Do you know that clinics don't have to be private practice owners' sole source of income? In today's episode, Eric Miller, the Owner and Chief Financial Advisor of Econologics, shares with Nathan Shields the importance of creating multiple income streams and how you can do it. It isn't a sudden shift of capital; instead, it's a steady effort to create wealth from other financial sources, leveraging the clinic's revenues to diversify your wealth. If you follow this episode, you'll witness a dynamic change in your financial future. You wouldn't want to miss out on this opportunity. Tune in!
I've got Eric Miller of Econologics on with me. Thanks for joining me.
We got to stop meeting like this. We need to change the name of the show like Eric and Nathan Show or Nathan and Eric Show.
We can do all of the above, but it's fun to talk about all this money and finance. It's more important than ever people get their money right.
Every time we talk, we tend to start talking about other things that are going on in the private practice world and you tend to come up with some other things that we could talk about, “Do you think your owners would be interested in this?” I say, “Of course, Let's talk about it.” It makes it too easy and we're continuing that conversation. Share with us what you want to talk about on the show because I think it's important for owners to get this larger view, this bigger perspective of what their clinics can do for them financially.
If you took a survey of 20, 40, 50 practice owners, 90%, 95% of them if I asked them the question, “How reliant is your household on your practice income?” Most of them would say, “My household is heavily reliant on my practice income for its economic survival.” My follow-up question is, “How many of you want to be in that condition forever?” Almost all of them are like, “I don't want that to be the case.” It's imperative that no matter where you are in your practice journey, you start thinking about, “How is it that I can start building multiple streams of income for the benefit of my household?” I'm not relying upon a practice cell for my, “Retirement.”
That is something that people should be thinking about immediately. The concept of having multiple income streams is not new. I didn't make that up. That's been around for a long time and it is true. I think it’s the sequence. People start chasing other income sources without getting their main income source, humming and purring. They take their attention away. "Maybe I'll go through this real estate flipping. Let's get my practice flowing like the Mississippi first and making sure that I set up the right channels for money to flow to the household to build other income sources."
It's important that you said it's time to start thinking about it, not to start doing something right away. Thinking about what those other income streams could be with ideas down the road. Maybe look at your vision board 2, 3 to 5 years down the road as necessary but focusing on, “I want to have multiple ends of constraints, but let's focus on getting this one solid and strengthened first where I can now divert attention without hurting my business.”
The business is still the main generator of your wealth and that is the case. You want to make sure that it is serving the needs of the household and you set it up so that it can do that accordingly.
What do you think would be a good marker for someone to say, “Now is the time for me to look at other income streams with more attention?” Do you have an idea in your head of where a practice owner should be at that point?There's no such thing as a bad investment, just the misapplication of it, except for attempts to defraud and rip people off. Click To Tweet
Let's take someone that's starting a practice. You shouldn't be thinking about building other income sources if you're starting your practice. You're going to be getting new patients in the door, growing your practice, growing your marketing. All those things are where you should be diverting most of your money. I think once you start hitting that threshold where maybe you do not have to treat full-time, the revenue range could vary, once you start hitting that maybe $600,000 to $750,000 range where you've established. I think that at that point, “Let's make sure as this thing grows, that I'm not channeling all the money back into the business that I am siphoning off some of this money to go to the household.” Specifically, to create other income sources. That's probably a good marker, as far as revenue.
At the very least, they're not treating full-time and ideally, maybe they have a trained and trusted leadership team of some form or another, even if that's 1, 2, 3 people on board that they delegate day-to-day operations to.
I think at that point in time, you've established that you do have a real business going on. It's not you, one other person and that's it. I have a business, I have an organization board, we've written up policies, procedures and all that. I've grown up, now I need to make sure that this business serves my household accordingly.
I'm glad you bring it back to serving the household because that's something I know that we've discussed in the past, but for those people who haven't read those previous episodes that we've discussed, how the business serves the household? I'm glad that you brought it up and reminded the readers of that.
This idea is that it's going to take 30 years to accumulate enough money to, “Retire.” We're trying to rid people of have that notion that it shouldn't be able to do that. If your practice is viable, it's growing and you set up the right systems, there's no reason why you can't be financially independent in a 7 to 10 year period. I think it's a real number, but you have to set it up accordingly so that it can do that.
I know you have something you want to share with us. Is this a good time to serve people who are reading?
