Latest / Wealthy Woman Lawyer Podcast, Helping you create a profitable, sustainable law firm you love / 237 | What to Do When You Make Your Mills with Darren Wurz

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237 | What to Do When You Make Your Mills with Darren Wurz · Wealthy Woman Lawyer Podcast, Helping you create a profitable, sustainable law firm you love

• 0:01
  Intro: Welcome to the Wealthy Woman Lawyer Podcast. What
• 0:05
  Davina: if
• 0:05
  Intro: you could hang out with successful women lawyers, ask them about growing their firms, managing resources like time, team, and systems, mastering money issues, and more. Then take an insight or two to help you build a wealth generating law firm. Each week, your host, Devina Frederick, takes an in-depth look at how to think like a CEO, attract clients who you love to serve, and will pay you on time, and create a profitable, sustainable firm you love. Devina is founder and CEO of Wealthy Woman Lawyer, and her goal is to give you the information you need to scale your law firm business from 6 to 7 figures in gross annual revenue so you can fully fund and still have time to enjoy the lifestyle of your dreams. Now here's Davina.
• 0:51
  Davina: Hi, everyone, and welcome back to the Wealthy Woman Lawyer Podcast. I'm your host, Davina Frederick, and today's guest is Darren Wertz. Darren is a fee only financial adviser and co owner of Wertz Financial Services, a family business he runs with his dad and his younger brother. He's a certified financial planner and earned his master's degree in financial planning from Golden Gate University. Darren has developed an expertise in the unique financial planning needs of those in the legal profession, and he now specializes in serving attorneys and law firm owners.
• 1:24
  His mission is to help his clients achieve financial independence as they define it. As a small business owner himself, he's particularly understands the challenges of solo practitioners and law firm owners. He's the host of the Lawyer Millionaire Podcast, and you may recognize him because he has been a guest on the Wealthy Woman Lawyer Podcast before, but we had so much to talk about that I had to bring him back. He's also the author of the Lawyer Millionaire, the complete guide for attorneys on maximizing wealth, minimizing taxes, and retiring with confidence published by the America Bar Association. Darren is a member of the America Bar Association and the Financial Planning Association as well.
• 2:02
  So welcome, Darren. We're so glad to have you here.
• 2:04
  Darren: Absolutely. It's wonderful to see you, Devina, and to be back here for round two.
• 2:08
  Davina: I know. So you and I are very aligned in that we both want to create a lot of lawyer millionaires out there. Yes. And so you we we sing the same tune with with regard to that. I wanted to bring you back because I I one of the challenges that I think a lot of law firm owners have is as they start to increase their revenue and their profits, for many people, it's a newfound experience to, start acquiring this extra money that they can invest, that they can, invest in real estate or invest in the stock market or or invest in other things.
• 2:51
  And they often don't know what to do to actually build wealth with this newfound cash that they have coming in. So I think a great conversation for you and I to have today is sort of talk about that and talk about what you've seen with some of your lawyer clients, and some of the things that you share with them to help them.
• 3:11
  Darren: Yeah. I I see this a lot, and I think it's gonna be the subject matter of my next book because there is so much information out there, and, and you have great information and this is what you do with clients, helping them get to that place of profitability. Right? But then what? Right?
• 3:31
  Right.
• 3:32
  Davina: Right. Right. It's like, what do I do with this money now? And especially if you don't like, for me, I didn't come from money, and I didn't come from a my parents were savvy enough and had the capability to invest in real estate, which is often where people sort of start with trying to build wealth because they know it. They think, well, I can buy a house for me and my family, and that's gonna be a place to start.
• 4:00
  But I think there if you like for me, I didn't grow up with a wealthy family. And so I had no one educating me along the way. I had to sort of self educate. And sometimes we don't think about that until after we're already starting to get some money. And it's a good problem to have, but it can feel very overwhelming and very confusing because financial matters have a whole language in and of them.
• 4:26
  So just like the law. Right? It's a whole different language. It can feel very intimidating when you're talking to people in the financial world and they just assume that you sort of know what certain things mean. Right?
• 4:37
  Mhmm. Have you kind of discovered this in some of your conversations with people?
• 4:41
  Darren: Yeah. Absolutely. You know, a lot of some of the basics and and I sometimes make this mistake of thinking that people automatically know the basics. And a lot of attorneys are very well read and have a a great comprehension of finances and financial topics, but that's not always the case. And even if you do feel like you have a pretty good handle on finances, there are always gonna be gaps in that knowledge.
• 5:07
  So it definitely helps to have somebody to help you with that. And I think being very busy, having to run a practice and be an attorney at the same time, you don't have the time to devote to figuring all those things out. And I think even more importantly than all of that is just having someone by your side to help you make those decisions. I recently started working with a podcast coach, and I told my assistant this, I was working with this coach, she said, That's great. You know, it's great to have someone so that you're not the only one making all the decisions.
• 5:47
  And I thought that was really a a great comment and so key because I don't know if you've experienced this, but I've experienced this as a business owner, and I think a lot of lawyers experience this. Two things, decision fatigue and analysis paralysis. Absolutely.
• 6:02
  Davina: Absolutely. Yeah, for sure. I get to the end of the day and I just wanna sit and not make any decisions about anything. My husband's like, what do you want for dinner? I don't care.
• 6:15
  Like whatever. Food. Just food. Yeah. I just I know I want dinner.
• 6:19
  And it isn't and I don't think we talk enough about that, about how overwhelming that is. And it becomes more so as you become a business owner because there's so many different fact factors in owning a business. And you're the one I I I I've hired different people through the years. And one of my complaints is, a lot of times you hire people thinking that they are going to do the mental work and they're still expecting you to do the mental work. And then they'll go do the thing that you're asking them to do, but they want you to to go through and tell them exactly what to do, how to do it, where to find you know?
