WEBVTT 00:00:05.950 --> 00:00:09.250 Hi, everyone. This is the How to Lower Your Tax 00:00:09.250 --> 00:00:12.449 Bill podcast. I'm your host, Terrence Hutchins. 00:00:12.910 --> 00:00:15.410 I'm a financial and tax advisor in the Dallas 00:00:15.410 --> 00:00:18.210 -Fort Worth area. And the goal of this podcast 00:00:18.210 --> 00:00:20.789 is to help you listeners get educated on different 00:00:20.789 --> 00:00:23.589 tax strategies that you can implement to improve 00:00:23.589 --> 00:00:26.730 your tax situation immediately. Each episode 00:00:26.730 --> 00:00:29.769 will break down useful tax tips you can use to 00:00:29.769 --> 00:00:32.390 save money. no matter what your personal or business 00:00:32.390 --> 00:00:35.350 income situation. Because our motto is, keep 00:00:35.350 --> 00:00:38.549 more of what you earn. So let's get into today's 00:00:38.549 --> 00:00:48.609 episode. All right, so welcome back to the How 00:00:48.609 --> 00:00:52.570 to Low Your Taxable podcast. We are doing a series 00:00:52.570 --> 00:00:55.289 around what to do with your profits as a business 00:00:55.289 --> 00:00:58.759 owner. And we'll talk about making smart business 00:00:58.759 --> 00:01:00.560 decisions and then how that impacts your taxes. 00:01:01.020 --> 00:01:04.739 So we have talked about how taxes are an expense 00:01:04.739 --> 00:01:06.780 of the business and your business needs to be 00:01:06.780 --> 00:01:08.900 able to make enough money to pay that expense. 00:01:09.239 --> 00:01:11.719 And now we're going to talk about debt today 00:01:11.719 --> 00:01:14.000 as it relates to how do you manage that from 00:01:14.000 --> 00:01:16.680 the profits that you have. So welcome back our 00:01:16.680 --> 00:01:18.640 lovely co -host Tamiya. Say hi to the people. 00:01:19.019 --> 00:01:22.299 Hey good people. Hey good people. And so we will 00:01:22.299 --> 00:01:26.040 try to keep this practical. for people as a lot 00:01:26.040 --> 00:01:28.939 of people have small businesses and oftentimes 00:01:28.939 --> 00:01:32.700 people get generic advice without really factoring 00:01:32.700 --> 00:01:35.439 in the ramifications of how that impacts them 00:01:35.439 --> 00:01:37.200 in the long run. So one of the things I hear 00:01:37.200 --> 00:01:38.879 is, you know, you got to spend money to make 00:01:38.879 --> 00:01:42.180 money. And that could be true. Okay. Depending 00:01:42.180 --> 00:01:44.540 on your business model. But we also want to think, 00:01:44.540 --> 00:01:47.200 all right, in the case of debt, if I'm going 00:01:47.200 --> 00:01:49.799 to take on debt, I have to acknowledge that that 00:01:49.799 --> 00:01:52.519 comes with a level of risk. And as a result, 00:01:52.700 --> 00:01:54.920 I need to be able to assume a certain rate of 00:01:54.920 --> 00:01:58.000 return that can compensate me for the risk I'm 00:01:58.000 --> 00:02:00.680 taking plus the actual debt payment. So let's 00:02:00.680 --> 00:02:03.920 kind of dive into high level on the debt side. 00:02:04.219 --> 00:02:06.719 So first, before I get into that, tell me, what's 00:02:06.719 --> 00:02:08.319 your experience with debt, maybe on the personal 00:02:08.319 --> 00:02:10.740 or business side or lessons you've learned? So 00:02:10.740 --> 00:02:13.060 y 'all remember last time I was on, you talked 00:02:13.060 --> 00:02:16.180 about me being on the couch and it seems like, 00:02:16.180 --> 00:02:18.840 you know, once again, Terrence just put my business 00:02:18.840 --> 00:02:21.939 out there. So, but basically my experience was 00:02:21.939 --> 00:02:23.819 that is, you know, trying to start my own insurance 00:02:23.819 --> 00:02:27.139 agency. I, for me, you really had to, because 00:02:27.139 --> 00:02:28.740 I heard it too, right? You got to spend money 00:02:28.740 --> 00:02:30.860 to make money. Starting an insurance agency. 