Podcast Episode 1: Wealth Coordination Account

Hello and welcome to Sound Financial bytes, this is Paul Adams, president and CEO of Sound Financial Group. Looking forward to sharing with you today some ideas that are central to our clients being able to make solid, consistent, financial decisions a concept called the wealth coordination account. Now, before we get into today’s episode, this is episode 1, I wanted to take a minute and just talk to you about what you can do if you choose to to want to engage with our firm. If you haven’t already done so, I would encourage any of you to spend 30 minutes on the phone with one of our advisors.

We have no idea whether or not our process will be right for you right now but we do know that the time you invest in that call will merit the time you put into it. You can go to our website and subscribe to our newsletter. You can get some of the videos off of our website that are me speaking to different financial issues. Look at our events page and come join us in person or join us remotely from wherever you are in the country and you can always order the first 3 chapters of my book off our website or you can order it Sound Financial Advice off of amazon.com.

Let’s get right into it. Today I also have a little bit of what I might call a good life tip and we’re going to … Whenever I give a good life tips they’re going to be broken into is this a narrative of a good life? Is this a good life structure or is this a good life practice and habit? I want to talk to you about is a good life structure that just about anybody could put in place. If you are a Chrome user, when you’re online and you use Chrome, it’s not uncommon for many of us to get so driven to distraction every day that you might have 10 or 15 tabs open at any given time. There is a Chrome extension install now called momentum.

Momentum as you put in your, you have to put in an e-mail and username all that but once installed then your computer it’s just going to ask you what’s your biggest focus for today? As we open tab after tab after tab to do different things, as the internet with all of its information drives us to distraction, after you have put in your biggest focus for the day number 1, it just reminds you what is the focus today? Think about that if you’re home with your family on the weekend and you’re tempted to do work stuff, so what’s your biggest focus for the day? It might have you just start doing that.

Second at work if your biggest focus for the day is developing 2 new client somehow and you type that in then you realize that whatever you’re going to look at doesn’t achieve that end. In the lower right hand corner what it will also do is give you some major to do’s for the day, so this is not a massive productivity tool but just 1 extra structure that I know many people who are using this and loving what it’s doing for them. Again it’s called momentum and you can get it from the Chrome store as a part of your Chrome browser.

Now today we’re going to be talking about building a wealth coordination account as a center piece to your financial life. Now before I talk about why, what a wealth account is, what it does, what it can do for you and your family, let me first talk about why we even need it. I’ve had the unique opportunity to speak to many different groups. When I speak to groups one of the first things people say if I were to ask a huge room full of people, what is it most people sometimes do with their savings? The response that I all too often get would be spend it, we spend it. We save money up then we spend it.

Now, I don’t know why it is that that’s kind of laid into our electric corner or why that’s people’s automatic response to what we do with savings. One of the biggest things we all try to do is we try to set aside money for our long term future by putting it in a savings account and yet there’s this underlying, somewhat unconscious agreement by all of us that what we do periodically with our savings is we spend it. We wanted to set up something new, a different way of thinking about money, we call the wealth coordination account for our clients but there’s one other reason why we want to set up a wealth coordination account and it has to do with how most people get to the amount of money that they can save.

We’ve all heard that what you should do is pay yourself first and yet if you go online and you’re trying to save more money, what most people default to is I need to do a budget. I’ve got to go online, I’m going to download an Excel spreadsheet and there’s going to be a whole bunch of items listed out. How much is gas, how much is my mortgage, how much are clothes for the family and it gets to the end. The very top there is an intrigue for your total income and then you get through all these spending items and at the very bottom there’s this blank that says savings. Savings is a residual number.

When our society we have 2 different problems with savings. One, this underlying and unconscious agreement that what we would do is periodically spend the money that’s in the savings account. We also have this underlying agreement that what we do to arrive at our savings is that it’s a residual number after all of our spending. Now if what those 2 are so closely nested together. I want to give you the definition of that wealth coordination account.

Is that a wealth coordination account is either an existing account you have that you designate specifically for this purpose or a new account that you open up with your bank. Now, wealth coordination account is nothing more than a checking account in it’s structure. It it’s use if you’re understanding of it that makes all the difference in the world. Your wealth coordination account as a checking account whose only purpose is to buy an asset. What’s an asset? Speaking of large groups of people if I asked a whole room of people, what’s the definition of an asset, I’m going to get a whole room full of answers.

Let’s define an asset. An asset is anything that can put money back on your balance sheet, back in your life either today or in the future but the next part is key, without changing your lifestyle. Anything that puts money on your balance sheet now or puts money in your balance sheet in the future without changing your lifestyle. That means certain things that most people accept widely as that’s an asset for me is not actually an asset. For instance if one of the things that you feel like is an asset is right now I have a really nice home. Well that’s not an asset because it’s not going to put money back on your balance sheet somewhere else unless you change your lifestyle.