• 7:00
  And so you're still doing the mental work. And so it's one of the things I'm often encouraging my clients to hire people who are critical thinkers who could take some of that mental load off of them. And so I think that's really where financial advisors can come into play in terms of you building wealth. Because I think as lawyers, we tend to think we're smarter than the average bear, and I know I certainly do. And it's like, I think to myself, if I just had enough time, I could figure this all out myself.
• 7:30
  But the real if is if I had the time and you're not going to not fast enough, You may be able to, but it might take you five, ten years. So what if you had somebody to sort of short circuit that for you? So I think that's where I think it's important to have expertise. So I'm gonna I'm gonna ask you some questions. Sure.
• 7:48
  You mentioned the basics. So tell me kind of what you think are the basics that we need to know. If we're here we are. We've got some we're finally able to now do this thing that we're always hearing people tell us to do, which is invest. Mhmm.
• 8:01
  So what kinds of things do we need to think about when we think about investing money?
• 8:07
  Darren: Yeah. I mean, at a very fundamental level, just keep it simple. You know? It doesn't have to get terribly complex. Buy the S and P 500.
• 8:17
  Just open a brokerage account. Don't worry about oh, it's gotta be a Roth IRA or a traditional IRA or what kind of account do I need to have? Open an account, start putting money in it and start buying the market. You know what I mean? That's the simple way to start.
• 8:31
  It's the easy way to start. Maybe it's not gonna be the most sophisticated strategy, but it's a great foundation. You're not going to go terribly wrong by doing that. So that's an easy way. Just open an account, start putting money in, and start investing in it.
• 8:52
  And I think another really basic fundamental thing is to try to automate that savings as much as you can. Make it a part of your your your cash flow, your budget, make it a part of your your billing cycle. You know, I have x amount of dollars going into investments. And I hear so often from law firm owners that I can't save money. And no, it's not because they're not making money.
• 9:17
  Okay. Let's get that out of the way. Right. I have law firm owner clients who are making $607,100,000 dollars a year and struggling to find money in their budget to save. Now let me just be clear about this.
• 9:31
  If you feel like you can't save, you're lying to yourself. You can. And I'll prove it to you. As a business owner, how quickly how quick are we to sign up for little things? I'm gonna oh, I've got this new little program that's really cool.
• 9:47
  It's $50 a month. I can do that. Click, and I'm signed up, and I'm paying $50 a month for this new program. Right? It's so easy to add these expenses.
• 9:58
  It can be easy the same ease to add savings. Right? And to set it up and get it going and treat it like that. Right.
• 10:08
  Davina: For me, I tell you what, automation was really the key. Yeah. Really the key. By automating, even small amounts
• 10:16
  Darren: Mhmm.
• 10:17
  Davina: Add up so quickly. Sometimes I go into I just have some I have multiple different things that I do, but I have just kind of this basic little amount going into a high yield savings account just for keeping that emergency fund up, keeping those vacation funds up, stuff like that. I just have a little bit at a time sort of going in, and every now and then I'll chunk you know, do a chunk in or whatever. But it's amazing because I'll go in sometimes. I'm like, oh, look at that.
• 10:39
  Because little bits add up, especially if you have Yes. Compounded interest, you know, behind the behind the scenes. So before we get into sort of investment strategies, let's talk about some of the things. You know, the Dave Ramsey's of the world have a sort of philosophy about pay off all your debt. And then after you pay off all your debt, have an emergency account, and then, you know, do these other things, and then you can start, like, investing.
• 11:10
  I have a little bit different perspective on that. And it was a mistake that I made early on. And that is this idea that I you pay off your debt and then you start saving and then you start investing. And what I found was this is my own lifetime of bad habits that people can learn from is that you pay off your debts and then something happens right after you pay off your debt that requires you to run up more debt. Or you feel debt free, and so you're like, yeah, I can go buy this thing and I'll just pay it off.
• 11:42
  And then before you know it, you run up debt again. And we get into this cycle of paying off debt, never saving, never investing. And so I'm a firm believer in personally in saving and investing as we're paying off debt. And I I know that can happen a a with with, lawyers especially because we have this law well, a lot of them a lot of people have lost student loans, student loans. And they're sitting here thinking, I'll never pay this loan off.
• 12:10
  So how can I ever afford to buy a house or how can I ever afford to save or invest? What are you what kind of advice do you give to people who are sort of in that situation?
• 12:19
  Darren: Yeah. I'm so glad you brought this up. I I think I agree with you in your approach. You can do both. It's important to do both.
• 12:28
  There is something that you miss out on when you're not investing. It's called opportunity risk. We don't know what the stock market's going to do. Right? The the market may have, know, kind of normal returns, single digit returns, but it could happen that we have a 30% year in the stock market.
• 12:46
  And if you're not invested, you're going to miss out on that event. So that's the risk that you experience. I do counsel people to pay off high interest debt, double digit debt, try to pay that off. But I listened to a guy a long time ago, he was talking about this whole thing. And let's say you have $100,000 in debt, right?
• 13:10
  And you have $100,000 in your bank account. And you're thinking to yourself, I can take my $100,000 in my bank account, I can pay off my debt, and boom, I'll be debt free. Wonderful, right?
• 13:20
  Davina: Right. And we'll start from scratch.
• 13:22
  Darren: But here's the problem with that. The problem is now you have zero in assets and it takes a long time to go from zero in assets back to $100,000 in assets. And I think really, there's math. There's a mathematical way to do things that makes the most sense. But for us human beings, we're not completely logical.
