

"First, invest in you. Increase your skill basis so that you can generate more income. It is the highest return."

The speaker is emphasizing the initial investment should be in oneself, as skill development yields the highest return through increased income.

"And then when 10% of your net worth growth exceeds your income capacity currently. At that point, it makes sense for you to shift your perspective into growing your wealth and rather than your income."

This quote provides a specific metric (10% of net worth growth exceeding current income) as a signal to shift focus from income generation to wealth growth.

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