When Is It Time To Actively Invest Ep 524

Summary Notes


In this insightful discussion, the speaker, a seasoned entrepreneur with multiple business ventures, shares his philosophy on financial management for business owners. He advocates for regularly extracting dividends from a growing business as a form of downside risk protection, given the high probability of business failure. Stressing the importance of opportunity cost, he advises against active investing until one's passive income from investments significantly outweighs active business earnings. Instead, he suggests investing in personal skill development to enhance income potential and placing excess funds into passive, liquid investments like index funds. For employees, he emphasizes the importance of skill acquisition to increase value and income within a company. Ultimately, he recommends focusing on the most effective vehicle for net worth growth, which for most is income generation, until the scale tips towards asset growth.

Summary Notes

Importance of Taking Dividends

  • Speaker A advocates for regularly extracting dividends from a growing business to reduce downside risk.
  • Statistics indicate a high likelihood of business failure within the first five years.
  • The rarity of successful business sales further justifies the strategy of taking dividends.
  • Regularly taking money out of the business is a way to secure financial gains and mitigate risks associated with business volatility.

"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."

This quote emphasizes the speaker's strategy of minimizing financial risk by consistently withdrawing profits from a business as it grows, as opposed to reinvesting all earnings back into the business.

"Whatever it is, 90% or 95% of businesses fail within five years. And so it's much better, in my opinion, to consistently take money out of the business as you're growing it, because there's a very high likelihood that it will not stick around."

The speaker is presenting a rationale for their strategy by citing high business failure rates, suggesting that extracting dividends is a safer approach given the uncertain longevity of most businesses.

When to Start Taking Money Out and Investing

  • Entrepreneurs frequently ask about the right time to withdraw and invest money from their business.
  • The speaker provides frameworks to assist in the decision-making process regarding investments.
  • Entrepreneurs should evaluate the opportunity cost of investment options, considering their current business income and potential investment returns.

"If I'm an entrepreneur and I'm growing my business month over month over month, when should I, one, start taking money out, and two, when should I start actively investing?"

This quote introduces the common questions entrepreneurs have about the timing and strategy for extracting and investing money from their growing businesses.

Evaluating Investment Opportunities and Opportunity Cost

  • Opportunity cost is a key concept in making investment decisions.
  • Speaker A compares potential returns from passive investment, like index funds, with those from active investment.
  • The decision to actively invest should consider the additional effort involved and the potential increase in net worth.

"So one of the big things is I just like to think about this through the lens of opportunity cost, which is if I am currently making, let's say, $500,000 a year from my business in net free cash flow, that's owner earnings, what I get to take out of the business after reinvesting in the growth and competitive advantage that we need to continue to maintain, to grow, right?"

This quote explains how the speaker uses the concept of opportunity cost to evaluate whether money should be taken out of the business or reinvested for growth. It highlights the importance of considering the net earnings from the business when making investment decisions.

"If I were to spend half of my time thinking about actively Investing, because it wil"

Although this quote is incomplete, it suggests that the speaker is considering the time commitment required for active investing and how it might affect the overall opportunity cost of such an investment strategy.

Mind Space and Active Income

  • Dedicating too much time to managing investments can negatively impact active income.
  • An example is given where a person with a million dollars can earn 10% passively.
  • Actively investing could potentially add an extra 5-10% return.
  • However, if one is already earning significantly from a business, focusing on the business might be more beneficial.
  • The opportunity cost of actively investing becomes relevant when wealth is substantial enough that it could outpace active income.

I take up half your mind space, I promise you, because I've done this mistake before. I made this mistake before, then what happens is your active income will fall at a disproportionate rate compared to what your money is making you.

The speaker emphasizes that over-focusing on investments can cause one's active business income to suffer, based on personal experience.

Opportunity Cost of Active Investing

  • The speaker discusses the trade-off between spending time on investments versus growing a business.
  • They highlight that it may not be worth chasing a relatively small increase in investment returns when one could significantly increase their business income.
  • The concept of opportunity cost is central to this discussion, where time spent on one activity is time not spent on another, potentially more lucrative one.

So let's say you've got that million dollars, and you can get 10% a year, which is 100 grand, 100% passable, right? But the additional 50% or $100,000 a year. $50 to $100,000 a year, which would be five to 10% of that million. Right. You could get through Actively InvestiNg.

