Transcription
What are some of the first financial moves someone should make once they cross six figures?
That's a really good question.
Here's what I would not do. I would not go buy a house. That part you just got comfortable. Like you, bro, you just got comfortable. Let's keep it that way.
Automation trumps determination. Create systems that you can set up to where the things that you want to happen automatically. So you don't have to be determined for it to happen.
You can add the, you know, the second scoop of the Chipotle bowl. Yeah. You know what I'm saying? But like let's get the guac. Get the guac. You know what I'm saying? But let's not get crazy. Okay. Let's not get crazy. You just got here. Just got here. Act like you've been somewhere. Act like you've been here before, man. Act like you'll be here for a long time. Okay.
Yeah.
What are some of the first financial moves someone should make once they cross six figures?
First financial moves someone should make once they cross. That's a good that's a really good question. Um, first I think I think at this point we have crossed six figures. I think you're ready for like a true financial plan like financial strategy. So I think there's five kind of key things you should address.
Number one, you need to have a very strong grasp of your cash flow, right? Every dollar that's coming in versus what's going out. You're paying a little more in taxes unless you're working with us. Um, so really just understanding where all the money is going because what happens is when you get to that first six figures, you stop you stop worrying about small things and it's very easy for lifestyle creep to start coming in, right? So having a stronger grasp of cash flow is number one. It should be an easy exercise but start there.
Next thing that you should do is you should start exploring like tax strategy at least fundamentally right like base level you know home office deduction and all those things. Um, just so you're not overpaying in taxes nothing too crazy fundamental tax strategy.
Three um I think you're at a point where you should be able to be maxing out you know your IR your Roth IAS and things that definitely max out your first $7,000 a year. Yeah. maxing out your Roth IRA and and paying more attention to the employer sponsored plan. So, it's like invest up to the match, max out your IRA and then come back if you have some extra and invest more in the uh 401k. If you're low six figures, you might not be able to max out the 401k, but you at least can probably can contribute more a little more than the match.
And make sure that you have a brokerage account so you can start building up this liquidity base so that as you look at other investment opportunities, you'll be able to have uh investments that you can leverage.
Uh the other thing I would consider is fundamental risk management, right? Like no longer we're past the days of just checking the box at open enrollment. Really want to understand what does all this mean um you know from a disability insurance because you're probably the bread winner for the family, right? So like if I get hurt or sick, what does this actually mean? Can my family live off 50% of my income? Um if not, maybe looking at a supplemental policy outside of work. Um making sure you have life insurance outside of work as well. I think I think at this point is key. probably should have already checked this box, but if you haven't, now is a great time to do it. Um, you are low six figures, so I'm not saying you got to go get this big robust uh permanent policy, but make sure you're getting like a renewable term so that as your income continues to grow, you can get a million dollar term policy in your Yeah, probably in your 30s, you make it six figures, probably in your 30s, you can Yeah, you can get that for a couple hundred or $100 a month. Yeah, for sure. If that. Yeah. Yeah. My point, but get it renewable, right? So that way if you want to convert it into a permanent policy over time, um you can do that and get your uh basic estate plan like a living revocable trust. You know what I'm saying? Just fun fundamental doesn't be anything super fancy. Obviously your family is going to continue to grow over time and it might need to become more dynamic, but get that in place and just iterate it as your wealth grows. But those are some of the first money moves I would make as someone who's new to making six figures.
Yeah. Here's what I would not do.
Yeah.
I would not go buy a house. That part I would not go buy a house like I made six figures. need to get the bite pick and fence and follow the American dream. No, if you want to see the rest of that money go away, buying a house is the for sure if I do that cuz yeah, I think if if it's a $300,000 house, what are you talking like, you know, $30 to $50,000 down payment, there goes all the money you trying to invest that year, right? Right. Then you going to love it. You going to deck it out, all that stuff. Yeah. Do not do it. Do not hit that six figure mark like I need to buy a house. Don't make any large purchases in my opinion to be honest. like you just got comfortable like you bro you just got comfortable let's keep it that way you know so all those things uh George said but I just I just want to reiterate something I would not do which is buy a house and lifestyle creep obviously like avoid that at all cost.
You you can you can you can add the you know that second scoop of the Chipotle bowl. You know what I'm saying? But like get the guac. Get the guac. You know what I'm saying? Let's not get crazy. Okay. Let's not get crazy. You just got here. Just got here. Act like you've been somewhere. Act like you've been here before man. Act like you going here for a long time. Okay.
Yeah.
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Can't wait to see you inside. Peace.