It's a blueprint for how to create multiple income streams for the benefit of the household. I'm going to preface this by saying that a lot of people have been under the notion, I'm going to go back here, like the traditional wealth-building model. Any of the people reading this, I know that they probably work with financial advisors in the past.
Traditionally what advisors will tell you is to save enough in your retirement accounts. Eventually, you'll have enough that can replace about 70% to 80% of your current income. They'll run all these fancy simulations that show you that if you do that, then the probability is that you'll run out of money are a little bit small. My issue with that is who wants to live on less income?
When you figure taxes, inflation and all these things, it's a model. It's like, “Why would I want to do that? I don't want to live on less. I want to be able to live on at least what I'm making now or if not more.” That's been the traditional wealth-building model. It's like, “Here's my practice. Let me take enough money home from my household where it pays for my lifestyle, my taxes, my debt. I put money in qualified plans and maybe some brokerage accounts.” That is the target. I'm not saying this is terrible because it's better than doing nothing. It's certainly better than not having anything, but I feel there's a better way to do it.
Let me go over how this works. It's a shift in a viewpoint that your practice is not more important than your household. We've talked about this concept before the household being the parent company. Everything is eventually going to flow for the benefit of the household. The practice is there to serve it, but it also needs to be viable because if your practice isn’t viable, then you're going to have problems channeling money in the household.
This is why it's important to make sure your practice is profitable, sustainable, transferable, new patients, all those things that you guys talk about in working with people, that your business is getting into that condition. At some point in time, you are going to have to figure out a way to set up that wealth storage account, which again is the owner compensation of the three hats that you wear in the business. That is the owner's compensation.
You should be taking enough out of practice to pay for your basic lifestyle, your taxes and your personal debt, whatever that is. Salary and some distributions are typically what they would be. I know this says 15% to 20% distributions, probably not. It's more like 5%, I would say. Figure a salary in 5% of distributions and that should cover your lifestyle, your taxes and your debt.
Make sure you set up that wealth storage account, which is a bank account or some kind of an account that's going to get linked to your business account. Every week, an automatic draft comes out from the business checking to that wealth storage account like clockwork, 10% ideally. I know people can't start there. Try not to start there if you haven't done it before, but you're trying to get this expense into the business so that it comes out every single week.
As a testimonial to that, I had a coaching client who, during the pandemic, started this. He followed your advice. He also read Profit First by Mike Michalowicz, who says the same thing. He started with a small percentage, 1%, 2%, 3% weekly. Whatever his collections were, he put that into the savings account and did it faithfully even through the pandemic. He's a small practice. It was him and another PT and that has grown since getting some coaching, but now he's got this $40,000 sitting in a savings account after a pandemic year. He's like, “I didn't know if it was possible. I didn't think I could do it.” He does it now. Whether he thinks it's going to hurt or not, he does it and went fine.
Nothing bad has happened to him because of that. The message is what you hit right there was that he looked at it as a necessary expense. He pushed the practice hard enough to cover it as an expense. It's one of those natural financial laws, phenomenon or whatever you want to call it that I know seems a little mystic when you say, “Don't worry about it. The money will show up.” It does. There's a demand for it because it's an actual expense.
That's a perfect example of someone that was like, “I have no idea where the money's going to come from because I see the numbers. I know my expenses. I know that it's physically impossible for me to do this and for this to work.” I'm like, “Do you want to bet me? I've had many people that have told me that and I bet them. I win almost every time." If you do it, you'll have a certain amount in your wealth storage account. That's the first thing to do.
What do you recommend people do with this chunk of change that they got now in these small storage accounts?
It’s not ideal to have money sitting in a bank in any case. You want enough to have reserves, you want enough to have emergency funds, but ideally, this money isn't sitting in here to do nothing.
We did a full blog on this to refresh people where we talked about the many different savings accounts you should have, whether it's an emergency account, rainy day fund, fund account, tax account. All this 10% can go to all these numbers of things.
The 10% is for the household wealth storage account. The other accounts have their own percentage that you would put into those. Remember, this money is for the benefit of the household. Those other accounts may have been for the business and your personal taxes. The money is not designed to sit there and earn 0.00001%. We want to get it in motion from that perspective and then it comes to what types of investments do we want to put it into?
By and large, this is where you can get in many differing opinions of how people invest money and their viewpoints on, “That's good. That’s a rip-off. I've never had any success with that. My dad said only invest in this.” I've been doing this long enough that I finally figured out that there's no such thing as a bad investment. It's the misapplication of it, except for attempts to defraud people and rip people off, which there are people out there that.