00:02:31.099 --> 00:02:32.719 That's one of the things people do is actually 00:02:32.719 --> 00:02:35.240 go out, get huge loans to buy a book of business 00:02:35.240 --> 00:02:39.060 or to, you know, get an office storefront or 00:02:39.060 --> 00:02:42.460 whatever is necessary. Systems, if you need computers, 00:02:42.699 --> 00:02:46.020 like all the things. And for me, I actually initially 00:02:46.020 --> 00:02:47.819 was. Really thinking about it, I was like, oh 00:02:47.819 --> 00:02:50.300 yeah, that makes perfectly good sense. But when 00:02:50.300 --> 00:02:52.280 you really think about it, I was like, what's 00:02:52.280 --> 00:02:54.180 the likelihood of me being able to pay this back? 00:02:54.379 --> 00:02:57.960 So my relationship with debt, I would say, is 00:02:57.960 --> 00:03:01.960 not healthy in the sense of I'm low risk. So 00:03:01.960 --> 00:03:05.319 I'm like, I want to steer clear of debt as much 00:03:05.319 --> 00:03:09.180 as possible, also without hurting my business, 00:03:09.240 --> 00:03:12.020 if that makes really sense. Yeah. So Kyle, a 00:03:12.020 --> 00:03:15.909 simple example I think about is a seesaw. sort 00:03:15.909 --> 00:03:18.969 of mirrors a balance sheet. You have assets and 00:03:18.969 --> 00:03:21.030 then you have liabilities. When you take out 00:03:21.030 --> 00:03:23.629 debt, you get cash, that would be your asset, 00:03:23.629 --> 00:03:25.909 but then you get the loan itself, which is your 00:03:25.909 --> 00:03:28.490 liability, that's on the opposite end. So they 00:03:28.490 --> 00:03:31.949 start off even. Now you might have a loan fee, 00:03:32.110 --> 00:03:33.650 so you might have a little disproportionate, 00:03:33.810 --> 00:03:36.310 but generally the seesaw is even. So in reality, 00:03:36.409 --> 00:03:39.169 you think, all right, if the asset I'm buying 00:03:39.169 --> 00:03:42.610 should be able to increase more than the debt 00:03:42.610 --> 00:03:47.219 that I have. Oftentimes, if you have an imbalance 00:03:47.219 --> 00:03:50.259 where you have more debt than the assets generated, 00:03:50.680 --> 00:03:52.979 then that's not a good use of debt, all right? 00:03:53.240 --> 00:03:55.599 So we'll talk about three main concepts when 00:03:55.599 --> 00:03:58.620 it comes to debt. So number one is debt to save 00:03:58.620 --> 00:04:01.219 on taxes. So this is what I get a lot of times. 00:04:01.280 --> 00:04:02.900 So many times when I first start working with 00:04:02.900 --> 00:04:05.099 a business owner, they tell me, you know, my 00:04:05.099 --> 00:04:08.060 accountant doesn't really talk to me about strategy 00:04:08.060 --> 00:04:11.120 and how I could save on taxes, other than, hey, 00:04:11.139 --> 00:04:13.479 go out and buy some equipment or go buy a vehicle, 00:04:13.740 --> 00:04:16.439 all right? And I get a lot of the people who 00:04:16.439 --> 00:04:18.879 have the list of, you know, those cars that are 00:04:18.879 --> 00:04:21.199 6 ,000 pounds or more where, hey, I can go buy 00:04:21.199 --> 00:04:24.399 that model X or that big, you know, Yukon or 00:04:24.399 --> 00:04:26.839 whatever it is. And with bonus depreciation with 00:04:26.839 --> 00:04:29.139 the one big visual bill, I can actually write 00:04:29.139 --> 00:04:32.399 a hundred percent of my car off. So just picture 00:04:32.399 --> 00:04:34.980 this. I go to the car dealership. I signed for 00:04:34.980 --> 00:04:36.819 this hundred thousand dollar vehicle. All right. 