Hey there, money masters! In this episode, Wade Reed dives into the Maximize (O.S.O.M. Method) principles to explore how to turn surplus cash into sustainable cash flow through smart investing. He explains why high risk doesn’t always equate to high returns and how being a savvy investor involves more than just following the crowd. We become a student of money and learn how to invest with minimal risk. Through compelling stories from Wade’s personal experiences and those of his clients, this episode highlights effective strategies for investing in oneself and one’s business to maximize income. Join Wade to ensure your money works effectively for you!
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Maximize Wealth With The O.S.O.M. Method
Turning Cash Into Cash Flow
What is up, Money Masters? I’m back with another fantastic episode. We’re talking about how to turn cash into cashflow. Who here does not want to know how to do that? If you don’t care about turning cash into cashflow or learning how to invest, please go to the next episode or find somebody else to listen to. I’m just kidding. Stay here because there’s some cool stuff, even if that’s not your greatest desire. This is more about personal development and the right process of becoming an investor, not necessarily the right investments.
Investments are plentiful. We’re going to talk about some ideas on the types of investments that exist to create cashflow. This is not going to be advice because investing is so messy, so personalized. It couldn’t be in an episode like this. We are going to talk about the principles and this is the fourth part of my awesome methodology, Maximize. We are talking about maximizing wealth by turning cash into cashflow. Let’s dive in a little bit. What does this really mean, turning cash into cashflow?
Over the years I’ve been at this, again, it’s been around two decades at this point, I’ve come across this concept, this idea that, “What’s the best investment, Wade?” I get that question all the time. My response will always be you. You are your best investment. You are the one who dictates the success of your life. You are the one who has developed skills and abilities that you can exchange with other people in the form of employment or business activities, serving clients, customers, or whatever that is. You’re the one who creates the greatest value in your life. You will always be the best investment.
“I know that, Wade. I get that. What about the investments that are out there? What should I do? What are the things that are out there?” I don’t even really know what’s out there. It always comes back to what you care about. If you’re a business owner, like most of my clients are, want to become a business owner, or want to be proactive in your financial life, at some point, you want to invest. In other words, you want your money to work for you.
What does that even mean, money working for you? As I mentioned in a prior episode, in my opening episode about my awesome methodology, I talked a lot about personal finance, and I talked about this concept of if we want money to work for us, we have to hire people to work for us. The only way money ever works for you is if you have people working for you. It is not a passive activity. It is not an abstract idea. The only way money works is if we deploy our money in somebody else’s business. Literally, we have to hand it over to somebody else to go do something productive with it. That’s the only possible way our money can grow.
Just like natural processes show us the law of the harvest, you have to plant seeds in the ground. You have to give them good soil. You have to nourish them with water and sunlight, remove weeds that could choke them out, and then allow time to occur in order for your seeds to germinate and grow and become a crop.
That crop will then become useful for personal consumption. It will also become useful for future seeds for future harvests. Of course, there may be a surplus that you can sell to other people. It may be your primary business to produce a certain crop, which can then be sold in the marketplace for a gain above what it costs you to produce it. This is a means of production.
We want to be producers. Producers are those who add more value to the world than they take from it. Producers are those who have the mindset of abundance and generosity and are the capitalistic mindset. There’s a motive to take care of one’s personal interests, of course. We need to eat. We need to have a place to sleep. We need to have personal enjoyment. We need to have all those things that we all have personal need of in this life. Oftentimes, we need a little bit of surplus so that those what-if scenarios that come up can be taken care of. We need some surplus that we can use to invest in other people’s businesses.
In the end, it’s always business. There has to be an exchange between somebody who has ideas and knowledge and somebody who needs those ideas and knowledge. Of course, ideas and knowledge turn into business solutions, either services or products, and then those products are exchanged with those who need them. There’s a unity that takes place. That’s commerce. That’s an economy.
It’s a way to exchange one with another. Turning cash into cashflow or maximizing our financial life, how does that differ from optimization? Last episode, we talked about optimization. Optimization is about efficiency, getting the most efficient use out of a resource. When you buy a car, that car may have been optimized when it came from the manufacturer. Everything’s in good working order. A few years later, it may need to have a tune-up.
It may need to be re-optimized. It may need to have tires replaced. The engine may need to be overhauled. It may need to have different brakes put on so that it’s more efficient. It may need to have some improvements, like cleansing the engine so that it can burn the fuel properly to its most optimal efficiency. That’s different from maximization.
