Figuring out your true net worth and gaps in your wealth

0:00So when you graduate from Service Academy, you have a 5-year military commitment. And all the all my my buddies that played football were, you know, we're going to go in the Marine Corps and we're going to go kill bad guys. And I was just, oh yeah, that that's what I'll do. That sounds that sounds good. And I just got engaged to my, you know, now wife and, you know, she kind of came to me and said, hey, you know, is there any way that that you can pick a safer job? Like maybe one that's maybe one that's not voluntarily putting yourself in harm's way.

0:31And and that really led to a long conversation of, you know, what do we want our lives to be? Do we want to be in the military for 20 years moving around or, you know, do we want to get back home and be around family? We're born and raised in Las Vegas, both of us, and and both of our families, you know, to this day still live here, and family's really important to us. So, we wanted to raise our children, you know, around, you know, family and grandpa. I I never met either one of my grandpas growing up. They both died before I was born. And so that's really important to me to have, you know, my girls be brought up with with, you know, living grandparents.

1:06And we're very fortunate that we have a big family here. And so I chose financial management. And I remember sitting in the middle of of Quanico, Virginia. It was like I don't know -9 outside with windchill and they're reading off where everyone's getting their you know their duty station and their orders and you know they're like Lieutenant Smith you know you're going to Lune Lieutenant whatever you're going to Lune whoever you're going to you know Pendleton and people would get like oh man I'm jealous like you're getting somewhere warm and then they were like Lieutenant Pearson Miami Florida and all 200 people just like looked at me and they were just like are you kidding me like you would get Miami.

1:47And so I spent all five years on active duty in Miami, Florida, and I ran the budget for Central and South America out of Marine Corps forces South. So, kind of a weird place for a second lieutenant to go. Cuz everyone else there had kids that were my age and I didn't really have any friends. But professionally, I got a lot of experience with within finance. And then really figured out that I I I kind of had a passion for it and I liked it and I didn't want to go into corporate finance and there was some you know military programs available for you know going to get my MBA and going to get you know additional certifications and and designations within the financial planning arena.

2:30So I I really was just a professional student for five years. My whole time on active duty I was I was in school. I never left. And wow, you know, this this was I kind of I I'm the kind of guy that kind of plants his flag in something early on and was just like, okay, like this is what we're doing. This this is the plan. So, let's just go out and get all the education I can possibly get before I start so that I can be very effective in, you know, guiding guiding clients forward through, you know, their own lives. Yeah. Yeah. Yeah. And it's such a testament to to show that, you know, the military can be such a great path for a lot of different careers, you know, and and you can obviously you're serving your country and and you're going to be very proactively involved in whatever it is you're doing in the military, but at the same time, you're going to have downtime and you're going to have opportunities

3:20To pursue other things that are really going to help you in the future. So, that's what I found to be the case, too, with real estate. So, that's awesome. And you also discovered that you hated humidity, I guess, too, because you Yeah. No, that my listen my Miami, Florida is a fun place for about six months to live. And then my wife got pregnant and couldn't even couldn't even walk out of the front door because she's in her first trimester sick as a dog and it's 95 degrees and 95% humidity.

3:50AI. So, it was it was a tough place to to have young children for sure. Yeah. Nice. Well, I'm glad you got back to the desert. So I tend to be really focused obviously again on high cash flowing rental properties because I eat, sleep, and breathe it and and that's what I know best and I probably have a very unbalanced portfolio. I'm I'm guessing you would tell me. Since pretty much everything I have is invested in real estate. And I've tried different investments over the years. I even took part of my loan as a as a junior or a cow at at West Point and was day trading for a little while, which did not go well.

4:29And I've tried just about everything else out there. But I've always come back to the the the realization that I can just create so much higher returns with these these rental property the right properties because I really understand it and I know how to buy the most efficient property and I can control it a lot better than you know some equity that I have no control over obviously. So, how do you approach a client like me and help someone become more round well-rounded or diversified or or should I even be do you think in your opinion?

5:04Yeah. No, I think it's I think it's interesting the the financial industry itself has been very transactional in nature just really over I mean let's call it the last hundred years or so, right? It's been very much, hey Kirby, give me all your money and I'm going to go buy these stocks and I'm really good at buying stocks and therefore I justify my commissions that I'm going to make off of your money. That that's really how the industry had worked. And even today, you know, if you go to most, you know, guys that call themselves, you know, financial adviser or wealth manager, financial planner, whatever title they give themselves, and you're a real estate investor or a privately held business owner, it's kind of the same concept.