00:04:37.019 --> 00:04:39.079 I go back to my tax person and say, hey, I bought 00:04:39.079 --> 00:04:41.319 a hundred thousand dollar car. He says great, 00:04:41.360 --> 00:04:44.689 or she says great. they write off $100 ,000 in 00:04:44.689 --> 00:04:47.009 your taxes. So if you had $100 ,000 in profit, 00:04:47.310 --> 00:04:50.089 all of a sudden, your profit is gone. Now, you 00:04:50.089 --> 00:04:52.089 drove off the lot and you didn't pay anything, 00:04:52.310 --> 00:04:53.949 right? You could have literally left the parking 00:04:53.949 --> 00:04:57.110 lot with just a signature, all right? Now you 00:04:57.110 --> 00:04:59.149 have a loan, which is what we're talking about, 00:04:59.209 --> 00:05:02.850 the debt, and for that tax year anyway, you're 00:05:02.850 --> 00:05:04.110 high -fiving because you're like, look, I made 00:05:04.110 --> 00:05:06.930 $100 ,000 and I paid zero taxes. But fast forward 00:05:06.930 --> 00:05:09.269 into year two, that loan is going to now kick 00:05:09.269 --> 00:05:12.709 in for you to start paying. And so the math will 00:05:12.709 --> 00:05:15.269 suggest, Hey, if I have a hundred thousand debt, 00:05:15.449 --> 00:05:17.709 the only deductible expense that I have from 00:05:17.709 --> 00:05:19.889 that point forward, if I've already written the 00:05:19.889 --> 00:05:22.689 entire car off is the interest. Yeah. Which is 00:05:22.689 --> 00:05:25.769 just a cost. That interest is tied to though, 00:05:25.910 --> 00:05:28.569 the monthly payment. So every month, let's just 00:05:28.569 --> 00:05:32.170 say for easy math, the interest is 10 % of the 00:05:32.170 --> 00:05:35.370 payment. So let's say my payment is $1 ,500 a 00:05:35.370 --> 00:05:37.050 month. I have a hundred dollars of interest. 00:05:37.290 --> 00:05:40.939 I have $1 ,400 in principal. Now. I pay $1 ,500 00:05:40.939 --> 00:05:44.500 every month, but only $100 is deductible. So 00:05:44.500 --> 00:05:46.139 if you're doing the math at home, you think at 00:05:46.139 --> 00:05:49.639 the end of the year, I've paid $16 ,000 of principal 00:05:49.639 --> 00:05:52.939 payments that aren't tax deductible. So that 00:05:52.939 --> 00:05:55.379 actually was cash that came out of my account. 00:05:55.699 --> 00:05:58.120 So if I have another $100 ,000 of profit, I pay 00:05:58.120 --> 00:06:01.939 tax of $100 ,000 minus the $1 ,200 of interest. 00:06:02.170 --> 00:06:04.949 So I pay tactical 98 ,000 and you know, $800, 00:06:05.350 --> 00:06:09.250 but I only have cash of like $84 ,000 because 00:06:09.250 --> 00:06:12.370 the principal payments didn't count. So the second 00:06:12.370 --> 00:06:14.930 year, third year, fourth year, I'm actually shelling 00:06:14.930 --> 00:06:17.430 out more cash to compensate for not paying the 00:06:17.430 --> 00:06:19.689 taxes in year one. All right. So that makes sense. 00:06:20.209 --> 00:06:22.529 Basically what I, what I hear you saying is. 00:06:22.649 --> 00:06:25.430 don't take on debt without a clear plan for repayment 00:06:25.430 --> 00:06:27.149 and return on investment. That's what I hear 00:06:27.149 --> 00:06:29.189 you say. What I hear you say it is, I think you 00:06:29.189 --> 00:06:31.370 said it on the tab, don't spend a dollar to make 00:06:31.370 --> 00:06:34.209 40 cents. To save 40 cents, yeah. To save 40 00:06:34.209 --> 00:06:36.930 cents. And what you're saying is kind of what 00:06:36.930 --> 00:06:38.889 I took on when I was thinking about taking debt 00:06:38.889 --> 00:06:41.050 is simple. You really need to think, does it 00:06:41.050 --> 00:06:45.629 make sense, right? Does it make sense? I have 00:06:45.629 --> 00:06:48.060 this money, I have this profit. Does it make 00:06:48.060 --> 00:06:52.000 sense to go buy a $100 ,000 card? Does it make 00:06:52.000 --> 00:06:55.680 sense, financial sense, tax sense to do this? 00:06:55.899 --> 00:06:58.120 And I think a lot of us, even though we've been 00:06:58.120 --> 00:07:00.699 with our tax people for a while or whoever it 00:07:00.699 --> 00:07:03.620 is, but just ask them, I want to challenge you 00:07:03.620 --> 00:07:06.360 all who's listening that you're not using us 00:07:06.360 --> 00:07:08.759 for your services, but you're using someone else. 00:07:09.019 --> 00:07:11.279 I want to challenge you to really do the math 00:07:11.279 --> 00:07:13.540 because in the long run, it could really cost 00:07:13.540 --> 00:07:15.779 you. And then you still have this debt you got 00:07:15.779 --> 00:07:18.620 to pay. Definitely. And generally when it comes 00:07:18.620 --> 00:07:21.279 to assets that aren't going to provide a return 00:07:21.279 --> 00:07:24.540 like that, like a car. Yes, you can buy a car. 00:07:24.860 --> 00:07:26.839 Yes, that car might have a business purpose, 00:07:26.860 --> 00:07:28.500 but that generally that car is not going to help 00:07:28.500 --> 00:07:30.879 you make more money. So you want to only buy 00:07:30.879 --> 00:07:33.959 things that don't make you more money that are 00:07:33.959 --> 00:07:35.779 things you would have bought anyway. All right. 