The speaker provides a numerical example to illustrate the potential returns from passive versus active investing, questioning whether the additional effort in active investing is justified.

Downside Risk Protection

  • Entrepreneurs should regularly extract cash from their business as a form of downside risk protection.
  • This strategy acknowledges the reality that many businesses fail or do not end up being sold for a significant amount.
  • Regularly taking money out of the business and investing it passively can provide security.

It's my belief that a, you should be ripping out cash on a regular basis, because that's downside risk protection. It's not your upside. It is downside protection.

The speaker advocates for regularly taking profits from a business to protect against potential future failures.

Confronting Reality and Business Longevity

  • The speaker stresses the importance of being realistic about the success and longevity of one's business.
  • They share personal experience, having started multiple businesses and currently owning several.
  • The likelihood of a business being both the start and finish of an entrepreneur's career is low.

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

This quote reinforces the idea that entrepreneurs should plan for the high probability of transitioning between different businesses throughout their careers.

Passive Investment Strategy

  • The speaker suggests investing extracted cash into passive vehicles like the S&P 500 or index funds.
  • The aim is to invest in a way that doesn't require ongoing attention.
  • Passive investments can also serve as collateral for loans, which can be used to start new ventures or invest in other opportunities.

And so you take this money out and you put it into the s and P, or you put it into an index because it is passive and you can put it there. And the idea is that you never have to think about it again.

The speaker explains the benefit of passive investments, which is the minimal effort required to manage them once the investment is made.

Cash Reserves and Liquidity

  • Entrepreneurs should maintain cash reserves of about six months to two years of living expenses.
  • Having cash reserves is for peace of mind and not necessarily for investment purposes.
  • Passive investments can be leveraged for loans, which provides liquidity and the ability to invest in other areas without selling assets.

Now, the amount of money that you should keep in cash, in my belief, is you should have about six months, two years worth of normal living that's saved up in cash, and that's just so that you can sleep well at night, and that's it.

The speaker advises on the amount of cash to be kept on hand for personal security and stress reduction.

Time and Energy Allocation for Entrepreneurs

  • The speaker believes entrepreneurs should focus nearly all their time and energy on growing their primary income source.
  • While doing so, they should also be extracting money to invest in low-maintenance, passive income streams.
  • This approach allows entrepreneurs to grow their wealth while minimizing the time spent on managing investments.

And so for entrepreneurs, it is my belief that 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.

The speaker concludes by emphasizing the importance of concentrating on one's business while securing wealth through passive investments.

Passive vs. Active Income

  • Passive income involves earnings derived from ventures where the individual is not actively involved.
  • Real estate flipping is considered active, not passive, due to the hands-on investment of time and effort.
  • Speculative investments, like cryptocurrency, can consume significant attention and potentially harm the primary income source.
  • The focus should be on the opportunity cost of attention, as it can impact net worth growth.

"That's passive. That's truly passive. Not real estate flipping. That's not passive, right. Truly passive."

This quote emphasizes the distinction between truly passive income streams and those that are mistakenly believed to be passive, such as real estate flipping.

"If you're in crypto, right, or you have some 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 speaker warns about the potential negative impact of high-attention speculative investments on one's primary income and overall net worth growth.

Business Growth and Opportunity

  • Business owners with substantial businesses should aim to scale up to even larger financial milestones.
  • Acquisition.com is suggested as a resource for business owners who want to grow their businesses significantly.
  • The opportunity for business owners to consult with a team to help them achieve their growth goals is highlighted.

"If you are a business owner that has a big old business and wants to get to a much bigger business going to 5100 million dollars. Plus, we would love to talk to you."

This quote is an invitation to large-scale business owners to engage with a team that can assist in scaling their businesses to higher financial levels.

Investing in Skills for Income Growth

  • The primary goal for employees should be to increase their income.
  • Initial investments should focus on skill development to enhance one's value in the marketplace.
  • Investing in skills can lead to a significant increase in income over time.
  • The speaker advocates for personal investment in skills and self-improvement as a means to increase earning potential.
  • Self-improvement investments are seen as highly valuable and affordable compared to the potential returns.
  • The concept of an individual being the source of income generation is emphasized, underscoring the importance of self-investment.

