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Did you know that cash flow can be as important, and possibly even more important, than your investment returns?
On this episode of the Science of Economic Freedom, “Why Cash Flow Matters,” I speak with Al Zdenek, author of the best-selling book, “Master Your Cash Flow: The Key To Grow And Retain Wealth.”
Al is a CPA and Personal Financial Specialist (PFS), and he’s the founder, president & CEO of Traust Sollus, a firm he started over 30 years ago. Don and his firm now have joined the Mercer Advisors family, and that means we get to directly benefit from his knowledge about the importance of cash flow to your overall investment picture.
According to Al, “Cash flow is king,” and that’s because if you have enough cash flow you can live the life you want and provide for you and your loved ones in the future.
Rather than concentrating your financial focus simply on portfolio returns, Al reminds us of the importance of maximizing your cash flow, and he offers some interesting insights on how to do just that.
Some of the topics discussed in this episode include:
Doug: Have you thought about your cash flow lately? On this episode of the Science of Economic Freedom, why cash flow matters as much as your investment returns. Joining me today is Al Zdenek, author of the Amazon best-selling book Master Your Cash Flow.
Announcer: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment perspectives carefully before making any changes to your investment portfolio..
This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc is the parent company of Mercer Global Advisors Inc and is not involved with investment services.
Doug: Welcome to The Science of Economic Freedom. I’m your host Doug Fabian. This podcast is all about helping you achieve your financial dreams. We call that economic freedom. This program is about your journey to achieve economic freedom for yourself and your loved ones. Today we want to help you identify your next step on that journey.
This is episode 32, Why Cash Flow Matters. Joining me today is Al Zdenek, author of the Amazon best-selling book Master Your Cash Flow: The Key to Grow and Retain Your Wealth. Al is a certified public accountant and personal financial specialist. He is the founder, president, and CEO of Traust Sollus Wealth Management, one of the most recent firms to join Mercer Advisors. Here’s my interview with Al Zdenek.
Al, welcome to the podcast.
Al: Dough, delighted to be here. And oh, by the way, let me congratulate you on your recent nomination for the Science of Economic Freedom by the wealthmanagement.com organization. It’s a great honor, considering the number of nominations that were submitted.
Doug: Well thank you. Thank you very much, Al. And just for our audience, I’m in Santa Barbara, California, Al is in New York City. And so it is great to have you with us today, Al.
Al: Well, background on me, I’m a CPA and a personal financial specialist. And over 30 years ago I started a CPA firm that focused on sophisticated tax plan filing for high net worth individuals, families, business owners. Well, our clients loved our tax services. They started asking us questions that we couldn’t answer, like: How much insurance do I need? Can I improve the investment returns on my portfolio? Am I saving enough?
And we found out we were not equipped to answer those questions. And when we couldn’t help them, we saw that sometimes they made very poor decisions and sometimes disastrous ones. So we decided that we could make more of an impact on their lives if we could answer these questions, empower them to live the life they want to now, and secure their economic freedom in the future.
So I became a personal financial specialist. We shifted the firm and became a wealth management company, Traust Sollus.
Doug: Al, what motivated you to write your book, Master Your Cash Flow?
Al: Well, quite frankly, I’m the poster child for not being the master of your cash flow many years ago. About the same time we were looking to help clients make better financial decisions, I was experiencing some tough financial issues myself. In fact, I made personally so many poor financial choices I was on the verge of bankruptcy over 30 years ago. And here I am a CPA.
I still remember when I had to lay off a third of my staff, my company. Eight people in one day.
Something that haunts me to this day. Then I had to go home and tell my wife that the Victorian house we had, that she lovingly restored, and in which we raised our sons, that by the time I was done getting through this, I’m not so sure we could hold onto it.
But then I was very lucky. A CPA financial planner and some other mentors and people basically mentored me and helped me see that the key to my survival and recovery was becoming a master of my cash flow. Looking at how to make better financial decisions. And due to their generosity, I not only recovered but became financially independent by age 48.