For example, let me give you another thing. I live in the Salt Lake City, Utah area, a little bit north of there, and I have family down in Southern Utah. It’s about 325 miles away. What is the optimal speed to get the most efficient use out of the fuel in my car and get the most mileage? It’s typically around 55 to 60 miles per hour, but the speed limit is 80 miles per hour on the open freeways because it’s really safe out there. There’s not much traffic. It depends on the season.
Investing And Risk Management
Holidays are pretty busy, but you can legally go up to 80 miles per hour between Salt Lake City and St. George for much of that distance. Going 80 miles per hour is not optimal. It’s maximal. It’s the maximum speed I’m allowed to go to get there, so I can get there in the shortest period of time. Maximization isn’t always optimization. It’s just trying to get the most out of something. In order to have the right to invest or to practice investing, we first have to do the other three things. We have to get organized. We have to systemize our financial life, and we need to optimize it so we’re getting efficient use.
As surplus is developed, there’s this temptation. There are literally billions of marketing dollars out there telling you that you should be invested always and often, that we should automate the transfer of our wealth into somebody else’s company, a brokerage like Fidelity or Charles Schwab, the 401(k) contribution that’s automated through payroll deduction, the transfer from your bank account to Robinhood or whatever other brokerage account it is to make dollar-cost averaging. These are all methodologies. These are systems that businesses set up to help you transfer your money to their institutions so that they can make money off every transaction you do. There’s a motive behind it. It’s not just for your benefit.
It’s largely for the business’s benefit because the more cash they have under management, the more fees they can generate to operate their business and create a profit for themselves. Are you getting this? We have to ask the questions. Why is it so easy to do this? That’s what the businesses want you to do so that they can make money. We have to become well-educated investors. This maximized component of the awesome methodology means we have to become well-educated. We have to be students of the monetary system.
I have lots of books on the shelf behind me. If any of you are paying close attention or have a big enough screen on my video, you might be able to read some of the titles. A new one I have behind me is calledScaling Up by Vern Harnish. This book is largely about business activities. How do we grow our resources and, at the right time, add more? There’s always risk when we’re investing. The skill of investing requires that we understand risk. One of the things that we have to do with risk is to recognize how strong it is, how likely something is to fail. That’s hard to quantify. A lot of the people I’ve studied with regard to investing bring in the topic of risk as the unknown factor.
The skill of investing requires that we understand risk, and one of the things that we have to do with risk is to recognize how likely something is to fail.
It’s really something that we can’t put our arms around. It’s something we can’t fully grasp. The likelihood of you stepping out of your house and twisting your ankle isn’t that high because it doesn’t happen that often, but it happens often enough. In fact, I have a family member who stepped off a step and broke their ankle, literally shattered the ankle and an arm at the same time. That’s a risk that happens periodically, but we often overlook it in finance because of the statement, “high risk equals high return.” If you want a high return, you have to take a high risk.
That is not always true. In fact, producers, those looking to create the most value out of life, to add more value than they consume, are often looking at how to minimize their risk to get a maximum return. How do I minimize risk and get a maximal return? That’s why I call this component maximize. We want to get the most out of something with the least risk. Again, it’s closely connected to optimize, but to get the most out of something is to maximize. Risk is an unknown factor. It’s the thing that we need to have clear criteria for.
If we’re going to take risk on something in some investment vehicle, such as real estate, what type of real estate are we talking about? Is it a single-family residence in an urban area? Is it in a suburban area? Is it in the slums? Is it in a different state than you live in? Is it multifamily? Is it 2 units, 4 units? Is it a large multifamily, like 50-plus units? Am I going to need partners or not? Once you’ve identified the type of real estate, that’s just residential-type real estate. There’s commercial real estate, too.
There’s land. There are storage units, mobile home parks, car washes, retail operations, strip malls, and warehouses. There are all kinds of things. There are so many ways to invest that we have to create a vertical for ourselves. We have to find something we care enough about that we’ll be interested in for a long period of time and then create a set of criteria that defines the circumstances under which we will make that investment. To minimize risk, we need a set of criteria.
The Hierarchy Of Wealth
Part of my coaching process with clients, once we’ve got through those first three components, is to start looking at a series of questions that can help us quantify whether or not something has worked out in the past, what the characteristics of it were, and what risk category it fits into. There is this model that I’ve come across over the years, and I borrowed this from my friend Patrick Donahoe. He created this thing called the hierarchy of wealth.