5:45You know, you're going to go to me and say, "Hey, why would I put money into the S&P 500 and get 10% return when I know that I can place that same capital into a real estate property, get a higher appreciation percentage plus cash flow plus tax incentives or privately held business owner? Hey, yeah, but I can put the same money back into my business and I know I can get 20x that return." so, so I think when you approach, you know, traditional finances from that perspective, yeah, there hasn't really been a lot of advice given to real estate investors because there's no way for most guys to monetize off of it.

6:29And so, you you sort of see this whole demographic of of investors that really don't get a lot of, you know, high sophisticated advice around their finances. You know, the way that I look at it is, hey, Kirby, you're really good at, you know, buying real estate and picking real estate. And if that's the what you know and how you want to create returns and cash flow, that's great. However, you need to make sure if you're going to put all your chips on the table in one asset class, you need to ensure that all the ancillary parts of your balance sheet are airtight, right?

7:08all of your estate planning, your trust documents. You need to make sure that you have, you know, a very very robust tax strategy. You have to make sure that you have the right insuranceances, right? You got to have the right liability protections. You got to have, you know, compartmentalization of risk of your properties in different LLC structures and that you're not taking too much liability risk within the properties. Something as simple as the right car insurance and and people always one of the first questions I always ask people is you know what like do you know what your liability limits are on your car insurance and they're like no I have no idea whatever whatever Geico told me to get and I've just seen it too many times where you know someone's driving home from

7:56work or they're going to the grocery store and they're not driving in a business capacity they're not in a business car they you they run into someone and that person hires a personal injury attorney and you know they've got state minimums on their car insurance and they're worth you know they're worth a million $2 million when guess what if you don't have the right insulation and the right protection everything you just built boom like it's gone and yes can they come after your LLC's that have your real estate no but if they take all of your cash that's sitting in your bank account well guess what now you can't make the next deal or you're going to have to sell a property to create liquidity on your balance sheet so you can put food on the table.

8:36Right? So, it's everything's connected, but I think traditionally everyone looks at this is my real estate and I'm only going to make real estate decisions around it. This is my retirement money and I'm only going to when in reality everything is connected. And I think a really really good strategy is when you're able to leverage one asset that has no correlation whatsoever to another asset for an overall economic gain. And I think that's the name of the game is understanding where all your assets are, what liability and risk exists with each of those, and then what efficiencies can we find by leveraging one asset for another.

9:17Got it. Okay. And that that kind of that kind of ties into your living living balance sheet tool. And and if you're listening to this, you can get a copy of this tool, but I was just looking at it. You sent it over to me a couple weeks ago, and it was it's really interesting because it kind of puts all these different categories that you just talked about into one it's it's one like picture. It's one dashboard, I guess, when you log into it.

9:49So you enter in what your different components are and it asks you all the questions it around these different components and then you can see one overarching financial picture and and maybe where you have some some lack or some categories that that you know you haven't attended to. So I want to talk through the different categories to understand where people listening to this could focus more. So could you kind of share what what categories you think are most important?

10:20Yeah, I think I think financial really good financial planning I think we can break it down into four domains. And I we we we focus so much on the balance sheet because I think a lot of people are very used to looking at balance sheets but but they've never really set up you know really their own to include every facet of their entire life. Like maybe they include a couple components but not everything. And so really that those domains break down to you know your assets, everything you own, your liabilities, everything you owe.

10:55You subtract, you know, the assets from the liabilities, you're left with your net worth. But I think there's two other components that that need to be added on top of a traditional balance sheet. And that's the protection of your balance sheet. These are things like different types of insurance that you get. These are things like your wills and your trust and your legal entities. Life insurance, disability insurance, health insurance, umbrella insurance, liab like there's there's a lot of different products that are available that you can buy to ensure that net worth is never detrimentally impacted, right?

11:29And the reason why I think that that really knowing your net worth number is so important and knowing it to the penny is because you know when when I think about like what financial freedom means, financial freedom means that your asset base and your net worth is sufficient enough to provide cash flow to you for the remainder of your life without running out of money. Like that's the mathematical equation of financial freedom.

12:02Now that means different things to different people, but that's the math behind it, right? And so you can kind of think of of the the the balance sheet itself. You know there there's a really good story a lot of people are familiar with it about General Mattis back in Fallujah. And you know, he was talking to a reporter and one of his, you know, staff ran up to him and was like, "Hey, you know, we're going to launch this air strike." And he just said, "Yep, do it." And the reporter kind of looked at him funny like, "H, how can you just make a decision like that without you didn't even ask where it was?" And he kind of looked at the reporter and kind of laughed and he was like, "I don't need to think about making this decision.