• 13:46
  And I think therein lies the biggest part of the problem. We are very much driven by our emotions and by other factors. And so when you go from a 100,000 to zero, right, you take your assets, you pay down debt, that's a very demoralizing position to put yourself in because then it's like, oh my gosh, I have so much work to do to get back to where I was. So there are some things you have to be aware of there in terms of your own psychology and how you think and what's going to impact your behavior. The other problem, as you mentioned, you pay off your debts.
• 14:22
  Now you have nothing in assets, and it can be very easy to have a situation again where, oh, no, something comes along and I'm accumulating debt. So there's two kinds of people. Right? There are people and you have to know what kind of person you are. There are people who once their debts paid down, they accumulate it all over again.
• 14:40
  You know? And so you might be one of those people. There are people who are the opposite where, you know, it's difficult to save. So you just have to identify what are your weaknesses and what's key for you. I experienced this in starting my business, things were rocky as they are for many people starting out their businesses.
• 15:02
  And I had some credit card debt. What I found was that I was shifting it around, different 0% balances and things like that. But the balance in total was growing. I would wait until I got a huge check, a huge payout, pay off all the debt and it's you, woohoo, look at this. I've paid off my debt.
• 15:26
  This is great. But then I would just put back on the credit cards and build the credit cards back up. And by the way, again, this is not a function of your income. I have clients who have been in this boat making $5,600,000 a year, but they're getting paid, let's say quarterly. They're getting a $100,000 payout quarterly.
• 15:45
  They're running up their credit card debt. And then when they get paid, paying down their credit card debt or building it right back up. And as a result, they're stuck in this cycle and never accumulating assets. That's the problem.
• 16:02
  Davina: I wanna talk about assets and what that means because I'm not sure Yeah. For a lot of people that they really understand what it what what why we need assets, what they are, why they're important. And and when we're talking about wealth, you can be making a million dollars a year in your business. Personally, you may be taking home 500,000. Some people take home more than that depending on how lean they operate.
• 16:27
  Some people take home less. But millionaire status really comes from having assets Yeah. Of a million dollars or more. Right? So we're not talking about a function of revenue or income or anything like that.
• 16:43
  We're talking about what do you do with that revenue or income? And that is what distinguishes you from being a millionaire versus not being a millionaire millionaire. Right? So Yeah. Let's talk about assets.
• 16:55
  Tell me tell me what what they what what are they? Give me examples of some assets and why that's important.
• 17:02
  Darren: Sure. Well, you have your investment portfolio. You know, that's that's one thing. Right? Your investments and stocks and bonds and mutual funds and things like that.
• 17:10
  But it can extend to other areas, like real estate, cryptocurrency. Your law firm, by the way, is an asset and something to think critically about as you think about your future and how you position that. Maybe you want to get involved in other sorts of things, but assets are things that have value. As a result, they are things that can be turned into income. And so the real deal with assets is they are things that create freedom for you.
• 17:43
  Liabilities are things that you
• 17:46
  Davina: Create bondage.
• 17:46
  Darren: Suck money. Yeah. Create bondage for you. And I think one of the great bondages is spending. Our incomes grow, we expand our lifestyles and we come to expect a certain level of lifestyle, right?
• 18:05
  All of a sudden you have a $7,000 a month mortgage and you've got huge car payments. Not that that's bad. You know what I mean? So these are all relative numbers. Right?
• 18:16
  Of course, maybe 7,000 is is very affordable for you. Right? It just depends on your own circumstances. But assets, the real key for assets is wealth. And and and really wealth means freedom financially for your family.
• 18:33
  And and and there is a really key difference between cash flow rich and asset rich.
• 18:41
  Davina: Cash flow rich Explain that.
• 18:42
  Darren: Yes. Cash flow rich means you've got a great income. But here's the deal. Right? Let's say you're making a million dollars from your law firm, but you're spending all of it.
• 18:52
  And so as a result, you won't be able to free yourself from this law firm. Right? You are dependent on it. And that what I see with a lot of law firm owners is they are stuck in this cycle where they can't think about retirement. They can't think about what's next because there's no way they can get out of this.
• 19:15
  They really do feel stuck in this position. Asset rich means that you have assets that can create income that require nothing from you. No input. And it's about the the financial future, the lasting. Assets are things that last, right, that can create lasting financial income for you and for your family.
• 19:41
  And really that's, I think, what it's critically about is how are you setting up things for not just yourself, but also making sure you're protecting your family? This is not all just self interest. This is not all just about, let's all get rich, but it is about, let's make sure our families are protected. Because so many of us want to take good care of our kids and our grandkids. But we're not going to be able to do that if we have not, created a portfolio of investments that can create some sustainable income for the future.
• 20:20
  Davina: Right. Right. And I think it's I think creating wealth is really about options. Right?
• 20:26
  Darren: Yeah. Yeah.
• 20:27
  Davina: It's options for you and for your family.
• 20:30
  Darren: Yeah.
• 20:31
  Davina: Don't You if you're constantly living hand to mouth no matter how much money you're making, you're limiting your options. Because like you said, you're tied to something you can't walk away from. Mhmm. And and also, are you you know, a law firm is a it can be an asset in term if it's cash flowing, and it can be an asset if you could sell it. But if you have a law firm that's set up in a way that you can't sell it, that's really limiting your options.
• 20:59
  So there's a lot of a lot of different, types of assets out there that could help us build wealth. A lot of people, sort of turn to real estate, for example, and say Yeah. Well, you know, real estate, I'm gonna go buy I'm gonna invest in real estate. I'm gonna go buy a bunch of houses or whatever, and I'm going to those are gonna cash flow, and that's gonna set me up for the future. And sometimes that works and sometimes it doesn't.