If you want to learn more about that, there’s a book behind my shoulder calledHeads I Win, Tails You Lose: A Financial Strategy to Reignite the American Dream, one of my top five books on personal finance. In chapter seven, he describes this equilateral triangle, like a pyramid, which is the strongest shape that we know of. A triangle is the strongest shape we know of in physics.
An equilateral triangle has four different tiers. The bottom and base tier are cash and cash equivalents, bank accounts, CDs, municipal bonds, T-bills, treasuries, whole life insurance, and cash value. These are all things that are safe and liquid, may or may not have tax advantages, but they are easy to access when needed, anytime, for any purpose. The next tier up is things we have direct control over, our business activities, knowledge acquisition, and how we engage with society to create an income for ourselves. Our own income generation, as well as things like real estate that we own that’s rented out by other people, has a consistent cashflow. It needs to be backed by some asset that can be sold to somebody else at some point. Our own knowledge is easily sellable to other people, depending on the type of industry that we’re in.
Our own knowledge is usually sellable to other people.
The next tier up is called tier three, or the investor tier, where we’re investing in other people’s business activities. These are things that we don’t necessarily have the skill in ourselves but might want to be invested in and have some interest in, but not necessarily the time or ability to run those businesses or investments ourselves. The top tier, the fourth, is speculation.
The speculation involves highly volatile things, cryptocurrencies, individually chosen stocks, startup businesses you’ve never been involved in before, or new to an industry, such as blockchain technologies. Things on this new software platform back in the ‘90s and early 2000s, nobody really knew what the internet was. I still don’t even know what the TCP protocol or HTTP protocol are. We figured it out, and we’ve built websites that are highly profitable, and we do commerce on that platform. Blockchain is the next thing.
It’s the next iteration of something that is available to build businesses upon and exchange with other people. As we become well-educated investors, we start to learn about these things. We set up criteria. We reduce our risk. We get clear on the things that we want to know, and we start to make investments based on these four different risk classifications. The bottom tier in that hierarchy is just where we store money. It’s not an investment tier. It’s a storage place for money.
The next three tiers, 2, 3, and 4, are where we can create an increase to our income that’s greater than a simple 3% to 5% in a bank account or cash value in life insurance. There are different risk associated with that. There are different portions of our money that ought to be allocated if we are in those different risk classifications. We have vertical diversification, and then we have, within each class, horizontal diversification.
I have anecdotal story after anecdotal story about clients and colleagues who have invested in things that they thought were sure bets. They said, “I’m going to earn 25% in six months,” and then it completely fails. “I’m going to get this tax advantage on an oil well or a natural gas well. I’m going to get a 90% immediate depreciation on my money. I’m going to drop $100,000 toward this investment and get an immediate $90,000 tax deduction against other income. I reduce my tax bill by my current tax rate. Let’s call it 30%.”
They save 30% of that $90,000 immediately on their taxes. That’s a net return. The well fails, or the operator of the well or series of wells accidentally or possibly on purpose turns it into a Ponzi scheme where new investor dollars are being used to pay out old investors, and then the thing fails. I have lots of stories of people who have been involved in those.
I luckily haven’t had one yet myself. There are things in multifamily real estate. I’m involved in one personally, where it was supposed to be a 15-month flip, $20 million to buy, $7 or $8 million to renovate, $45 million sale in 15 months. That was the intention. We’re almost two years later, and we might break even. You guys just have to recognize when you’re invested in other people’s things, the likelihood of them turning out is not what it’s purported to be. They are literally high-risk.
The return potential is also there, but the risk, unknown and unquantifiable, at least not easily quantifiable, is very high. Too quickly, a lot of my clients have got involved in things that go really badly. What might be a few months of an original investment time horizon turns into years and years. How about other things? I like the term sound investing. That doesn’t mean audio investing. That means something that is complete, something that is successful, that has a track record, run by people who have a good track record.
When we make a sound investment, we’re not choosing speculative things. We’re choosing things that have a track record. Maybe you want to invest in a stable, operating business that still has some growth potential. A lot of people choose multifamily because they can buy it at a discount, renovate it, add some value to it, and sell it at a higher rate or increase the rents and create a higher cashflow. A lot of people choose industries that are ready for disruption. The clothing industry, the laundry industry, and laundromats are unlikely to go away.
That’s something that’s been needed for generations and hundreds of years. People have hired others to do their clothes washing. That still exists, dry cleaning and laundromats. There might be room for disruption in that space. I don’t yet know how to do that. You might, but you might want it for its stable cashflows. You go out and buy a business. One of the ways you maximize your dollars and turn cash into cashflow is to buy an existing cash-flowing business. Some people are just ready to retire, want to sell their business, and want a lump sum to do something else with.