00:07:36.019 --> 00:07:39.759 So, Hey, maybe the tax savings allows me to buy 00:07:39.759 --> 00:07:43.540 a car that would equal out another car. Maybe 00:07:43.540 --> 00:07:46.000 you could justify that, but just buying the car 00:07:46.000 --> 00:07:48.360 just to save on taxes isn't a good strategy. 00:07:48.560 --> 00:07:51.600 Now, if you could identify that $100 ,000 of 00:07:51.600 --> 00:07:53.139 profit that I was going to have, I was going 00:07:53.139 --> 00:07:55.519 to pay $30 ,000 of taxes on. Well, hey, let me 00:07:55.519 --> 00:07:58.819 take that $30 ,000 and can I reinvest that $30 00:07:58.819 --> 00:08:01.860 ,000 that can pay for the car? And oftentimes, 00:08:02.480 --> 00:08:04.319 depending on the amount of debt and interest 00:08:04.319 --> 00:08:06.459 and whatnot, it's going to take a pretty good 00:08:06.459 --> 00:08:08.519 amount of return to be able to compensate you 00:08:08.519 --> 00:08:10.560 for the debt that you took on on a short -term 00:08:10.560 --> 00:08:13.290 asset like that. All right. Now the other thing 00:08:13.290 --> 00:08:16.050 that people normally use that on is for projects. 00:08:16.730 --> 00:08:19.709 So this is for people who are normally in like 00:08:19.709 --> 00:08:23.290 construction or they bid on some type of job. 00:08:23.430 --> 00:08:26.230 So a lot of times let's just say, Hey, you're 00:08:26.230 --> 00:08:29.949 in construction or you have a project that you're 00:08:29.949 --> 00:08:32.830 trying to complete for a customer where you normally 00:08:32.830 --> 00:08:35.809 don't get all your money upfront. Ideally, you 00:08:35.809 --> 00:08:38.210 like to get as much of it as possible, but maybe 00:08:38.210 --> 00:08:40.570 that's not just feasible. All right. If as if 00:08:40.570 --> 00:08:42.509 you are working with a big company. They're not 00:08:42.509 --> 00:08:44.110 going to pay you upfront, right? They're going 00:08:44.110 --> 00:08:46.470 to pay you over a period of time. So they put 00:08:46.470 --> 00:08:49.710 down a deposit and really that deposit, you want 00:08:49.710 --> 00:08:52.169 to have that cover whatever cost of your job. 00:08:52.509 --> 00:08:55.090 So for example, if I have a job that is going 00:08:55.090 --> 00:08:59.950 to pay me $10 ,000, but it costs me $3 ,000 to 00:08:59.950 --> 00:09:02.789 do the job. So I got to pay people. I got to 00:09:02.789 --> 00:09:06.330 buy materials. My deposit, I want to have enough 00:09:06.330 --> 00:09:09.769 money that I collect upfront to cover my cost 00:09:09.769 --> 00:09:11.909 of goods sold or whatever it costs to do the 00:09:11.909 --> 00:09:14.529 job. So I can effectively say, I'm not going 00:09:14.529 --> 00:09:17.690 to have to come out of pocket to finance the 00:09:17.690 --> 00:09:20.269 difference because if it costs me 4 ,000 to do 00:09:20.269 --> 00:09:22.590 the job and I only cut it off at 3 ,000, I'm 00:09:22.590 --> 00:09:25.809 going to dip into my cash reserves to finance 00:09:25.809 --> 00:09:28.690 it. Or what happens is you dip into your line 00:09:28.690 --> 00:09:32.009 of credit and many times people take on jobs, 00:09:32.070 --> 00:09:34.909 but they don't evaluate, okay, how profitable 00:09:34.909 --> 00:09:37.750 is this job? And this is essentially how companies 00:09:37.750 --> 00:09:40.610 will actually grow. themselves out of business. 