• 21:22
  And so there's, as much risk associated with that as any other type of thing. To give you an example, I was a foreclosure attorney, in 2008. So you can imagine how busy I was. And a lot of the people I saw sitting across the table from me were real estate investors who were overleveraged and suddenly found themselves in bankruptcy foreclosure on those properties because of that. So, there are all different kinds of ways.
• 21:55
  And so a lot of people think, well, investing in the stock market is risky.
• 21:59
  Darren: Yeah.
• 22:00
  Davina: And so my point is is that it's all risky. Right? It's risky, but it is riskier if you do nothing. Right? Oh, yeah.
• 22:10
  Yes. That is so eating cat food. We're eating cat we're old and we're eating cat people don't think they're gonna live that long, I think, is where where a lot of people get into not wanting to prepare to take care of future you. And
• 22:25
  Darren: Maybe. Yeah. I think a big part of it too is we we just we there's a lie. It's a very, very powerful lie we tell ourselves that if I can just make more money, it'll be okay. And the problem is when you do make more money, you're in the same situation that you've been in.
• 22:46
  Davina: If you haven't set up a mechanism to do something with some of that money. It's not like it's not how much you make. It's how much you keep. That's how much you invest, really.
• 22:55
  Darren: Yeah. Yeah. And it's about your behaviors. It's about, know, if you're you're spending all your income at 500,000 a year, getting to 600,000 a year is not going to change it for you. There's something internally that has to happen.
• 23:11
  And I think there's a couple areas that really you have to key in on. One is really knowing what you want. I think sometimes we're so busy running our practices that we forget to sit down and say, okay, wait a minute. What do I really want life to look like in ten years?
• 23:32
  Davina: What
• 23:32
  Darren: exactly do I really want?
• 23:36
  Davina: I think a lot of people say, what do I want life to look like today or tomorrow?
• 23:41
  Darren: Yeah. In the next year. Ten years. Yeah. Yeah.
• 23:45
  And and we're just we're we're in this hamster wheel, grow, grow, grow, grow, grow, grow, And we have to step back for a minute and say to ourselves, what am I doing all of this for in reality? What's the great purpose here? Right? He who dies with the best law firm doesn't win. Or she, I should say, since we're on the Wealthy Woman Lawyer.
• 24:10
  Davina: Exactly.
• 24:11
  Darren: It's not all about that. You have to really dig down into what is your key life purpose. What is it for you? What's really it? What drives you?
• 24:22
  What motivates you? And I think we experience this when we take a vacation. This happened to me on, you know, Christmas break. Right? I I finally took, like, a week off of working over the the holiday break, and I found that it was hard to go back to work.
• 24:41
  And, normally, that's not me. You know? I'm I'm up I'm up early in the morning, you know, Monday morning, ready to go. Let's go to work. And it was like, oh, I've I've had a taste of just kinda, you know, in
• 24:52
  Davina: Not doing anything.
• 24:53
  Darren: Yeah. And, yeah, it's it's very interesting.
• 24:59
  Davina: You were talking about getting clear on what you want. And I I I if you listen to my most recent podcast was about, retirement. And I was sort of digging into this thought of, like, why is it that I talk to so many people and they never mention retirement as a goal of what they want? And I've just in that podcast, I explored all sort of the different reasons I think that people go through when they they they don't think, you know, that either they think it'll take care of itself or, that they'll deal with that later or something. And I'm just somebody who's sitting here, you know, on the brink of 60 wishing I had made a lot of different choices when I was younger to take advantage of compounded interest and and the like.
• 25:46
  And so I'm kind of trying to throw up a little bit of a warning for people about it. And I I think with law firm owners, there's a greater opportunity than there are maybe for other people who are working you know, have, support jobs or working jobs or whatever, and they don't have as much disposable income that lawyers can have. And so I'm trying to wave the flag around that and say, you know, really, it's not so much about what we want. We yes. We wanna live the life in the moment and enjoy life.
• 26:19
  And if that means going to France for you, then that's going to France. But also to remember that there's probably a future you that needs taken care of as well. Yes. And, so when people say, what do you want? In the moment, they say, what I want in the moment is to travel to 20 foreign countries and never work.
• 26:42
  And it's so it really is a little bit about it it's like the child in you wants something, but then you there's a parent in you that also needs to step up and go, yeah. We can do that, but we also need to do this as well because we wanna take care of our full well-being Yeah. Financially. One of the challenges that I think law firm owners face that is, you know, unique from other business owners in general face are taxes. And I don't think we talk enough about taxes and how that fits into our picture, not only in how we can avoid them, but how we can prepare for them and without undermining our wealth.
• 27:35
  Do you have a lot of people discuss taxes with you and sort of tax strategy? Yeah. So talk to me about that.
• 27:43
  Darren: Yeah. Definitely. You know, you don't wanna be one of those people who at the end of the year is like, oh, crap. I have to pay what to the IRS?
• 27:52
  Davina: I have to take all my savings and give it to the IRS.
• 27:55
  Darren: Yeah. So it's really critical to do tax planning throughout the year. Before I dive into that, I just wanna touch on retirement. I think retirement people have kind of the wrong connotation of what retirement means. And for many people, they think of retirement is I'm gonna stop working.
• 28:14
  I'm gonna sit on my butt. Right?
• 28:15
  Davina: Yeah.
• 28:16
  Darren: And lawyers are not built that way. Law firm owners especially are not built that way. So it's not about stopping work. It's about having the freedom of time and freedom of money to have those options you mentioned, getting to that place. And I don't think a lot of law firm owners are gonna stop working entirely.