By the way, got to keep our house. And I wanted to return that generosity and how they helped me to others that were struggling like I was. I wanted everyone to be empowered to live the life they want to now, and reach their financial goals sooner rather than later.
And the key to this is always making the best cash flow decisions. You do that, and avoid poor, disastrous ones, you become a master of your cash flow, achieve the economic freedom in the time frame you want, and stay that way.
Doug: Very, very powerful story, Al. Thank you. Thank you for sharing that. A very basic question here, Al. Why does cash flow matter?
Al: Well, as you may have heard, cash flow is king. And well it is. If you have enough cash flow, you can live the life you want currently and provide for yourself and loved ones in the future. And most people think the key to growing wealth is to concentrate on having better investment returns, picking the best stocks and managers. And having a well-structured portfolio is important.
But how you grow true wealth is finding cash flow from everyday decisions and not wasting it. From maximizing the cash flow from your job, where you work, or your business. This is how you achieve economic freedom. If you don’t have adequate cash flow, you will not be able to live the life you want now, you’ll have to work longer and harder in life, and you still may not achieve the financial freedom or economic freedom you want.
Doug: Al, expand on that a little bit more. Because so many times people are so hung up on their investment portfolio and their returns, and to play it back to you from what you’re saying is your cash flow is just as, or maybe even more important, than your portfolio returns.
Al: Well, Doug, as you in your firm as a personal financial specialist and wealth advisor, you’ve probably seen this too. Most people come in to you and what do they say? You know, my portfolio, I’m not getting what the returns I want. And they always talk about their investments first.
But I always ask them, I start asking, well, what is your cash flow needs now? What are you saving? Are you filling up your 401(k)’s? Are you achieving – if you have a business – are you achieving what you want there? Because if you’re not going to be able to have excess cash flow there, and put it away, there’s nothing to earn money off of. You know, you can earn a return of 5% or 10% a year, but 5% or 10% of nothing is nothing. So concentrate on the cash flow first.
Doug: What are the biggest mistakes that people make consistently when it comes to cash flow? I mean, you’ve been dealing with high net worth families. I’m sure you’ve seen kids out there, young adults, struggling. What are the common mistakes?
Al: Well, Doug, you say that, you know, yes. I primarily have worked over the years with high net worth individuals, but I believe in helping anyone I can. And I’ve helped people of all income ranges and socioeconomic ranges. But there are key things that they all sort of have focus on that really hurts them. And one of the biggest things I see is they have to make sure they pay down their mortgages and debt quicker. That can be a very disastrous decision for them. They should learn how to use debt smarter, to create cash flow and wealth. Major corporations do it. Companies do it. And so that’s one of the biggest mistakes I see.
Another one is that they’re so busy they don’t fill up the simple things. They don’t do things like fill up their 401(k)’s at work, which costs them taxes and possibly employer matches. They don’t fund IRAs properly, or don’t know that they can fund an IRA as well as a pension. A lot of them make these gut decisions. [Laughs] Sometimes I look at people and the way they make decisions is like they spend more time choosing the toppings on their pizza than some financial decisions. Like should I lease or buy a car?
So those are the major… But the thing is, again, they don’t look at what’s coming in and what is going out. But all of this and more is going to determine how they live now and how it’s going to take for them to achieve economic freedom.
Al: Well, I would say that I think a lot of it has to do with our educational system in the United States. And Doug, I’m sure you’ve seen this too, is that you can have the most successful CEOs, businesspeople, and they can run a business pretty well, but their personal finances are a mess. And I think it’s because we make financial education a low, or not a priority at all.
But then, there’s other things that I think stop people. And I call them obstacles. It’s in my book. There are practical obstacles and there are emotional obstacles. The practical ones are people really don’t know the numbers they need. There’s nothing written down. They don’t know how to do things, don’t know how to process things or make things happen. And finally, they don’t know where they are in their wealth versus their goals. Just imagine if Tim Rice [sic Cook] of Apple said at a quarterly meeting, “Look, this quarter we really don’t know what we earned. We don’t know what money came in. We’re not sure what our goals are. And, by the way, we give something out but it’s not written.” He would not be the CEO of Apple very long. But we do this every day. So there’s those practical things.