00:09:40.809 --> 00:09:42.629 So wait, wait, wait before you get into that, 00:09:42.730 --> 00:09:44.690 because you're making really good sense. So, 00:09:44.710 --> 00:09:46.470 you know, I like to say, I tell my son all the 00:09:46.470 --> 00:09:48.409 time, don't count your eggs before they hatch. 00:09:49.009 --> 00:09:51.929 How do you then, I mean, I'm sure you have an 00:09:51.929 --> 00:09:53.629 experience with a lot of different companies. 00:09:54.029 --> 00:09:56.990 What do you, and I won't say it lies because 00:09:56.990 --> 00:10:00.850 listen, you need to seek help from someone else. 00:10:01.009 --> 00:10:03.110 This is not, you know, we're just giving you 00:10:03.110 --> 00:10:05.500 strategies, different things, right? When you 00:10:05.500 --> 00:10:07.840 mention that, because a lot of people do believe 00:10:07.840 --> 00:10:11.379 that you have to spend to get, you know, and 00:10:11.379 --> 00:10:14.340 so your example of, you know, needing to have 00:10:14.340 --> 00:10:16.799 this money up front for this project, what would 00:10:16.799 --> 00:10:19.700 you tell a person of how to balance it, how to 00:10:19.700 --> 00:10:22.700 manage that? Because to your point, most people 00:10:22.700 --> 00:10:25.340 don't want to pay you 100 % upfront. They're 00:10:25.340 --> 00:10:27.919 just not going to do it, right? And so, and then 00:10:27.919 --> 00:10:30.779 you do have those flaky people who just kind 00:10:30.779 --> 00:10:33.440 of bail on you or whatever, don't pay. So how 00:10:33.440 --> 00:10:35.720 do you balance that? Or what experience do you 00:10:35.720 --> 00:10:38.679 have? What have you seen before to help people 00:10:38.679 --> 00:10:42.100 kind of keep some things in mind before you start 00:10:42.100 --> 00:10:45.080 this project or borrow money for a project? So 00:10:45.080 --> 00:10:48.240 you essentially need to, number one, forecast. 00:10:48.639 --> 00:10:51.740 So in the same way that if I was going on a trip, 00:10:51.980 --> 00:10:54.120 I'm going to check the weather to see, okay, 00:10:54.340 --> 00:10:57.159 hey, I live in Texas, but if I'm going to the 00:10:57.159 --> 00:10:59.100 Caribbean or wherever, I'm going to check the 00:10:59.100 --> 00:11:02.600 weather. so that I can prepare to dress for the 00:11:02.600 --> 00:11:06.399 weather that I'm going. And many times you have 00:11:06.399 --> 00:11:08.679 to say, hey, when am I projected to get paid? 00:11:08.799 --> 00:11:10.940 Because that's the other part. What are the terms 00:11:10.940 --> 00:11:13.460 of when you get paid? I collect money up front 00:11:13.460 --> 00:11:15.440 and then I collect it at the end. Well, how long 00:11:15.440 --> 00:11:18.019 is that project going to take? So sometimes it's, 00:11:18.100 --> 00:11:20.460 hey, people take on all these projects and then 00:11:20.460 --> 00:11:23.559 they have all these kind of unfinished projects 00:11:23.559 --> 00:11:25.700 that are going on to where they actually can't 00:11:25.700 --> 00:11:27.840 collect. So I have to be strategic with my schedule. 00:11:28.039 --> 00:11:30.879 So I can now map out, all right, I got project 00:11:30.879 --> 00:11:33.440 A starting. Project A should be completed here. 00:11:33.559 --> 00:11:35.460 Here's when I should get paid. And then do I 00:11:35.460 --> 00:11:37.879 have a process to make sure I get paid on time? 00:11:37.980 --> 00:11:41.399 All right. Because when you're in business, remember, 00:11:41.399 --> 00:11:43.740 this is a two -way relationship. Granted, you 00:11:43.740 --> 00:11:46.779 want to provide the customer certain benefit, 00:11:47.299 --> 00:11:50.580 maybe terms and whatnot. But ultimately, if you 00:11:50.580 --> 00:11:52.139 feel like you have to bend over backwards for 00:11:52.139 --> 00:11:54.960 the customer, you need to assess the work product. 00:11:55.139 --> 00:11:57.690 Is what I'm offering really valuable? and compared 00:11:57.690 --> 00:12:00.370 to their competitors, because if what I'm offering 00:12:00.370 --> 00:12:03.269 is that valuable, then people will make adjustments. 