By and large, most people that, when they put their money in these different categories, as long as they do it correctly and they understand, then they're going to have a positive result. I can dig deep into each one of these buckets if you want me to start there. These are different buckets and your expectations need to be different on each of them because they're different and they serve different purposes.
Wealth management would be traditional stock and bond investing. If you're a big believer in public securities, equities, maybe some fixed income, then certainly there have been plenty of people who have made a lot of money in those types of strategies. From my standpoint, I would want to make sure that the allocation is correct, meaning that I'm not overly exposed to loss or risk, knowing that my practice is a pretty big and risky investment at the same time.It's prudent to build other income sources, so it's not the sole source of your retirement when you do sell the practice. Click To Tweet
What ends up happening with a lot of practice owners is they end up taking all their reserve money and they throw it in S&P 500 or whatever kind of 100% exposure and then the market goes down 40%. They're like, “My business now is suffering and now my retirement's down 40%.” If they're going to invest in that area, be a little bit more prudent on your allocation. Not being weighted in equities is a smart approach. That money's liquid and it's accessible to you. You can dip it. You can borrow against it if you need to. There are securities back lines of credit that you can get. As long as you do it right, you can get a positive outcome from it.
You have insurance products. You're going to get 1,000 different opinions on insurance products. Some people are like, “They're a rip-off. The insurance companies are just making money and your money's tied up.” I'm like, “All those things have some element of truth, but there is no other financial institution on the planet that guarantees an income for life and can provide some element of tax-free income like the insurance carriers can do.” Not only that, but I think a lot of people, probably a little nervous that Social Security may be there when we go to ask for it. It'd probably be prudent to have a portion of your money in some guaranteed products that can provide that income source for the rest of your life.
What are some of those products? Just name a few.
That would be like annuity contracts, cash value life insurance. We could narrow that down because there are specific types that you have to do it right. You have to do it correctly. There are specific types that you would buy, but that doesn't change the fact that you can get a positive outcome by doing it. There's that misnomer that all products in this category are bad and I get it because you talked to an insurance guy. He’d be like, “Why are you investing in the stock and bond market? You should be taking all your money invested in insurance products.” You talk to a stock market guy. He'd be like, “Why would you invest in insurance products? You're going to make 8% to 10% in public securities." It's like the scorpion and the frog thing.
I'm looking at this from a household perspective. That sounds pretty prudent to me to have some exposure to those two categories. The third one would be real estate. There are 1,000 different ways to buy real estate. You can do it yourself. You can do it with a partner. You can do private placements, whatever it is. You have to know yourself and find out which type of real estate that you have the most affinity with and that is going to produce your income and cashflow. I think by doing this, it minimizes your chances that if the stock market goes bad, big deal, I got plenty of money and insurance products and real estate. The real estate market goes bad, big deal. I got wealth management insurance products that are relied upon.
I'm not dependent upon one of anything. If I combine that with maybe I own my own building, which I would encourage if you can do that. I don't know if that's always possible, but it's certainly advisable to get that because depending on who's going to buy you out, especially corporates provide incredible lease arrangements with people that own their building.
In the real estate space or considering real estate, this 10% expense line, if you don't own real estate, would you recommend this chunk of money that's in the savings account be something that could be set aside for a down payment?
Absolutely. Let's say my practice is doing $1 million a year. Ten percent would be $100,000. How should that be split between these three buckets is usually a question that I get. There's no hard and fast rule. One of my advisors is like, “I do a third, a third, a third.” I’m like, “That's fine.” Some people are naturally inclined to real estate more. Maybe they do 50% of that amount in real estate and then they split the rest up between the other two.
I don't have a hard-fast rule. I think you can do all three, you know, especially if you're doing your full 10% and you've got a viable practice. This is how I do it. I put money in a storage account and then I try to do all three of these things. I'm building multiple income sources by doing that. If I do that in combination with growing my business, then in that 5 to 7-year period, I should have created enough to be able to cover my lifestyle expenses at least.
Have you seen anyone take this form or discuss this type of scenario with other financial advisors by yourself? Have you experienced what the feedback has been?