And then there’s emotional. Emotional, people have these conversations with themselves that basically determine some of the actions that they’re going to take, like: I’m too busy. I don’t have the time. I’m not really good at money. Who can I trust? Or, I’ve lost money in the market before, and if I do this again I’m going to screw it up. So it’s like there’s fears, there’s other things that stop us too. So I think it’s education. It comes down to practical obstacles and then emotional obstacles.
Al: Well, I think one of the ways is understand that there are these obstacles for them, and they may need some professional help with it. Now, professional help, they may need to have a good wealth advisor, financial planner, a good accountant. But it’s also again, it’s going back to a game I call playing tennis. If you want to improve your tennis game, what do you do? If you’re only going to play once a year, you’re not going to play very well. But if you start playing once a month or more, like a few times a week, well, you may never be a champion out there, but you’re going to play it a lot better.
Well, why not start looking at the money that’s coming in at least once a month, your expenses going out once a month, and start to look at what you’re spending on. Do you really need that many magazines? Did you realize you spent that much on dinners, or clothes? But if you start at least doing some of these steps, you may not a master immediately, but you may get a lot better at looking at your cash flow and possibly your numbers.
Doug: Al, I want to walk through some age groups. And I realize that people are in different financial situations and different age groups. But I want to talk about younger people for a moment, people in their 30s to 40s. What would be your cash flow coaching to this age group?
Al: Well, that’s a tough age group, Doug. Because especially if you’re in your 30s you’re probably just out of school for a while and you have debt, and you may have bought a house, and probably a family. And it may get a little better as you get into your 40s. But whether 30s and 40s, the first thing is to basically save whatever you can in your 401(k) at work, or if you’re self-employed a pension plan. The next priority is an IRA. Because at that particular age, especially in finance, you want the money to compound. You want it to grow. You want to start that nest egg to grow.
So another thing is to remember at that age is that, again, you’re probably buying a house. My advice is to pay the least amount down as possible and preserve whatever cash you have, again to save or for any kind of emergency cash. So basically it’s like make sure all your pension plans, 401(k)’s, IRAs, are immediately going to be funded.
Al: The best advice I ever gave is a story. I was in front of the graduating class of a medical school about 15 years ago. And, as you’re aware, physicians normally have easily $150,000, $200,000 or more in debt by the time they’re finished. And I was invited to give this speech, and they are all – I know because I’ve dealt with a lot of physicians that Sallie Mae, one of the financing government agencies for them, encourages them to pay off their debt in five to eight years. Now most physicians, when they leave school, they have good incomes. And while it can be tough, they can do that.
But I gave an illustration that day and showed them that, for one thing, unknown to them, Sallie Mae will also give a payout of their debt up to 25 years. So I encouraged them to take that 200,000 and pay it off over 25 years, rather than the five or eight. And what that does, if they save the difference – because that can be very substantial. It could be like thirty or forty thousand a year – they’re able to fund their pensions. They’re able to do other things that, with compounding, will pay for something like half of the retirement, sometimes two-thirds, by the time they reach their 50s, without them having to work one hour more, one day more, see one patient more.
And this is the power that debt can have. Now, you don’t have to be a physician with $150,000 or $200,000 in debt. If you have 25,000 of debt, fifty, a hundred thousand, you want to look at how long can you put that off in paying. But do the calculation that, if you had to pay it off in five or eight years, but save the difference. And if you do that, that’s using debt smarter.
Al: Forties and fifties, Doug, you probably know this. This is where people are finally starting to come to you and say you know, I’m in my mid-40s, late 40s, and 60 doesn’t look that far away right now. And so they tend to get more serious about where they are. But I would say again to them, they have to look at a combination of how much they’re saving in their 401(k)’s, always concentrate on that.