• 28:38
  They may go into other areas. They may start other ventures, start other businesses, do different things, you know, go into coaching. Who knows? But, you know, it's it's unfortunate that retirement has that connotation. So I think that there's some work we need to do with helping people identify that.
• 28:56
  And I think people need to understand that you may not think that you're gonna do anything else now, but twenty years from now, you're gonna wanna do something different.
• 29:08
  Davina: Yeah. That's for sure. I could speak to that for sure. For sure.
• 29:11
  Darren: So, yeah, that's important.
• 29:13
  Davina: I'm tech Absolutely. I mean, I think you're absolutely on the right path with that. I I think I think there's a generation of people now that doesn't believe that having looked at prior generation, doesn't believe that they will have the opportunity to, quote, unquote, retire the way, let's say, the silent generation did and the boomers did to be able to actually retire and have money, pensions, and, you know, social security and be able to not work. And and so I think that's where a lot of it comes into this, like, this idea of, like, I I won't retire. But the reality is is that people get sick, people get older, things happen, and you just won't be able to bring the time, energy, and inclination to do certain things that you sort of are so excited about now and you think about now.
• 29:59
  And, so that's why I'm always discussing that and bringing that up. But I but it's not really retirement so much as it is just financial preparation
• 30:10
  Darren: Yeah.
• 30:11
  Davina: Or to take care of future you in case things change.
• 30:15
  Darren: Yeah. Future you and future your spouse, future your kids, you know, future all of those things. And another aspect I think of it is, you talk about financial preparation, preparing for those things you mentioned, health. Law firm may not be competitive. You know what I mean?
• 30:39
  As time goes on, so many things are happening in the world. AI is coming into the picture and is scaring a lot of folks. Don't know what the industry is going to look like twenty years from now. Things are going to change. I think we have this bias where we just think, I'm just going to keep growing like this in this line.
• 30:59
  It's going to be ever stretching upwards. You're experiencing that 20%, 30% growth, when you're approaching the million dollar mark, you're thinking, Oh, this is great. I'm going to grow 20% every year. I'm going to have a $100,000,000 law firm in twenty years. Well, you're going to hit that plateau, things are going to look a little different, you're going to have to adopt some different strategies.
• 31:20
  So, there's some some biases that we are prone to that way.
• 31:26
  Davina: It's interesting because I've been having a lot of conversations lately with women in their sixties who are looking for what's next in the evolution of their law firm. They don't really wanna work as hard as they have been for the last two, three decades or whatever. And but they're sitting there going, okay. I've been a solo, and now I've gotta hire people to have something to sell, or I've gotta find somebody to buy my book of business. Is anybody gonna so they're really sitting here going, what what is that?
• 32:01
  And I think oftentimes if we thought about that earlier, we thought about our end goal earlier Yes. We could have a better plan and be more prepared than waiting until we get there and then realizing, oh, crap. There are things that I should have done to prepare myself for this. Because if I had, I might've been able to sell it for a whole lot more and then had that money, or I might've been able to transition more easily. But think everybody is kind of, caught up in that short sighted thinking.
• 32:29
  We get focused on what we're doing today and what our goal is today. And we really don't think ten, twenty, thirty years down the line. But we see it all the time. That's kind of my point is we see it all the time. I I have conversations all the time with law firm owners who are now at a point where they're saying, oh gosh.
• 32:51
  I'm this age. I don't wanna do this anymore. But how do I get out of it? And how do I get out of it without losing that financial support that it provides? Right?
• 33:04
  Darren: Mhmm. Definitely. There is, every a true business plan. If you're an entrepreneur, you're starting a business, always begins with your exit strategy. How are you gonna exit this business?
• 33:20
  And if we wanna think as as business owners, that's how we should approach it. Today, if you haven't already done so, now you should think now about the end game, the exit strategy, because you will exit one way or another.
• 33:35
  Davina: One way or another, we're all exiting.
• 33:38
  Darren: You know
• 33:38
  Davina: what mean? A cheerful thought. Yeah. But but that's what we have to think about is we will. And the question is, do we exit on our own terms, or on our the terms that we're not prepared for?
• 33:51
  Right? Yeah. So I think that's where the wealth building piece comes into it is really looking at and saying, if you're looking at your law firm as as one of your assets in your portfolio of assets, looking at that law firm and saying, okay, how is this going to be, an asset for me and not a liability? Because you literally can get to the end of your career and your law firm is a liability at that point. And I don't I don't think people realize that.
• 34:16
  And I'm seeing it in some of the conversations I'm having where people are going, now what? You know? And thinking that they have something to sell when they don't. Mhmm. Back to taxes.
• 34:29
  Yes. Because I do wanna touch on that. Because this is another this is another thing that I where I think that people when you're thinking about building wealth, one of the biggest mistakes I see a lot of people make is not realizing how taxes can diminish your wealth and impact your wealth and how important it is as part of your strat your wealth strategy to understand how taxes impact your wealth and how to avoid it. Right? So can you speak on that a little bit?
• 35:10
  Darren: Absolutely. Davina, have you had this experience where you were starting to make really good money, but you felt like you were making less money?
• 35:20
  Davina: Yes. Yeah.
• 35:23
  Darren: That's the impact of taxes. Absolutely. So we think, Oh my gosh, I have a million dollar law firm. It's like, Okay, great. I've achieved this level.
• 35:32
  But you're giving away a lot of money in tax at that level. And it's not a linear relationship. The higher you go, the higher that tax rate becomes. So tax planning is so critical. You have to think proactively throughout the year.
• 35:50
  One of the reasons for that is as a law firm owner, business owners experiences, but especially law firm owners, your income is fluctuating. You need to stay ahead of the curve. You need to be in constant communication with your CPA. How much should I be setting aside for taxes? Should I should be making those quarterly estimated tax payments?