00:12:03.809 --> 00:12:06.330 You know, I was talking about, we won't go down 00:12:06.330 --> 00:12:08.610 this rabbit hole, but if you were to go buy a 00:12:08.610 --> 00:12:12.289 designer purse, for example, then those high 00:12:12.289 --> 00:12:14.769 -end designers don't give you discounts, right? 00:12:15.029 --> 00:12:17.850 They don't run specials. You don't see, you don't 00:12:17.850 --> 00:12:19.909 see, you know, when you're at Macy's or JCPenney, 00:12:20.110 --> 00:12:22.830 right, you might get a 10%, 50 % off call. Well, 00:12:22.830 --> 00:12:24.950 when you go to, you know, Kristin, they're not 00:12:24.950 --> 00:12:27.220 running specials, you know? They just say, Hey, 00:12:27.340 --> 00:12:29.379 here's the problem. Here's what it costs. And 00:12:29.379 --> 00:12:31.480 if you can't afford it, you need to come back 00:12:31.480 --> 00:12:33.899 when you can. All right. And, and so as a business 00:12:33.899 --> 00:12:36.799 owner, sometimes you have to be willing to take 00:12:36.799 --> 00:12:39.080 the risk of not bending over backwards to your 00:12:39.080 --> 00:12:41.419 customer. Because like I said, if you take on 00:12:41.419 --> 00:12:44.220 bad projects and you haven't forecast it well, 00:12:44.220 --> 00:12:46.700 or you take on a bad project that you forecast 00:12:46.700 --> 00:12:48.419 it, and you're like, Oh, I'll just make it up. 00:12:48.840 --> 00:12:50.639 Well, basically you're just going to eat away 00:12:50.639 --> 00:12:53.200 at your profits. And then those, a lot of times 00:12:53.200 --> 00:12:55.480 you have what they call as cash trapped in the 00:12:55.480 --> 00:12:57.919 balance sheet. Because if I know, if I have money 00:12:57.919 --> 00:13:00.000 in the bank, but I know I got to pay for the 00:13:00.000 --> 00:13:02.120 next project, I can't really spend that money. 00:13:02.179 --> 00:13:05.139 I got to prepare ahead of time. So my cash isn't 00:13:05.139 --> 00:13:08.100 really free to use. And then what happens is 00:13:08.100 --> 00:13:11.200 I show profit for the prior year. And this happens 00:13:11.200 --> 00:13:13.700 also when it comes to, most people are on what 00:13:13.700 --> 00:13:15.940 you would call a cash basis. So for example, 00:13:15.960 --> 00:13:18.799 I could do a job today, but not get paid for 00:13:18.799 --> 00:13:21.379 it until next year. Well, I wouldn't report the 00:13:21.379 --> 00:13:23.919 income until I get paid for it. So I've had clients 00:13:23.919 --> 00:13:26.330 where, hey, In January, they received $200 ,000, 00:13:26.330 --> 00:13:29.570 $300 ,000 for prior work they did. Well, the 00:13:29.570 --> 00:13:31.870 IRS says, hey, you received that money in this 00:13:31.870 --> 00:13:33.789 year, so you're going to pay tax on it in that 00:13:33.789 --> 00:13:36.629 year. But they've already allocated that cash 00:13:36.629 --> 00:13:38.470 to something else. So it could be tied up into 00:13:38.470 --> 00:13:40.669 a project. So what happens is they get a tax 00:13:40.669 --> 00:13:42.950 bill. They're not ready to pay. Or, hey, when 00:13:42.950 --> 00:13:44.610 we talked to you about the quarterly estimates, 00:13:44.909 --> 00:13:46.629 as far as, hey, you need to pay on a schedule 00:13:46.629 --> 00:13:48.710 and you don't have the money to pay it, then 00:13:48.710 --> 00:13:50.710 the IRS is going to just charge you more. So 00:13:50.710 --> 00:13:52.929 part of your plan is I want to pay the IRS more 00:13:52.929 --> 00:13:56.120 money. So I had to account for taxes as the expense 00:13:56.120 --> 00:13:58.399 when we talked about before. But if I'm managing 00:13:58.399 --> 00:14:02.159 debt, that really holds in further on my forecast. 