Another thing I would stop them from doing – and I see this quite a lot – is again paying down accelerated payments on their homes. It only increases their taxes and it doesn’t put the money aside to compound and create wealth.
I’d also have them start looking at things like getting into a better habit of things like tax planning. A lot of people I run into is they basically do their tax planning when they drop off their information to their accountants in February or March, after the year ends. There’s a lot of things that your accountant, a good one, could help you with before the end of the year that basically can help you save taxes before the year ends. So I would encourage them to do that also.
Doug: Al, I’m going to run through a quick scenario. I had a wealth coaching call with a couple recently. They’re married, son in his teens. She’s a dentist. He actually works for the State of Texas and has an excellent pension.
They’re making about $200,000 a year. And as I went through their balance sheet and their cash flow, I was noticing that they had some decent credit card debt on the business, and they were carrying some credit card debt personally. And I asked them about this. And they told me that they are making credit card payments regularly – not just the minimum – but they continued to pile the debt back on each month. So they’re really not making any progress on knocking down that credit card debt. Comments on that situation?
Al: Well, you know, that’s very tough. And it’s not something that I haven’t seen, and you haven’t seen in your career. And unfortunately it’s very common.
I think the best way is to sit down with them and try to go through what are they spending on and what are they making, and why is there a shortfall? Why aren’t they able to make any headway? If it’s because they’re actually spending more than they’re making and living above what they can, then I believe one way is to show them possibly the consequence of that. And that, as years go by, you’re not going to be able to retire. There’s things that you’re not going to be able to achieve.
But, on the other hand, I would look at them and I would also try to assist them, as you’re looking at their spending, is what are you spending on? Is it just you’re not watching it? Are there things you could do?
Like again, are you spending too much on clothes, going out, or whatever? And again, you know, it’s really funny. I hate to – as a financial advisor, a wealth advisor – I hate to really deal with a person and have them spend less or live less than they want to. And in my career there’s only been a few times where I’ve had to let people know they’re just spending more than they have to.
But I think you have to be straight with them, let them know, and then say, okay, let’s look at this and see if we can come up with a solution that is going to decrease expenses or increase your income. And then it might come down to where they just need some professional help. And I don’t mean a wealth advisor. I mean, there are people that we see addiction to drugs and alcohol. There’s people that have addiction to spending too. They may need that sort of help too.
Al: Well, again, in today’s world, especially in the 50s, there’s a lot of people that are starting out late in saving, or accumulating wealth. One of the first things I would do, and again this goes against the grain of a lot of them – they think they have to get out of debt – I would probably tell them stop paying the extra payments on their mortgage. Possibly even take out some money from their homes at low interest rates and invest it, so that they make use of the equity in their home as well as their home rising.
I would again make sure that they’re filling up all their 401(k)’s and their IRAs. Especially if they’re self-employed. You know, one thing about being 50 and 60 is that, the bad news is that you’re growing older, the good news is that there are pension plans out there, cash bounce plans, that you are able to – depending on how much you’re earning – can put away a hundred, $200,000 or more a year. So it gives a person a boost if they’re behind on savings.
I would say one thing, though. At that particular age, make sure you’re sitting down with someone. I had a client once who basically came in to me and wanted to have a checkup. He was 60 years old. Just informed his corporation he was leaving. And he was an officer of this very big pharma company. And so we did our analysis and we saw one thing he did is that he gave away some money to his kids. But one of things he did was that he decided to pay off his mortgage. Another two or three hundred thousand.
So I sat down with him and I said, “Pat, I’ve got some good news for you and some bad news. The bad news is that, based on your cash flow, you don’t have enough assets to live the lifespan you want. But you know the good news? Go back and take out the mortgage.” So I will say that, if you’re in that range, try to understand where the numbers are and get some help with that, so at least you know what the goal is and you can make your decision making according with that.