12:48I've been planning on making this decision and I've modeled this out in my head a thousand different times. Like I knew this was going to happen. And I think if we take that analogy and we apply it to having a really really wellth thoughtful builtout balance sheet, what that means to you as a real estate investor and what that allows you to do in the marketplace and with opportunities that arise is when you have really really good cognizance of of what your financial picture is currently, you can start to simulate things like you know there's going to be a a lastm minute home that comes up and you got 60 days to close and instead of scraming handling at the last minute.

13:30Like, let's stress test it. Like, let's simulate that out. What if I need $200,000 in 60 days? What's my plan? How do I do that? Or on the flip side of things, what happens if the unexpected happens? What happens if I can't go to work for a month, 3 months, 6 months? What if I get sick? What if my kid gets sick and takes me away from work or doing my deals or focusing on like what like stress test all those things and without having a true cognizance of what your financial balance sheet looks like?

14:08It's impossible to model those simulations out. So, so is that what you typically do? Because I was going to ask you about that because I like that that definition of financial freedom that you know your assets pay are are enough to pay you till the day you die. You know, support your lifestyle for the rest of your life. And on the surface, you know, that sounds logical and sounds pretty easy to calculate, but it's easy to calculate based on today I need this much money and you know, but then you have another kid, you have like you said, an illness that comes up, you have new opportunities, a change of jobs, all these things that it's very difficult to predict.

14:48And so I think that's where people then start to go, you know, no matter what level they're at financially, it's never enough, you know, because they're like, well, yeah, but if this black swan scenario occurs now, I'm screwed, you know, and so they they're left with this feeling of anxiety that, you know, the answer is always more. And so I think my goal and what I like to think about when with financial freedom is to get to a place of feeling peace, you know, and and not feeling like more is is the solution, but feeling like you have enough.

15:20And and that's a very tricky place to get to because we don't know what's in store. So so I guess when you're looking at somebody's living balance sheet, what is it that you're looking for? And then how do you help them answer that question of what's enough for them? Yeah. So I think num number one is is I think most people's financial lives are like the junk like the drawer in the kitchen like the junk drawer if you know what I mean. You probably have one, right? It's like you get important mail or you have something on the kitchen counter but you don't want it out but you want to keep it.

15:57And there's you know my house we have like seven, right? Like little kids like they're just filled to the brim. But that's most people financial lives, right? They're this they're this proverbial, unorganized junk drawer in the kitchen. And so really what I look for number one is, you know, how did our balance sheet get to where it is today? Like what were you trying to accomplish when you set up X, Y, and Z? Right? And it's it's very interesting to hear people perspective on this because you ask someone, "Hey, you know, I see that you you know, you you have a you know, self-directed IRA and you've got $100,000 sitting in it.

16:38You know what what take me through how we got to that point." And it's like, "Oh, well, you know, I had an old IR, you know, old 401k and you know, I didn't really know what to do with it. So, you know, I rolled it over into a self-directed like, okay, like what's it invested in?" Well, nothing right now. It's just been sitting in cash. Like I've heard that a lot from people like what what was the plan for it? Well, I don't really know. So, people kind of make these decisions just like, "Oh, I heard about a self-directed IRA. Like, I should do one." Yeah. But they they don't really have a purpose for it.

17:10They just kind of do it. Or like, "Hey, I see you have, you know, $675,000 worth of death benefit, a life insurance policy. Like, how did you come up with that?" Oh, you know, I I don't really know. Like, I I just I had a kid and and that's what the agent told me to get, so that's that's what I got. And it's really interesting. You kind of if you keep asking these questions around people's like how they got to the point that they're at on their balance sheet, it's it's very commonly I I don't know.

17:40It's just kind of what happened there. There very rarely is someone that says, "Well, I have this percent in, you know, this retirement account to accomplish X. I have this amount over here to accomplish why I did this and I set this up like very rarely and this is regardless of net worth like you you'd be amazed people think like super high net worth like think of like the wealthiest person you know and you're like man that guy's really got it together they know exact they're the biggest messes out of everyone they've just been able to out earn h poor financial decisions right and so it's there there's really never a cohesive ive unified approach to making investment decisions.

18:25It's usually just kind of peacemeal. So that's usually, you know, just asking people how they kind of got to where they are in in their balance sheet. And I think it's sort of a, you know, it's a tough thing for people to do. It's it's sort of a a reality check of I I haven't really put a lot of time and thought into this. I I I don't really know. I haven't updated my trust since 2003. And I've had four kids since then and acquired two businesses and 10 different properties. And yeah, I know I need to go get that redone.

18:57I just don't really want to. Yeah.