00:14:02.419 --> 00:14:04.320 Ultimately, I'm not paying more on money that 00:14:04.320 --> 00:14:06.559 I eventually will owe in taxes. Yeah. That's 00:14:06.559 --> 00:14:08.279 good. I hope y 'all heard that. Let me tell you 00:14:08.279 --> 00:14:10.139 something. First things first, I got a forecast. 00:14:10.360 --> 00:14:12.019 I don't know if y 'all heard that, but you got 00:14:12.019 --> 00:14:14.500 to kind of temper yourself, learn some contentment 00:14:14.500 --> 00:14:16.379 in the position that you're in before you all 00:14:16.379 --> 00:14:19.080 pursue these projects. Because it is a lot of 00:14:19.080 --> 00:14:20.919 pressure, especially out here in these social 00:14:20.919 --> 00:14:23.620 media streets and the TikTok and all the places 00:14:23.620 --> 00:14:25.779 where you, so like you gotta go, go, go, not 00:14:25.779 --> 00:14:27.720 really sitting down and seeing where your money 00:14:27.720 --> 00:14:29.960 is at. And you mentioned something there, Terrence, 00:14:30.100 --> 00:14:32.059 about it being tied up. So basically, you don't 00:14:32.059 --> 00:14:34.019 have it. You don't have it. If they have not 00:14:34.019 --> 00:14:37.039 paid you, you don't have it, right? So... doing 00:14:37.039 --> 00:14:39.620 another project, taking on debt. It doesn't seem 00:14:39.620 --> 00:14:42.860 to be wise or beneficial in this regard. Now, 00:14:43.039 --> 00:14:46.539 what is something to take on debt for? What does 00:14:46.539 --> 00:14:48.659 a good debt look like? I guess it's a good question. 00:14:48.860 --> 00:14:51.580 Well, ideally, when you take on debt, you should 00:14:51.580 --> 00:14:54.139 act to be excited because whatever you're buying 00:14:54.139 --> 00:14:57.299 is going to produce enough money to pay for it. 00:14:57.659 --> 00:14:59.740 So if I bought a house and I was like, hey, this 00:14:59.740 --> 00:15:02.340 house is going to pay me $5 ,000. And the debt 00:15:02.340 --> 00:15:04.820 is $2 ,000. Well, I'm excited. All right. I just 00:15:04.820 --> 00:15:07.840 made $3 ,000 a month, right? Minus whatever expenses 00:15:07.840 --> 00:15:11.080 I might have that are maybe unexpected. But truly 00:15:11.080 --> 00:15:14.360 debt should buy assets. Those assets should produce 00:15:14.360 --> 00:15:16.840 enough money to pay for the debt plus some. All 00:15:16.840 --> 00:15:19.059 right. And so that kind of leads to your third 00:15:19.059 --> 00:15:21.840 part is when you use debt to buy long -term assets. 00:15:22.120 --> 00:15:25.600 You have to factor in. the value of the assets. 00:15:25.779 --> 00:15:28.379 So I have to think about, okay, when I actually 00:15:28.379 --> 00:15:31.279 get paid, what's the spread between what I'm 00:15:31.279 --> 00:15:34.559 receiving from the asset and the cost of the 00:15:34.559 --> 00:15:37.500 debt itself? So generally we take on debt in 00:15:37.500 --> 00:15:39.840 a business, they call that your cost of capital. 00:15:40.240 --> 00:15:42.480 And the cost of capital, whatever the return 00:15:42.480 --> 00:15:46.179 I am desiring should be more than the cost of 00:15:46.179 --> 00:15:48.820 the capital itself. So that seesaw example, right? 00:15:49.299 --> 00:15:52.370 The asset should be higher as far as what it 00:15:52.370 --> 00:15:55.450 produces than the debt is costing. And because 00:15:55.450 --> 00:15:57.330 when you take on debt, you are at risk. Like 00:15:57.330 --> 00:15:59.570 we talked about before the podcast, when I spend 00:15:59.570 --> 00:16:02.450 my money and I lose it, I go back to zero. When 00:16:02.450 --> 00:16:04.549 I spend someone else's money and I don't make 00:16:04.549 --> 00:16:07.250 money, I'm in the negative. So you have more 00:16:07.250 --> 00:16:09.370 risk when you take on debt, which means you have 00:16:09.370 --> 00:16:11.629 to be compensated for that risk. That's really 00:16:11.629 --> 00:16:15.330 how it works. Right? For example, hey, lend me 00:16:15.330 --> 00:16:19.179 20 bucks. If I pay you back today, You may not 00:16:19.179 --> 00:16:22.179 want interest, or you may not desire much interest. 