What's up everybody? Welcome back to another episode of the Melanin Money Show. And here's the thing, y'all. So, first time we did one of these, we asked tax strategy qu answered tax strategy questions. The second time we did one of these, we answered investment strategy questions. Now, we going to do a little Now, now we doing a versus verses. Now, we doing now we doing Oh, matter of fact, you I don't know. You might have just stumbled on something. A financial services versus bar for bar for bar. So, the people asked and by the people we mean our team in the studio was like, "Why don't y'all just do a versus against each other and y'all do a task question and investing question that way people get both." So, here we are.
Here we go.
And you all are reaping all the benefit from these. These are really good questions at the team pool and I think y'all get some amazing value from them. Um, George has not seen any of them. Um, so you probably pick some one. Let's see how to see how you do, man. You know, you know, so that one's for me. I do one for you. Um, so so first question. Um, okay. So question number two, does a revocable trust protect a small business like a holding company?
So I'll answer this.
Okay.
Um so what is the purpose of having a holding company or let's call it a parent company for your small business. And the difference between a parent company and a holding company is that uh a holding company's job is just to hold assets. A parent company's job is to hold businesses and it can have its own operations outside of just holding those businesses, right? So your active income, you should have a parent company. The reason you want to do that is once you start having multiple businesses make six figures, if you have all of them in one entity, one lawsuit, all that money's gone. Yeah. So what having a parent company does is it gives you another entity that can protect you from asset, protect their other businesses from litigation. So you have this parent company and let's say you get three other businesses that do six figures. You have a financial fir you have a financial services firm. Let's say you have a media company and let's say you have a merchandise company. Say they all do six figures. Your parent company's going to own the interest in all three of those businesses. Those are three businesses in very different industries with different NCIS codes. So they should not be in the same entity. They should be a separate entity. So the good news here is that if you were to get sued in your merchandise business, they can't touch any of the money in your media company or your financial services firm. These are protected. So holding companies or parenting companies protect your businesses from litigation um or anything crazy happening. An employee tries to sue you, you're good.
Now, a revocable living trust is to do any of that, right? The purpose of a vocable living trust is not to protect your assets when you're alive. The purpose of a revocable living trust is for your assets to avoid probate when you pass away. So I think you should have both. You should have a parent company that owns all of your businesses and the owner of that parent company should be your revocable living trust. So all those assets flow into your revocable living trust. And when you pass away, the LLC's interest or the escorp's interest is owned by the revocable living trust, meaning that business get passed down to your heirs with no probate court. So they are not mutually exclusive of each other. They actually should be done in conjunction with each other if you want to maximize your asset protection and protect your assets when you pass away.
Hey, round of applause to the young man. You know what I'm saying? Round of applause to the young man.
Okay, so next question. This is I don't know why we didn't answer this question like in our last workshop, but I feel like we just you know because it was your job to source the questions and you didn't add it. So I mean that's that. I Okay. Well, I would ask for that. So, is it smart? So, I I currently have $275,000 in my bank account. Sure. Is this smart uh because I'm I heard that bank insurance only insures up to $250,000. Um when it comes to FDIC insurance, should I take out the other 25,000 and put it somewhere else or what is the best use I can do with this money?
I think you're worried about the wrong thing.
Yeah, that's what I was about to say. That's what I That's what I say. This is This is the question we should answer. personal things right now. Unless you have a a business that has expenses, you know, or that's doing north of, you know, half a million, a million dollar personal bank account. A thank you. So, we can get right to we can get right to it. Yeah.
Okay, cool. So, for the the bigger picture is not that you're $25,000. Was it $25,000 over the FDICs limit? The the bigger reason is why do you have that much money in cash in a bank account? I don't care if it's high yield. It's probably not high yield, but I wouldn't even care if it was high yield. that is way too much money in a bank account. That money could be working for you in a multitude of ways um if it were invested, right? So, even your emergency fund, right? And again, this might be a hot take for those, you know, those more basic financial experts out there. No, no shade, no no fingers pointed. But our thesis is when it comes to your emergency fund, right, by extension, it's an emergency. So, we don't expect or we hope at least that emergencies aren't happening every day, right? And even if you had an emergency fund in cash, nine times out of 10, you would end up replenishing that emergency, you know, after you've solved whatever it is. So, we're a big fan of always, outside of just, you know, your 30-day money, having as much money as you can invested so that your money can grow and compound more rapidly, right? And if you actually do have an emergency fund, if you have that money, I mean, if you actually do have an emergency and you have that money invested in a brokerage account, you can just borrow against your account, right? to get access to that money and then just pay yourself back. So, what you should do is get that money out of the account. Look at your your maybe two to three months max, right? Just like, you know what, I might just need this money for just random things that come up. Leave that there, you know? Then for the rest of it, I'd advise you to open up a brokerage account. um invested um at somewhere like M1 Finance in some globally diversified ETFs. At least 70% of the money, maybe 30% of the money, you invest in a few individual holdings that you really, really believe in. Where do you find those individual holdings? By looking inside of the ETFs that you select and which ones do you believe have the greatest opportunity to continue to perform well or they're already performing well inside that ETF and potentially doubling down on those potentially. This is not investment advice. then I would invest that money in the brokerage account. Simple. And if if and when you have an emergency, then you can borrow against it. Now, if you know about other expenses that are coming up like you have a family trip or you know something else in the near term, then just include that in the money that you keep aside and don't invest. But outside of that, if you don't have a intended purpose for it right now, that is what I would do with that cash.