If you downsize your home, the equity from your home after that is an asset that something could be done with but prior to that it’s not an asset because you’d have to make a change in lifestyle to produce that outcome. An RV not an asset. A secondary residence where you’re counting on the fact that you’ve got your clothes in the closet or your car in the garage is not an asset. I’ll talk about how a vacation home could be an asset in a moment.

The first purpose of this wealth coordination account is it gets set up, it’s this checking account whose only purpose is to buy assets but it’s first purpose is that it becomes a bill that we pay to ourselves every month and it becomes the first line item on that budget. There may also be residual we choose to save but the bottom line is it becomes the first line item. I want you to think about that with me.

Let’s say you have a commitment that you would like to save 2 or 3 thousand dollars a month. You’re going to save 3,000 dollars a month and you just set it aside first then you just make it on what’s left. Now the reason why you’ll know this works is we’ve all had a month where we’ve had bills we didn’t expect. Transmission go out on a car, a car accident and deductibles had to be paid for. We’ve all had that happen but we get all our bills paid anyway. If what would have happened in the beginning of those months is we’ve made our commitment to our asset building not our savings, to our asset building by adding money to our wealth coordination account first thing every month and now that money is sacrosanct and its purpose is to buy assets. That purpose one becomes your first line item.

Let’s talk about purpose too, is acquiring assets. Now we just talked about typical things like a secondary residence or a primary residence doesn’t count as an asset but let’s talk about a vacation home. A vacation home could be an asset. How is a vacation home an asset Paul? A vacation home could be an asset because when we’re not there, we’re perfectly happy to rent it out and let somebody else use it. In fact we could actually sell that home. One, we could produce positive cash flow while we own it and we still use it 2, 3, 4 weeks a year. That could be an asset putting money in our pocket now.

The other way it could put money in our pocket is we could literally sell that property and still use it 3 or 4 weeks a year. We could still use it those 3 or 4 weeks a year because we’re going to write it in a sealed contract before we sell it to somebody else that we want to proprietary use of that home over that period of time. No change in lifestyle. You’re still packing everything up when you go there, you’re packing everything up when you leave. That’s the difference between a secondary residence or why it’s not an asset because you’re used to your clothes in the closet, you’re used to your car in the driveway, okay now.

Other things that could be an asset you might not normally think of. A collectible piece of artwork that’s worth 40,000 dollars is an asset. A collectible car could be an asset as long as it’s not also a part of your lifestyle like you have a collectible Porsche and you’re a member of the Porsche club and you go see these people every month. Well, then it’s part of your lifestyle, no longer an asset.

What kind of assets can we buy with the wealth coordination account, things that qualify as assets. Well we could buy things like the vacation home. We could buy 401k’s stocks, bonds, Certain types of life insurance would qualify as an asset. Your retirement plans, Roth IRAs, all of those things qualify as assets, so it’s a second purpose. First purpose of the wealth account is it becomes your first distribution you make from your monthly income every month.

Second is now it only buys assets but now third is key. Third is that any money we have elsewhere in our life once it has a profit, right any of these assets that have a profit needs to go back to the wealth coordination account. You see it’s all too easy if you did have an asset say you sold a rental property and as you sold the rental property an extra 40,000 dollars drops in your life. It’d be very easy to think about “Well we didn’t need take that vacation, we’ve thought about taking money and getting a new car.” The little bits that 40,000 dollars will get whittled away before it gets reinvested. You see, we call that allowing money to get lost in the sauce of life.

Instead, what we would encourage our clients do is take any of those profits from those assets and put it back in the wealth coordination account first. Like rents from a rental property go back in the wealth coordination account and then get redeployed out to other assets. Now one tip for many of you listening to this podcast you may be in that 2, 3, 4, 5 hundred thousand dollar income range. What I would encourage you to do is to really watch your income every year whether it’s your business and you’re paying yourself W-2 or you work for somebody else, every year once you clear 120,000 dollars a year you get a pay raise because they’re no longer taking social security out of your wages.

Now for business owners that’s a, you’re getting both sides of social security, so it’s about 14% that you get a chance to save and if you are an employee, it’s a little closer to 6, 7% that’s back in your pay every month. Your wealth coordination account can be a great place to catch that. It’s actually one of the best examples we have of where people lose money in the sauce of life and it’s because their pay goes up, they don’t notice it, it just sort of gets spent, but think about year after year after year if that’s 7, 14, 21 thousand dollars a year that’s no longer being withheld in taxes after some portion of the year once you clear 120,000 of income and that’s per earner not households. If you’ve got a single earner, you clear that social security threshold a lot earlier.

Well, it’s been great having you all listen to the podcast today. Really look forward to get a chance to see you possibly at one of our events. Get out there, download our book, engage with one of our advisors. You can reach us at [email protected], that’s [email protected]. You can send me a note there. Reach out to our team, we’ll be sure to get you connected with someone. Hope you have a great rest of your day.

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