• 36:09
  And it's so critical to make those quarterly estimated tax payments now, today, more so than it was several years ago because interest rates have gone up and it's a pretty hefty rate that you have to pay if you're not making those estimated payments. The other thing is they don't have to be quarterly. What do I mean by that? So rather than writing a check to the IRS once a quarter, how about you put money in an account once a month, and then from that account, pay the IRS once a quarter? Suddenly, you've turned a quarterly expense that you were not expecting or maybe were not planning for.
• 36:48
  You knew it was coming, but it's gonna be a big hit every quarter into a monthly thing that's a lot more manageable. So that's one thing. At a very basic level, you need to pay yourself. You need to make sure that you're running payroll, that you're having taxes withheld, that you're staying on top of that, and that that is a consistent amount. Set your payroll at a certain level, set your draw at a certain level.
• 37:12
  By the way, you can plan your draw, you can plan out how much you're drawing from your firm, know what your core expenses are, know what your essential living expenses are, and align your draw with that number. And then if there's excess in the firm, you can have a bonus that you pay out at the end of the year. But consistency is really, really gonna be one of the big keys. Now above those are the basics. You know?
• 37:40
  Above and beyond that, there are lots of strategies you can employ to try to reduce that tax burden. It really makes a lot of sense to have a four zero one k set up once you reach a certain level. And, you know, I know it's it's an added expense and you have to then let your employees participate. But you know what? Those are all good things because you are going to be incentivizing your employees to stay around, and you can do cool things.
• 38:09
  Like, you can have profit sharing. You can pay bonuses to your employees through that. And the money that you are contributing to their accounts is all gonna be tax deductible to you. Plus, you are sheltering taxes for yourself. Right?
• 38:24
  You're putting money pretax away into that four zero one k. There's an even higher level you can go to. So it's called a cash balance plan. It's basically a pension plan. You can set up your own pension plan, and you can sock away upwards of a couple $100,000 a year pretax.
• 38:43
  So if you're hitting those really high revenue levels and you really need a way to defer that income, a cash balance plan could really be a very helpful tool for you. And I'll add one one last thing I'll say here. Don't forget about the Roth. The Roth IRA is so powerful. And I I butt heads with accountants on this one.
• 39:10
  Davina: Because accountants to hear what you say. Because because I hear my accountant on my shoulder. What do you say about it?
• 39:16
  Darren: Right. Accountants want you to save money in this year in this tax year. They're not necessarily thinking about, you know, twenty years from now for you. Here's how the math works. The math is exactly the same Roth IRA, pretax IRA.
• 39:32
  Let's explain the difference first. The Roth IRA, you do not get a tax deduction. But when you reach retirement age, anything you pull out is tax free. The amount you put in plus the earnings, no taxes. The traditional IRA, the pretax, you get a tax deduction when you put money in.
• 39:50
  When you reach retirement, anything you pull out, contributions, earnings is all taxable to you. So it's a question of when do you want the tax benefit, now or later. Now they are equivalent if you take the tax savings from the traditional IRA and you invest it. If you're not gonna do that, you might as well do the Roth because that is what makes them equivalent. If you're not actually taking the tax savings that you get from that tax deduction and investing it, it's not gonna be as powerful.
• 40:23
  Put 6,000 in traditional IRA, 6,000 in the Roth IRA. The Roth IRA is going to be more valuable unless you took the savings from the traditional IRA and you invested it. Now there's one important caveat, and it is your tax bracket in the future. A lot of people are going to be in a lower tax bracket in retirement. And so in that case, the traditional IRA may make a lot of sense, because you're in a high tax bracket now while you're making all this money.
• 40:51
  When you get to retirement, maybe you're gonna be in a lower tax bracket. And so then to pay taxes then would make more sense. But I would argue that everyone needs to have some money in a Roth IRA because here's what's gonna happen. You're going to retire and you're going to want a bucket of tax free money to pull from for certain things. You want to buy a boat, you want to buy a camper, you want to buy a cabin in the woods, pull that money from your traditional IRA and hike up your tax bill.
• 41:22
  No, thank you. You know what I mean? So it is very valuable to have that bucket of tax free money there down the road. And pay attention to your opportunities for the Roth IRA. Right?
• 41:38
  If you make too much money to contribute to the traditional IRA, do the backdoor Roth and get some money in that tax advantaged
• 41:46
  Davina: accounts. What that is for people who haven't heard of it.
• 41:49
  Darren: So if you have a workplace retirement plan, you have an income limit on whether or not you can make a traditional IRA. I don't have the exact figures, but at a certain level, you are ineligible to get the deduction for the traditional IRA contribution. Same thing applies to Roth IRA. There's an income limit. Once you hit the income limit, you can't put money in a Roth IRA.
• 42:11
  So you're out of luck. You can't do either one. Well, you can always make an after tax traditional IRA contribution. So that means you're gonna make a contribution to that traditional IRA. You're not gonna take the tax deduction, and you can convert an unlimited amount from an IRA to a Roth IRA.
• 42:32
  You convert that amount over to the Roth because it's after tax money. There's no taxes, and it's a sneaky way to get money into the Roth IRA. And there you there's some caveats. You can't really you you don't want to have existing money in a traditional IRA already because when you convert, it's a pro rata conversion. If you already have pretax money in there and you intermingle it with after tax money, when you do the conversion, a portion's gonna be pretax and a portion's gonna be after tax, and you might find yourself owing more taxes.
• 43:08
  So that's now there's some ways around that. You could get that traditional IRA money and roll it into your four zero one k. Right? And then you free that up as a vehicle to use for that, that Roth.