Yeah. Having $250,000 in a bank account earning 0.0000% 0000% interest rate is a risky move. It's extremely risk. It's it's guaranteed risk because you guaranteed a year later going to you lose 3 to 5% of that. It's not going to feel like it until you go buy something. Why is why does it still feel like it's more expensive?
Yeah. So, let's not do that. Um but but also on the other side, some of our clients are multi-millionaires, right? So, it's all relative. It's all relative. They like, "Dude, I don't care what you say. Having this $250,000 in my in my personal bank account allows me to go make these million-dollar decisions in my business while being able to sleep at night." Cool. Right. That's why personal financial advice is also personal. But if that's not the case, move that money. Move the money.
Okay. Um, next question. So, I have a million dollars in revenue in my business. Years ago, I was encouraged to use a Ccorporation as my business entity. Is that the right entity for me? What is the difference between a CC Corp and a S Corp? I have about seven employees and plan to continue growing.
Okay, first and foremost, congratulations. Congratulations. A lot of people um I forgot the exact percentage of businesses that don't hit a million dollars, but I know it's low. Um so you hit the million dollar mark in revenue in your business. Now, the first advice piece of advice I would give you is that revenue does not equal profit. So although your business did a million dollar revenue, I want you to focus on what are you taking home from that million dollars of revenue? cuz I don't want you spending as if you earned a million dollars when you didn't cuz that is the fastest way to liquidate your wealth. Um, so that's number one. Number two is what entity makes sense for a business doing a million dollars of revenue. So between S Corp and CC Corp. So S corps pay double taxation, right? Most of us, if not all of us, don't like paying taxes once, let alone having to pay taxes twice. So if you got a million dollars in in the C corp, you have to pay 21% tax on the profit of that and another 30 well 20 to 37% tax on whatever you take out of the C corp. So there are only a few instances where I think a CC corp will actually make sense for business owners and those instances are the following. Number one, you're trying to issue shares for equity. You're going on a shark tank give 10% of your business for $100,000. You need a CC corp structure to be able to issue those shares properly. Number two is if you're doing a Rob's 401k, a Rob's 401k where you're rolling over your money from your 401k to start a business, that structure needs to be a Ccorp for that rollover to work without having tax implications. That's where you need to have a CC Corp. The only other reason I can see you having a CC Corp is if the profit of your business reaches north of $3 million. Why do I say that? Because at $3 million in profits, there's only so many tax strategies that we can do before the end of the year. Yeah, that would make sense. That would actually eliminate $3 million of profit. So in that case, it could make sense to have a CC corp because with a CC Corp, yes, you pay 21% corporate tax on that $3 million in profit, but you can leave the money in the business and take it out when you need it. So you don't have to pay the additional 17% or 16% um taxes when you take the money out. So what you you leave the money in your C corp for next year where you want to reinvest that money. You can borrow money as the as the owner of the company where you don't have to pay taxes on it. So that's the only instance where I think a COP makes sense. Now you don't qualify in any of those three instances from what I see on this Q&A board which means that a S corp is the correct entity structure for you from from anywhere from $50,000 in net income to $3 million in net income. A S corp is usually the entity structure that we recommend to have our clients have unless there are other circumstances that are outside of this um you know particular scope of this question. But C corps are tough. They like it's just a lot to have to deal with and it's a lot to pay taxes twice and I don't want you to have to do that. So that part yes. So in that case you should have a S corp. Hopefully you did not make the switch and if you if you are a CC corp that you know you need to be a S corp. don't dissolve your entity. All you have to do is file form 215 2553 with the IRS to make your CC corp taxed as an S corp and that will be fine for you.
Um, okay. Next question. I am a tech employee. I have a salary of about $220,000. I also have about $100,000 in RSUs that are going to be vested within the next eight months. What should I be planning to do with these restricted stock opt restricted stock options? Restrict restricted stock units. Restrict restricted stock units. What should I be looking to do with these in the next six months before they invest?