You acquire it at a reasonable rate and turn it into something as good or better than it already was. Enjoy the cashflows from that. Similar thing with existing real estate rentals or multifamily. Maybe you’ve got the wherewithal to start a business from scratch and open up a location of your own. In fact, I remember a client who was in the chiropractic space, and he said, “I know we’re practicing this maximize skill. I have a need to buy shirts that are logoed, embroidered, or printed, and I have an opportunity to buy my local printing business.”
“That’s so different from what you’re currently doing in business. Are you sure you want to get involved in that?” “It’s a pretty reasonable price. I’ve done some analysis on this. What I love about business isn’t so much the chiropractic work that I do for patients, but I love leading my business. I study business. I have business coaches. I have systems in my business. This is an operating business with people who know the industry very well. I can take over the leadership of this business and take over existing assets in the form of people who know the industry.”
We had 2 or 3 conversations around this. In the end, he chose to buy it. He had done his due diligence, and he decided it was going to be worth it to not only have the ability to get his stuff printed through his own business, reducing some of his net costs, but also to have a business where he could sell that same service to other businesses in the community. That’s unlikely to go away. He can then optimize that business and maybe expand it. Some of you might be in a position where you’re working full-time for somebody else, and you might be making a decent salary, paying your bills, and have a little surplus, but you still crave doing something entrepreneurial.
What is often called a side hustle is a business. You’re doing something of value. You might be buying things at a discount and selling them on eBay. That’s still a thing. People still do that and make good money. You might become an independent brand, private labeling some product that’s a popular product and using Amazon as the platform to sell it. You can get into it pretty easily that way.
You might be one of these people who get into the fads of doing things like reviewing books on Audible and finding a way to create cashflow from that or doing reviews for other people’s products. Maybe you create an affiliate business, and you’re able to sell other people’s things rather than create your own. Maybe you’re able to get a list because of your skill set in marketing, and you know how to sell other people’s stuff. You’re just not ready to build your own brand or your own thought leadership business to sell other people’s stuff.
I have a neighbor who’s still in the DVD and book business on Amazon, and he makes a really nice living for himself doing that. A lot of time freedom in his life. What about the idea of transitioning from a full-time work environment to something maybe in that industry? I have another client who did this. He was in the paint industry and had a real skill in what he called account acquisition, and he’s like, “Things are not going as well as I would like them to in my current work environment. The incentives aren’t lining up like I’d like them to. The management is not something I enjoy.
The people that are over me aren’t people I’m enjoying anymore.” He and a partner started their own paint contracting business, and two years later, they’re doing really well. He took a skill set in an existing industry that wasn’t going well in the business he was working for, and they started their own thing.
You might do that for yourself. Here’s another one. I’ve got a client who’s in the process. This is a professional in the service industry as a dentist, and a few years ago, we started working together, and he said, “My biggest fear is that I won’t have patients keep coming in. They’ll run out of patients. I’ll get their mouths healthy, and they won’t come back.”
I said, “I’ve worked with a lot of dentists. That is never going to happen.” Almost four years later, he’s coming to me saying, “I’ve got a six-month backup. I’m the only dentist working in my clinic. I’ve got a six-month backup. People are waiting six months to see me.” I said, “What are you going to do about it?” “I’ve got an adjacent space I’m going to expand into and move from four chairs or operatories to nine.” He’s going to have two associates to help clean up that backlog so that those patients in his community can be taken care of in a more timely manner. They’ll be happier and happier because he doesn’t have such a big backlog to fill.
He’s got too much work to do. Expanding an existing business or perhaps part of the expansion could be new locations. I’ve got several clients who are doing that, who have 4, 5, 6, 7 locations of what they do. In fact, I had a client a number of years ago when I first got into the industry who was also in the service industry, a chiropractor, and interestingly had eight chiropractic offices but 27 physical therapy offices. I’m like, “How did that happen?” He said, “I just found that they coordinated well together. When people had surgeries, they needed physical therapy.
Along with that, in order for their bodies and muscles to work most effectively, chiropractic adjustments release the nerve stress, which then helps the muscles perform optimally. Physical therapy is even more effective.” He found that the business model for physical therapy was a little more lucrative and a little easier to get into than chiropractic offices. We ended up with more chiropractic offices. In addition to that, at the time we were working together in about 2011, there was a requirement to move to electronic health records. His software platform that integrated all these offices together became not only something he could use for his own business, but he could sell it to others.