I can only imagine, though, that what ends up happening because you got to look at how financial advisors are paid. If you go to a fee-only advisor, he's going to say, “Do wealth management.” Number one, he wouldn't get paid for insurance products and certainly doesn't get paid for real estate. He may have you invest in a REIT or something like that, which I'm not like completely opposed to. I think they're a little bit watered down by the time you invest in it. I like private placements if I don't have to do the work because I don't have to do the work on those.
That's generally what happens is that it flies in the face of their recommendations of have put everything in public securities, put everything in the stock market. Regardless of what happens over the last many years, they're thoroughly convinced that it's going to provide you an 8% to 10% rate of return every single year on average, given the up years in the down years. Fundamentally, I disagree with that concept that is the only place that how you should build your wealth. I'm like, “I think you need to look at all three.”
I've heard you say this before, “If you've got a number one referral source, start finding number two.” It's not good to have someone that is 60%, 70%, 80% of what you need to keep your business running. You could say the same thing about your wealth. You don't want 80% of your wealth into one thing.
The reality is when you break down a household of a practice owner, it ends up being that your practice in, generally speaking, represents about 60% of your overall household net worth because of how fast it can grow. The value of it can grow, especially if you're working on growing it. It's going to grow at a much faster rate than any of your other outside investments if you're doing it right and that's where your attention should be. It's prudent at the same time to build these other income sources so that when you do sell the practice, it's not the sole source of your retirement.
I can be a testament to that in selling our practices down in Arizona. It's provided a lot of income, but the thing that's providing continued income is the real estate that I had behind those practices. That's given me a foothold to buy other real estate opportunities and whatnot. I can attest to the fact that the sale of the business provided something and that was great, but going forward, I'm looking at a lot of my retirement being more in the real estate realm than the money that I got from the sale.
The same thing goes when you sell. It's a big event. Putting it all in like a brokerage account or something like that, it's probably not the smartest thing to do. You want to have some familiarity with these other “alternative investments” so that it's not foreign to you when someone says, “I think you should put money in here.” You're like, “I've never even heard of that before.”
I heard the word annuities, but I didn't know what annuities were until after I sold the practice and cash value, life insurance plans. It wasn't until after that fact that I started learning about these things as opportunities and I had to weigh them out.
From a return standpoint, you're not going to get anywhere near the same “return” that you would if you invest in real estate or wealth management, but that's not what they're designed for. They're designed for stableness, having some stability in your assets in case there is something that goes wrong in the wealth management and the real estate space. I know it's workable. I don't know if it's the best strategy, but I know that it works.
By doing this, I find people’s condition gets better and they feel it empowers them to be like, “I got all this stuff set up automatically and systematically. Let me work on my practice now and grow that.” Where your wealth is going to be made is on the sale of the practice. A majority of your wealth is going to be made on the sale of the practice.
Considering that or outside of that, you've got other streams coming to the household and what are those?
If you have a qualified plan that you've been contributing to, like a 401(k) or an IRA, that would be another income source and then the practice building would be another one. Even outside of that, if you are setting up multiple practices as well, you can monetize a lot of things. You can monetize your intellectual capital. You can put money into some other business that you like. You can do that as well.Don't follow the same cookie-cutter advice you hear everybody else talk about. It's different for you. Click To Tweet
The wealth storage account isn't just for these three categories. The nice thing about the insurance products, you can leverage them to even buy more if you want to. A lot of these things you can utilize leverage to buy another asset, investment, business or whatever it will be. A lot of opportunities come into play when you position yourself in these kinds of accounts.
I love that how you open that up a little bit more to say, “Take this wealth storage account that siphoned off of the 10% of your revenues.” If you see a business of a friend, a family member, you name it that you want to invest in and provide some seed capital, what a great opportunity to see your wealth grow. If you have an idea for a product, this is where you take the money from this account to do some research, development, promotion and marketing of that product to see if it has legs and move forward. It's that thing that provides a lot more opportunity for you.
The thing I try to impress upon people, it's there for your future household financial survival. It's not for boats, cars or things that are going to depreciate in value. It's for income-producing assets, businesses, real estate, whatever that is. That's what the wealth storage account is for. Wealth storage accounts are named appropriately. It's there for you to store money until you can find something that would create more wealth for your household because money is not wealth. My best example of that is if you got stranded in Alaska in the middle of nowhere and you had $10 million in cash, would you be rich?
Not much to do with $10 million out in the bush.
Money doesn't represent wealth. It is having assets that produce something of value. That's what having wealth is.