Doug: Let’s talk about retirees, Al, people who have stopped working, 65-plus. This is an age group that gets themselves in trouble with cash flow sometimes. So just share with us some stories and give us some coaching for retirees and cash flow.
Al: Unfortunately, again, there’s many horror stories out there, or poor stories around this. I had a client once, he was the senior officer of a company, a very successful career, owned a really nice apartment, had a lifestyle where he had a nice vacation a couple weeks a year, and he had some charities that he was involved in. And that seemed to do okay until he got to his mid-70s, late 70s. And you know, he didn’t take into account inflation and other things. And so then he had a cash flow crunch.
So actually, his son-in-law referred him to me. And I sat down with him. And he told me, “Well, I’ve gone through my numbers and this is what I need to survive.” And I said to him, “But you used to do all these other things.” He says, “But I can’t do those things any more. I can’t travel two weeks, I can’t do this…” I said, “Would you like to do them? Would you like to have your cash flow restored to you?” He looked at me and said, “If you can do that, that would be wonderful.”
So, you know, this happens so many times. What happened to him… For one thing, his portfolio was not structured properly. But the most important thing was that he was cash flow poor but he had some real estate. So all we did was look at restructuring the portfolio, but also restructuring debt. Taking out some money from debt putting it back into the market, restructuring some debt he was paying a higher cost on. And quite frankly, we were able to restore his cash flow.
So my message is that, if you’re having some of these issues, sometimes having another eye look at them, there are ways to handle it, or ways to, how can I say, create more cash flow and help you out if you are struggling like this.
Doug: In my own practice I’ve seen – especially here in California, which is a very real estate-focused state. We have high real estate costs here. Many people have been very successful with real estate here. There has been that mindset that people want to pay off their mortgages. And then they become real estate rich, cash flow poor. And they’re struggling. I believe that people need to be thinking far enough into the future and realize that some assets will need to be sold, and you may need that cash flow at some point in time.
Al: You know, Doug, to add to that, I think you’re completely right. And you know what? There’s been more than a few people, as they get into their 70s and 80s, that, if they have an apartment or a nice house, quite frankly the best choice for them sometimes is to sell that and just rent another apartment. Or rent another place. Because it improves their cash flow, improves their wealth. It gives them flexibility. But they make use of a very valuable asset. So I agree with you totally.
Doug: And the tax side of that, Al. Let’s comment on that. There’s the – if a married couple is selling a primary residence, they’re going to have potentially a $500,000 tax-free opportunity for them.
Al: Precisely. It’s a point in their life where they can take tax advantages. They can take an asset, which congratulations on being successful to have that, but now make use of it when they really need it.
Doug: Al, let’s talk about taxes. What about taxes? You’re a CPA, we’ve got some new tax laws. Most people are not knowledgeable enough about their tax situation. What sort of advice do you have? And obviously you mentioned it with tax planning before the end of the year, but what other coaching do you have on the tax side of things?
Al: Well, for one thing, there’s a lot of fear out there today about the new tax law, the 2018 tax law. And people are just finishing their 2017 taxes. Some may have filed already, some have until October 15th. And we’re getting this question all the time. “I can see how the new tax laws would affect me with the cap on real estate tax deduction and so forth…”
And so one of the things I say is people, rather than worry about it, if you just had your ’17 taxes done, if you have a program, just run it in 2018 like it was 2017. Or have your accountant do it. Basically, we’re constantly re-running our clients’ numbers under the 2018 law to see how it affects them.
And sometimes you’ll find it may not affect you that much at all. Especially if you were under AMT, alternative minimum tax, last year you may have not been able to deduct some of those things anyway. But at the very least, at least you can know where you stand and start to take action.
So now let’s say that basically you now know you’re going to pay more taxes. There could be some things you do around charitable deduction and other things that you should be speaking to your accountant about now, and during the year. And not waiting until 2019 to see where you were on your 2018 return.
Doug: Also comment, Al, on the busy season for tax preparers, CPAs. That’s not the time to be asking your CPA to do tax planning. Now is the time to be doing tax planning, when we have enough time between now and the end of the year to be able to get that kind of advice done without the burden that CPAs have during tax season.