• 43:22
  Davina: And now we can see why it's important to have financial advisers Yeah. As well as CPAs, to help us because this can get complicated. It can get complicated looking for things, and and your accountant often I think people tend to think accountants are gonna give us the answers to everything, but I know that my accountant is, while he may discuss strategies with you, he's not going to get to that level of discussing, like, you need this IRA. You need that I r he's gonna ask which IRA did you get, and let me do the taxes for you. Right?
• 43:58
  So I think that's, it's important to distinguish the roles, and why you might want to have a financial adviser as you start, accumulating more wealth and trying to make these decisions because it can get complicated what you're what you're doing.
• 44:15
  Darren: Yeah. There's different perspectives. You know? Right. There's we each bring a different perspective.
• 44:21
  I talk often with my client CPAs, and we work very closely in close partnership with them, because there are different perspectives, you know, coming to play, and it's important for us to collaborate together. Yeah.
• 44:36
  Davina: Yeah. Yeah. Another favorite tax strategy of mine is the HSA because Oh, yeah. Inch like, who these if you're a solo or small firm Mhmm. You're and you're making enough money, you're probably not there's nothing on the marketplace for you for insurance.
• 44:56
  You probably have a plan that's expensive and has a high deductible. And so having that health savings account is a wonderful tool to because I think you can use it after 59 and a half. You can use that for anything.
• 45:13
  Darren: Yeah. 65. I call the HSA the Stealth IRA.
• 45:18
  Davina: The stealth IRA. Yeah. So tell us about an HSA.
• 45:22
  Darren: You get a tax deduction for contributing funds, much like an IRA. And then you get an extra tax benefit. First of the the funds grow tax free. There's no taxes on them as they grow, but you can then use the money tax free for health expenses. So it's like double the tax benefits, maybe even triple.
• 45:47
  I don't know. But you're getting a tax deduction for money that goes in and then it's tax free for medical expenses. So it's really, really a powerful tool. And it's a very small amount that you can contribute. But as we all small amounts over time tend to add up and you may not be using it right now, but hey, twenty years from now, you may have more medical things that you need to pay for, and that's gonna be a very valuable tool for you.
• 46:15
  And like you said, at a certain age, then you can use it for anything. You just have to pay income tax just like an IRA on your distributions. Yeah.
• 46:24
  Davina: It's, it and it's interesting too because I think a lot of people think with an HSA, whatever I put in this year, well, I've gotta use it for medical expenses this year. And they don't realize that you can use them for future medical expenses. So you can put money in this year. And the older you get, your limits on how much you could put in increase too. So you can put a little bit more in the older you get.
• 46:46
  So it's a it is a stealth IRA. I love that. It's it is definitely some a a tax strategy. One tax strategy I thought was awesome, if I can remember what it's called, but it was where you if you have a child with special needs or you have a family member with special needs, it's like, you're you're you're getting the receipts and you're able to, so it's not like, an HSA. What is it?
• 47:15
  It's another health savings account, but it's a health
• 47:20
  Darren: Yeah. There is there is an account.
• 47:21
  Davina: I'm trying think of name of
• 47:23
  Darren: I'm not terribly familiar with those in particular, but but there are some great things you can do with your kids. One of the keys key things you can do is is pay your kids.
• 47:34
  Davina: Yeah. I know. I wish I could get my bulldog a social security number so I could pay her for something. I see all these people with kids, and I'm so jealous that they can put them on payroll.
• 47:44
  Darren: Yeah. Yeah. Are in a lower tax bracket. They get a tax deduction of their own. So you can pay a certain amount of money to them.
• 47:53
  They receive it tax free. It was tax deductible to you and your business. Wonderful idea. Now what if you took that money and then put it in a Roth IRA for them? Even better.
• 48:03
  Davina: Yeah. I love it. So all the strategies that Darren is sharing today, I hope you guys are taking good notes on this so you can go and think about this. I think, it's important to what we're hoping to do in today's conversation is get you thinking about your your wealth building and what happens outside of just making the money. What do we do with the money once we make it?
• 48:31
  And are we doing the right things with it? And I and I think one of the things that will come out of today's conversation is maybe a realization that it's important to invite other experts into the conversation with you because it can get really complicated and it gets complicated depending on what stage of life you're in as well. Right? So things change when you're sing young and single, it's one thing. And then when you start to get married and have a family, it becomes something else and your decisions may need to change.
• 49:01
  And then as you get older, like, like I was discussing with some of the people I've been talking with who are heading into retirement years, now they need to adapt their strategy as well. So the takeaway from this, I hope, is that people begin to ask those questions and start looking around and seeing who can help me with this. Who and a financial team, I've done a a webinar on this before. Your financial team includes not only a bookkeeper, a CPA, but a CPA, a banker. You have a banking relationship with somebody.
• 49:37
  Financial adviser is critical. So there are a lot of different people that can play different roles in your financial health and well-being. And, the tendency for a lot of people is to sort of try to figure it out on their own. And I think this is it's like when your clients come to you as a lawyer and they've been trying to Google and figure it out on their own, what is that experience like for you? I think it's the same thing when you start to talk with a financial advisor, then you begin to realize, oh, maybe I can't find all the answers myself on Google.
• 50:11
  Maybe this, you know, people know more than I do about this. I mean, just in this conversation we've had.
• 50:17
  Darren: Well, it can, it can be so exhausting to have to get on Google and and sift through different articles and try to figure things out. It's much like, you know, people going on a WebMD instead of going to their doctor. You know what I mean? You you do. You need that team.