00:16:22.799 --> 00:16:24.720 If I were to hold the money for five years, you'd 00:16:24.720 --> 00:16:26.940 be like, well, hold on, you gotta pay me like 00:16:26.940 --> 00:16:29.539 $30 back or $4 back, right? I'm not gonna just, 00:16:29.899 --> 00:16:32.720 so the longer it takes to pay it back, the more 00:16:32.720 --> 00:16:35.019 you should be compensated for it. So that's the 00:16:35.019 --> 00:16:37.259 same concept when you take on debt, right? If 00:16:37.259 --> 00:16:38.960 you're the quote unquote investor, which is what 00:16:38.960 --> 00:16:41.559 you are, when you take on debt, you're the investor, 00:16:41.700 --> 00:16:44.879 you need to be compensated. for the debt that 00:16:44.879 --> 00:16:47.960 you're taking on as the investor to say, hey, 00:16:48.019 --> 00:16:51.019 the money I get as a result should be more than 00:16:51.019 --> 00:16:54.360 what I'm paying for this. And if you can predict 00:16:54.360 --> 00:16:57.679 that and forecast it ahead of time, then a lot 00:16:57.679 --> 00:17:00.399 of times debt can help you accelerate where you 00:17:00.399 --> 00:17:02.740 are and the smart use of debt will help you get 00:17:02.740 --> 00:17:05.500 there faster. But if you don't do it smartly, 00:17:05.640 --> 00:17:07.859 you might say less of taxes in the year one, 00:17:08.079 --> 00:17:10.559 you might even see your revenues grow. But if 00:17:10.559 --> 00:17:13.039 you don't do proper forecasting, your cash will 00:17:13.039 --> 00:17:15.920 probably start to dwindle. And then like I said, 00:17:16.039 --> 00:17:17.480 you can literally grow yourself out of this. 00:17:17.640 --> 00:17:20.660 Wow, that sounds so terrible. Grow yourself out 00:17:20.660 --> 00:17:23.319 of business. And I remember one of the podcasts 00:17:23.319 --> 00:17:25.579 we did is that you really got to know your business. 00:17:25.869 --> 00:17:27.650 You really got to know what you're doing and 00:17:27.650 --> 00:17:31.230 see it taken on debt is even worth it at the 00:17:31.230 --> 00:17:32.910 end of the day. Cause like you said, you can 00:17:32.910 --> 00:17:35.269 get some interest from it. You can, it's some 00:17:35.269 --> 00:17:37.670 tax things that you can do, but at the end of 00:17:37.670 --> 00:17:40.670 the day, if the debt still outweighs the benefits, 00:17:40.869 --> 00:17:43.349 it may not be worth it. Definitely. So hopefully 00:17:43.349 --> 00:17:46.809 you took away some practical ideas around how 00:17:46.809 --> 00:17:49.369 you manage debt. And as Tamia said, this is not 00:17:49.369 --> 00:17:52.769 advice to you. So work with a qualified professional 00:17:52.769 --> 00:17:55.680 that can help you make decisions. And just because 00:17:55.680 --> 00:17:57.440 your accountant said, hey, you need to go buy 00:17:57.440 --> 00:17:59.740 a car or go buy some equipment to reduce your 00:17:59.740 --> 00:18:03.140 taxes. They are normally historic figures. They're 00:18:03.140 --> 00:18:05.980 only looking to help you from a historic standpoint, 00:18:05.980 --> 00:18:08.640 right? They look at what happened last year. 00:18:08.960 --> 00:18:11.640 How can I help you not pay taxes on what happened 00:18:11.640 --> 00:18:15.420 last year versus a forecast says, here's what 00:18:15.420 --> 00:18:18.380 you're anticipating to happen. What can we do 00:18:18.380 --> 00:18:21.069 to put you in a better position? for what we 00:18:21.069 --> 00:18:23.029 anticipate to happen. If you're always looking 00:18:23.029 --> 00:18:24.829 in the rearview mirror, you're probably going 00:18:24.829 --> 00:18:28.289 to crash at some point. We will talk next time 00:18:28.289 --> 00:18:31.829 about the actual reinvestment of your cash back 00:18:31.829 --> 00:18:34.009 into the business and how you want to treat that. 00:18:34.430 --> 00:18:36.849 So once again, keep more of what you earn and 00:18:36.849 --> 00:18:39.170 we will talk to you next week. Peace.