Al: Very good point there.
Doug: Al, many people think cash flow problems are for those who are young, or those who are struggling. You’ve worked with wealthy clients your entire career. Do the wealthy have cash flow problems too?
Al: You know, it’s really funny. Some people think that because people give an aura of success, or they’re the head of a company, or they’re well off, that they just be smarter. I will tell you they have the same [Laughs] issues around cash flow that anyone at any level, socioeconomic level, in the United States. In fact, sometimes even worse.
How many times have we seen where people who have been very successful and have a lot of money, especially in the entertainment field, Johnny Depp, Michael Jackson, Marvin Gaye, Willie Nelson… Francis Ford Coppola went bankrupt twice.
By the way, most people don’t know that. They know this, that Mark Twain, being the sage he is, he went bankrupt. [Laughs] So there’s countless people that we think they’re wise, they’re smart, or they must have more education than us, and they have the same exact problems.
Doug: So Al, let’s talk about action steps for the audience here. And one of the action steps that I’m going to recommend is your book. So let’s talk more about your book, and just how can people get a copy of your book, and what will they get from reading your book? In your words.
Al: Well, what you’ll get from the book is basically, in layman’s language, how to take everyday decisions and make the best financial choice of them. It may sound simple, but whenever confronted with a decision, follow the one, or follow the outcome, that results in the greatest amount of cash flow. So the book goes through that – whether it’s in taxes, insurance, whether it’s basically if you’re running a business – what kind of decisions are you making daily to create more cash flow, and how to do it, and the effects of that.
By the way, it also talks about, I think, a very important component of making sure that you’re making always the best cash flow decision. Make sure you surround yourself with what I call in my book a team of championship experts. The best accountant, the best attorney, the best pension person, the best wealth advisor and investment advisor. You know, sometimes we don’t do that. And these people are like a ball and a chain with us.
But getting down to some action steps, basically there are three main action steps that you can really take. Which, if you take these, you’re well on your way.
Doug: Al, I hear you have a new book you’re working on. Tell us about that and how it’s different from your first one.
Al: Well, the first one was Master Your Cash Flow, The Key to Grow and Retain Wealth. It was basically a compilation of all the things I’ve learned over the years to make sure you’re always making the best cash flow decision, and that you have the greatest chance at living the life you want now and in the future.
The new book, it’s going to come out very soon, is called Master Your Business Cash Flow. So I’ve looked at the first book, which was aimed toward the general population, everyone out there, and then I concentrated on businesses. Because there’s a lot of other issues that affect businesses and their cash flow that may not necessarily affect a person. So basically this is going to come in hopefully a few weeks, but Forbes Books.
And if anyone wants to look at getting a copy of that, they can go on amazon.com, look for Master Your Business Cash Flow. And I have also a personal website that people can go to. They can find out information there. And hopefully people will reach out and get some value from it.
Doug: Great, Al. Great. And the website, alzdenek.com, A-L-Z-D-E-N-E-K. Al, it was great to have you on the podcast this week. Thanks so much for joining us.
Al: Doug, a pleasure. I look forward to coming back again.
Doug: Great. Thank you, Al.
Here are my closing comments on today’s podcast. Cash flow matters. It matters as much as your investment returns. So pay attention to it. Here’s a summary again of Al Zdenek’s tips to managing cash flow.
And then, of course, get a copy of Al’s book, Master Your Cash Flow, The Key to Grow and Retain Your Wealth. And don’t forget that team of advisors that you want to have around you. A tax advisor, a financial planner, wealth manager. And then lastly, let me just mention episode six of the Science of Economic Freedom is about creating a spending plan. And along with it is the special report on your personalized spending plan.
Announcer: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio.
This program is sponsored by Mercer Advisors. Mercer Global Advisors, Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors, Inc. is the parent company of Mercer Global Advisors, Inc., and is not involved with investment services.
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