• 50:33
  And I would emphasize that you want a financial adviser who's gonna give you holistic advice over your whole picture. It's one of the reasons that we changed our whole model from focusing on investments primarily to being more of a wealth manager for our clients and helping them, bring all the pieces of the puzzle together and stay on top of it all. Because as your income grows, as your wealth grows, the picture becomes more and more complex. And we created this new model. It's a flat monthly retainer where we're just your financial partner.
• 51:13
  We meet with you on a regular basis, oversee your entire picture for you, and help you empower you to make better decisions and take better control and have more confidence over what you're doing. I talked with a law firm owner recently who she makes incredible money, but she recently got divorced and her husband had been doing all the money things, right? Handling everything. And I was talking with her about cash flow and budgeting, she's like, well, what if I just don't want to look at it? You know what I mean?
• 51:51
  And I was like, I understand that. Role here is to help you be empowered in that aspect, right? And not be afraid of looking at it. That's that's the role hopefully that I can can provide for you and that a financial adviser who is looking at your comprehensive picture can help you with for sure.
• 52:11
  Davina: Yeah. I'd love for and, just to note that I hear that a lot from women law firm owners. There's a kind of an avoidance and turning a blind eye to it because they may even be the breadwinners making the most money in the family. But this sort of reluctance to understand and deal with finances is something that is common among a lot. And I think it's a feeling of, I already have so much on my plate that just sounds overwhelming and intimidating.
• 52:39
  And I think that's where having somebody in your role can come in and really make a difference. I want, if you could take a minute before we wrap up and just kind of explain a little bit the difference between different types of financial advisors so people will know when they're looking for a financial advisor, will understand the right questions to ask.
• 52:59
  Darren: Yeah, certainly. Couple things to look for. I think one of the keys is to understand how your adviser is compensated because that is going to determine what exactly they're gonna do for you. I you know, my preference would not be to work with a commission based adviser necessarily. You know, if you do understand what their interest is.
• 53:23
  Right? There are commission based advisers that, you know, are gonna sell you a product, a life insurance policy, an annuity, something like that, Then they're going to earn a commission based on the value of that product. So if that's the kind of person you're working with, not a problem, just understand that going into that relationship. There are other advisors who are more as investment advisors and are going to be compensated based on a percentage of your investment portfolio. And so their main goal is going to be to grow your assets, right?
• 53:55
  Aligns their interest there. That eliminates a lot of conflicts of interest. One caveat to that is because they're compensated based on the size of your portfolio, they're always going to want you to invest more money and not to go anywhere else with it. And then there are advisors who charge a flat fee or an hourly based fee. And in that kind of arrangement, they're really just being paid for advice.
• 54:26
  And and that really frees them up from anything else that they may be tied to. But those are kind of the three models that we see in the intro in the industry that that you you should be aware of. And and that's a great question to ask. How are you compensated? What are the fees?
• 54:43
  Do you receive commissions or referral fees from anybody else? What are the conflicts of interest? And going back to what you said earlier about the hangups that sometimes women law firm owners have, for all of us, a lot of our hang ups come from the way we were raised, I think
• 55:01
  Davina: Yes. And
• 55:01
  Darren: our our family dynamics.
• 55:03
  Davina: Either nature or nurture. We got it one way or the other from the from our parents. Yeah. Yeah. Sure.
• 55:09
  And I and I, risk tolerance is something that I think is important for people to understand about themselves and know and when you're working with a financial adviser for them to know kind of what your risk tolerance is Yeah. As you're making these decisions. Because some people, have a really high tolerance of risk and are just like, you know, throw it all in. Let's see what happens. Let's go get these particular stocks and roll the dice and see what happens.
• 55:38
  And then there are other people. And I think that's where, a lot of times we wanna turn a blind eye or avoid is because maybe we don't have a high risk tolerance, and and so we can't even risk thinking about it. Right? So so I think it's that's an important thing. Do you is that something you do with your clients is kinda help them assess their risk tolerance?
• 56:00
  Darren: For sure. It's important to understand because it's important to know how you are going to react when the market goes down. Right?
• 56:07
  Davina: Yeah.
• 56:08
  Darren: Are you gonna make mistakes? And and everyone wants to be risky, wants to be aggressive when the market's hitting all time highs. But how are you gonna behave during the next COVID crash? Right? Are you gonna panic and pull your money out and make a terrible mistake?
• 56:26
  That's what you need to understand for that purpose. And there's difference between market risk and security specific risk, which is like specific stocks. That's a different game where there's a lot more potential for loss. When we're thinking about the broad market, the market has gone up consistently over the last two hundred years. Zoom way out.
• 56:54
  You know what I mean? The question is, how are you going to deal emotionally with those ups and downs when they come? Right? Are you gonna be able to weather the storm and to have the confidence? And that's where an adviser can really be helpful to you is to keep you on track and and help you
• 57:10
  Davina: avoid that. Different options within that. And I think that's the thing is is a lot of people think, oh, stock market means I have to go buy stock. And they, you know, if you are if you're if you've never been, invested in the stock market, you might not realize all the different options that are out there to invest in the stock market that can mitigate risk, you know, for you. So, we're gonna need to end, but I have really enjoyed this conversation, Darren.
• 57:36
  I know I was all over the place, but I have, you know, so many questions and so many things I think about when I talk to these women lawyers and law firm owners and of course myself. So I appreciate you being here and sharing, some of your wealth of knowledge about wealth building. I encourage everybody, if you haven't read the lawyer millionaire to go get it, check it out, listen to Darren's podcast, the lawyer millionaire. Thanks for being here, Darren.
• 58:00
  Darren: Thank you so much, Davina. It's it's been a real treat.
• 58:04
  Intro: If you're ready to create more of what you truly desire in your business and your life, then you'll want to visit us at wealthywomanlawyer.com to learn more about how we help clients create wealth generating law firms with ease.