I love the model and it's all based on that 10% withdrawal of your gross revenues on a weekly basis. When you were starting off, that number is relatively small and you think, “What am I going to do with a few thousand dollars? There's not much that can be done.” As this accumulates over time, it has a lot of power that can be available to you because for some annuities. You can get started for quite a little bit amount of money. You can put some of the stockings into stocks, but real estate, if you're looking at owner-occupied real estate, the terms there are significantly greater than if it's an investment per se. There's a lot of opportunities that you have even with a small amount of capital.
What kind of real estate do you like? Are you getting all kinds?
I personally like commercial real estate, to not have to worry about tenants, midnight phone calls and that stuff. I get my share of calls, but commercial properties are a little less hands-on. That was a great opportunity that I had with some of the commercial real estate that I had at the time of the sale was to sell it with some great terms of the company that purchased the practice. Then do a 1031 exchange into a couple of other properties.
You have to have some affinity or liking for the investments. I think there is something to that as well. It can't be because I think I'm going to get rich on this thing. When it comes to real estate, I'd like simple. I get it. People need a place to rent for whatever reason. These are how the numbers work and that makes sense to me. For some of the more complex real estate deals, I'm like, “That's too complex for me.”
To each his own because I have a coaching client who sold his practice within the past several months and he's got plans to do a different model of physical therapy. One thing that he does with his wealth is he learned how to, I wouldn't say, day trade, but he makes a good chunk of change on the money that he has by playing with stocks on a routine basis. He invested a lot of money into that education. Now he spends maybe an hour each day setting up what he needs to do on his trades. That is money that he has set aside for wealth matters.
That would be a perfect example of that. He figured it out but went out of his way to get himself trained and had it a little bit on this area. He didn't go into it blindly.
I'm excited about the real estate side of things. He's more excited about the stocks and bonds like you're talking about.
I don't think it's bad to maybe overweight that bucket if you like it more, but I would still have some exposure to the other three because I don't know if you know the outcome for every one of them is going to be certain.
Thanks again for sharing this. Anything else you want to share about it?
I think the big thing is that we don't want to be reliant on any one thing and the game isn't just an accumulation of savings. It is defining what it is that I want an income and working backward from there. I think you've got to figure out like, “How much income do I want to have?” That's going to allow you to look at how much in assets do I need to build to do that. If I want $20,000 a month of assets, $240,000 a year, I know I'm going to need at least $5 million in total assets.
I'm going to need at least that much to be able to generate that income. If I want $300,000, I'm going to need nearly $6 million in assets to be able to do that. It's important to define how much income you want when you decide that you want to transition so that you can factor in how much in assets you need to create to be able to hit that number safely.
You mentioned it earlier but being financially independent creates a lot of opportunities for you. I remember listening to a podcast and someone talking about the significant importance that financial independence plays nowadays when you consider a cancel culture. Having financial independence not only gives you an opportunity to do what you want to do but also allows you the opportunity to say what you want to say without fear. Go ahead and cancel me because I can do whatever I want financially. That could get worse in the future if you have ideas that are contrary to what is socially acceptable.
I didn't think about that, but you are right. You want to call it F-you money where you can say what you want to say because I have enough in assets, income and resources that household's indestructible or pretty indestructible. You have to have that viewpoint because it only does take one health issue, lawsuit, economic crash in a certain area that can devastate a household.
You have to make sure you have enough assets because not everything's going to go up vertically every single year. You're going to have corrections, asset prices, recessions and maybe even depressions. You have to have more than enough. Even if it comes down a little, it's not going to crash my lifestyle or my household, whereas people that are like razor-thin, something like that happens to them, game over.
Thanks for sharing. It was good to have you on again, as always. If people want to get in touch with you, how do they do that?
Go to Econologics.com. We have plenty of downloads, videos, assessments for them to take to help you take a step forward in changing your financial condition. That's all it takes. It doesn't take much. If you are a practice owner, don't follow the same cookie-cutter advice that you hear everybody else talking about. It's different for you. You have to recognize that not all advice is alike that you should follow.
Thanks for your time. I appreciate it.
Talk to you soon.
Eric Miller has been in the financial planning industry for over 20 years. He’s a co-owner of Econologics Financial Advisors – awarded an Inc. 5000 honoree since 2019. As the Chief Financial Advisor for the firm, Eric has had the good fortune to have over 10,000 financial conversations with private practice owners in various healthcare industries and helped guide them into a more optimum financial condition using a proven system.
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