Yeah, great question. All right. So, for the benefit of you guys watching this, um, when you work for a company, typically probably is going to be a tech company, they're going to issue you these restricted stock units um, just as additional compensation or incentive uh, of being a team member and employee. And my my advice is usually pretty straightforward, right? Like I don't really care how successful the company is. I think I always think about ways to hedge against risk. And when you get RSUs, that means you are getting is those shares of that publicly traded company, right? And for a lot of people, if they're not heavily invested in their 401k or other asset classes, those RSUs can make up a pretty substantial portion of their current wealth building. However, every single dollar that they're getting paid for their livelihood is also coming from that same company. So that is what we call a little bit risky. So my advice always is when you look at your overall portfolio, let's make sure that the RSUs ideally don't make up more than 10% of your overall portfolio for the anything above that we're probably going to want to strategically start to sell those investments and then reinvest in other places, right? So that way we have a more diversified portfolio. Now again if they're in a lot a lot of RSUs are investing it are investing at one time and it does become a taxable event. We want to be strategic about how we sell because yes we want to divest risk but we don't want to exacerbate the problem by then creating unnecessary tax burden. But outside of that, as long as we know that the plan is to keep our portfolio allocation of around 10% of those RSUs and then strategically sell the difference, that is my recommendation so that you don't have your wealth and your income completely tied up in one place.
Love that. Love that. Um, okay, last question of the day. Um, I am a sales consultant. I earned about $175,000 in as as a W2 for my company. They recently gave me a choice to become W2 or 1099 contractor. What should I choose?
Well, uh I think it's a question both of us can put some input on. Um so the benefit about being in sales is this usually is the case. They will pay you as a W2 or they'll pay you as a contractor. Um and so the question is what should you do from from a tax standpoint? Here are things I want you to consider as a W2 employee. You it's really hard for you to win the tax code because you're a W2 employee. There's only so many strategies you can do to lower your taxes. Once you go from W2 to 99, you then open up the floodgates of all of the popular tax codes, IRS code section 162A that allows you to turn your personal expenses into tax deductible business expenses. You unlock all these tax codes. And so from a tax standpoint, it makes all the sense in the world to move from W2 employee to 1099 contractor because now you're not not only is that $175,000 that you're earning taxes aren't being taken out every paycheck. So you have to get to keep more. You they will send you all the money and it's up to you to strategically save up for taxes or avoid paying taxes. And this is what we teach our clients. Instead of having a tax account where you put money in to pay your tax bill, we actually set up a tax account that you use to implement tax strategies so you don't have a tax bill. Right? So being a 1099 employee gives you a lot I'm sorry being a 1099 contract gives you a lot more flexibility on how you manipulate your money, how you man manipulate how how much you pay in taxes and overall you just control your wealth. Now being moving from W2 employee to non-contractor does come with some financial things you need to think about because you no longer have a 401k. you no longer have health insurance. You no longer have life insurance. So, those are things you're gonna have to substitute on your own.
Yeah. I mean, I think you hit the nail on the head. It's just like if convenience is a big factor for you, then saying W2 might be helpful, right? Because they're going to you have to sort sort out the what your tax issue is going to be. You have to sort out your health insurance or none of those things. But if you're but if you're pretty self-sufficient and you're like, you know what, I can go find all that stuff on my own and and spoiler alert, it's not that hard. Um, then I think going the 1099 route could be helpful. But you just have to be you have to be a little more responsible. Yeah, a lot more responsible.
Yeah, a lot more responsible and have a little bit more awareness and ownership um in what you're doing. But outside of that, you just pick your poison, know yourself, and if you're the type of person that's not going to be an issue, I say go 1099. If you're like, h I probably won't set up my own insurance if I if I don't if it's not set up on my behalf, then you should probably just stay W2.
Yeah. So, this particular person is a client of our firm. So, um, what we had them do is we may have to make the shift from W2 to 1099 contractor, but we also set them up with one of our, um, systems in our company that allows us to automatically allocate a portion of their income into specific accounts. So now a portion of their income goes to their investment account, a portion of the income goes to their tax account, a portion of the income goes to personal. So now we are able to take their responsibility off of them and now they have a have the best of both worlds. have the tax efficiency, but they have less complexity because now all their money goes in separate accounts so that they are strategically taking advantage of their finances the way that they should. Automation trumps determination, right? Like set create systems that you can set up to where the things that you want to happen happen automatically so you don't have to be determined for it to happen.
10,000%. Well, that was the versus y'all. So, y'all let us know three and three. Y'all let us know in the chat who won. Um, let us know. You put Georgia Carter in the chat. whoever gave the best answers to those questions. And if if this if y'all like this format, if he beats me, we're doing this again. If he if I win, we might not need to do this again, but we will see from you all's feedback. Let us know in the comments. Until next time, peace.