Maximizing Personal Development
There’s another way to maximize a resource that was created in-house that then could be sold to the public and branded for other purposes. Isn’t that cool? I have another thought for you as we get near the end of this episode. I wanted to talk about maximizing our personal development. Turning cash into cashflow, the only way we learn how to do that is by applying mental energy to it. We might want to be maximizing our life as well. We might want to maximize our health. We go hire a trainer. We need money to do that. In order to be our best self, we might be willing to invest and turn cash into a healthier body and mind, which then can be turned into applications, new ideas, and new ways to create more value for our employer.
Maybe you want to move up the corporate ladder and take on a new position and responsibilities and, thereby, have a higher income, or maybe you shift from one company to another. Being in a healthier body and a healthier mindset gives you the confidence to go do that. You can maximize your earnings by looking at ways you can help those you work for look good and talking to them proactively about how you can create a path for yourself to reach X amount of income.
If they’re not able to provide that, maybe you look for another employer who can provide that because you’re a motivated individual of high value to an organization. If you’re a self-starter and this type of person, you’re highly valued by many other organizations. Why not move and add your value to their organization for a higher wage?
How about hobbies? You might just need some time to mentally decompress and engage in the ability to do painting, or in my case, I like to mountain bike. You might need to turn some of your cash into the resources necessary, a bike rack. I’m going to talk about me here. I need a bike rack. I need a nice bike. I need protective clothing. I need biking clothing that’s comfortable to wear. I turn that stuff into hobbies, which then helps me free my mind.
In fact, I did an episode while I was on a mountain bike ride. I turned that into some of the free-thinking I had while I was riding and created a whole episode for this podcast you may have already listened to. You might want to travel. You need to create space to travel. You may want to get involved in service activity, use your time and money to buy assets that create passive income that allows you to be of even greater service in your community.
Use your time and money to buy assets that create passive income and allow you to be of greater service to your community.
You guys know already I’m a religious guy. I believe deeply in serving my community. I volunteer a lot in my church life, and it brings me great joy, probably the greatest joy of my life aside from my family, which also is a form of service. Raising children is a great service that brings productive young people into productive adulthood and society. Maybe you want to spend more time with family and deliberately take trips together, do fun activities. Maybe you have a side gig that’s a family project.
I did this for a few years where we were selling a product on Amazon, and it was outside my personal skill set and wheelhouse, but we learned a lot of valuable skills about resiliency, persistence, marketing, and the supply chain. We learned a lot about the nature of getting products from their manufacturing source, whether local or overseas, to the market through Amazon, online, or physical. A really cool experience we had as a family, turning cash into cashflow through that little side business.
Perhaps you want to be involved more in your spiritual development. You might hire mentors in that realm. You might engage in a Bible study. You might participate in church life. You might read some books. You can do that, but money helps with that. If you’re developing yourself, you’re more likely to be in a position to take advantage of opportunities because you have a sound, clear mind and sound, clear thinking. You’re willing to do the work that prepares you to take advantage of opportunities. I’m going to wrap this up with one thought.
If you’re developing yourself, you’re more likely to be in a position to take advantage of opportunities because you have a clearer mind and clearer thinking.
Final Thoughts
When you’ve organized, systemized, and then optimized, you literally are earning the right to maximize. When you are not so urgent about investing and you don’t succumb to the billions of dollars telling you that you have to always be invested, otherwise, you’re wasting your money, and inflation is stealing your money away. While there may be some truth that inflation is real, it does not require you to be invested.
In fact, that’s an uneducated investor who does that, someone who is ignorant of the rules of success when it comes to money. In my experience and my mentor’s experience, being willing to sit on cash, being willing to be patient for the right opportunities, not just any opportunity, but the right opportunities, the ones that match your criteria, the ones that you have actually created criteria for and that you can vet against, that is when you’re more likely to be successful.
When you are in a position of cash, here’s the statement I want you to memorize. When you are in a position of cash, opportunities will come to you. You won’t have to go seek them out. They will come to you. If you have criteria, you’ll be able to vet only the ones that are the right ones, the ones that are most likely to be successful for you. Thereby, you’ve minimized your risk and can maximize returns as a result of that.
This has been fun. I love this topic. I love working on the topic of money. I love getting to the point where you’re in a position where you can actually focus on maximizing. If you feel chaotic in your life, you’re really not ready to be investing. You’re not ready to maximize. You need to get cleaned up. You need to get the chaos cleaned up and organized so that you can think freely and with confidence as you start to make decisions about what your future might be. Thanks for joining me. We’ll see you in the next episode.