"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."

This quote highlights the importance of investing in personal skills as a foundational strategy for income growth.

"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 speaker provides an example of how mastering a single skill, such as selling, can dramatically increase one's income and elevate their financial status.

"At the end of the day, you are the source. You're the source of where all the money comes from."

This quote reinforces the idea that the individual is the primary generator of their income, making self-investment crucial.

Wealth Management and Investment Strategy

  • Once skills have increased income, the focus should shift to investing excess earnings into passive income sources.
  • The strategy involves transitioning from growing income to managing and growing wealth when investable assets' growth exceeds annual income.
  • The speaker outlines a phased approach to financial growth, starting with skill investment and eventually moving towards wealth management.

"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."

This quote advises on what to do with excess income, suggesting investment in passive income streams rather than active ones.

"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 managing wealth and growing wealth, rather than growing income."

The speaker provides a benchmark for when an individual should shift focus from income growth to wealth management, based on the growth of their net worth relative to their annual earnings.

Increase Your Skill Basis

  • Focus on continuous skill development to become more valuable within a company.
  • Tie personal growth to the company's revenue streams.
  • Identify and demonstrate ways to generate more money for the company.

"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 personal development and skill acquisition as a means to increase one's value in a company.

"The way you do that is by tying yourself to revenue streams."

The speaker suggests that employees should align their skill development with activities that directly impact the company's revenue.

Revenue Generation Tactics

  • Explore various methods to contribute to customer success, service, or fulfillment.
  • Focus on retaining customers and increasing customer satisfaction.
  • Track and present metrics that show a direct impact on the company's profits.

"How can I send as many customers as possible? How can I retain these customers? How can I track these metrics and show to the people who are deciding my compensation how I'm directly making the company more money, right."

This quote outlines strategies for employees, particularly in customer-facing roles, to demonstrate their direct contribution to the company's financial success.

Sales and Marketing Approaches

  • In sales or marketing, aim to close more deals and improve lead conversion rates.
  • Work on generating leads independently and managing the pipeline effectively.

"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."

The speaker is addressing employees in sales and marketing, highlighting the importance of their roles in acquiring new customers and generating revenue.

"How can I close twice as many deals? How can I close at a higher percentage?"

This quote encourages sales and marketing professionals to focus on improving their performance metrics to increase their value to the company.

Financial Strategy for Employees

  • Keep living expenses as low as possible.
  • Invest excess income into highly liquid assets.
  • Prioritize income generation until personal net worth allows for a focus on asset growth.

"You should keep your basis for living as low as humanly possible and plow as much of that money as possible into a highly liquid asset."

The speaker advises employees to minimize living expenses and invest in liquid assets, suggesting a financial strategy for long-term wealth accumulation.

Primary Net Worth Increaser

  • Focus on income as the primary means of increasing net worth.
  • Invest in personal skills and income generation before shifting focus to passive investments.

"All of your attention should still be going toward your primary net worth increaser, which will be your income."

This quote highlights that for most people, increasing income is the most effective way to build net worth.

Investment and Income Balance

  • Invest in truly passive assets to allow continued focus on main income generation.
  • Shift attention to growing wealth through assets when they can outpace income growth.

"First invest in you. Increase your skill basis so that you can generate more income."

The speaker is advocating for self-investment as the first step towards financial growth.

"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 benchmark for when to transition from focusing on income to concentrating on asset growth.

Conclusion and Call to Action

  • Summarization of the video's key message on prioritizing income and skill development.
  • Encouragement to subscribe for more valuable content.

"You should, it's my opinion, spend the majority of your time on the vehicle that will increase your net worth the fastest."

The final takeaway from the speaker is to focus on what will most effectively increase one's net worth, which for many is their income.

"Click subscribe subscribe and I'll see you in the next video. Bye."

The speaker concludes with a call to action, inviting viewers to subscribe for future content.

What others are sharing

Go To Library

Want to Deciphr in private?
- It's completely free

Deciphr Now
Footer background
Crossed lines icon
Crossed lines icon
Crossed lines icon
Crossed lines icon
Crossed lines icon
Crossed lines icon
Crossed lines icon

© 2024 Deciphr

Terms and ConditionsPrivacy Policy