Episode 6: Optimization (O.S.O.M. Method): The Key to Mastering Your Money

 

Optimization isn’t just about doing more—it’s about doing better. In this episode, Wade Reed dives into the crucial third step of his O.S.O.M. (Organize, Systemize, Optimize, Maximize) Method: Optimization. Often overlooked, this phase is where the magic happens, allowing you to fine-tune your financial systems and maximize your wealth with the resources you already have. Wade shares real-world examples, practical tips, and strategies to help you boost your cash flow, minimize tax liabilities, and ensure you’re getting the most out of your insurance. Get the tools to optimize your financial life and accelerate your journey to wealth today!

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Optimization (O.S.O.M. Method): The Key to Mastering Your Money

What’s up, Money Masters? It’s Wade Reed back for another episode of the Wealth Acceleration Podcast. We’re going to talk about the third component of my four-step system. Remember, that is called OSOM, Organize, Systemize, Optimize, Maximize. When we want to succeed with money, we want to be awesome with our money, so we need to follow this four-step system.

Optimization

This is the third component, and we call it optimization. This is an interesting one because it’s quite meaty, and there are so many cool things we get to do when we start to optimize our money. How do we do that though? We’re going to define this a little bit. Optimization is about efficiency. Here’s a silly example. I have kids who are vacuuming the floor, but the part that picks up and agitates the floor is not working properly. 

 

It was sucking air, so surface stuff could get on, but unless that thing is rotating properly at the right speed and level, it’s not optimized. It’s not getting the most out of the power of the motor and the suction capabilities. We cannot optimize it unless we know what’s happening with it. Historically, we know it’s been working, and we know the child is capable of doing this task. There’s a bit of a system in place, and then it’s a matter of checking things to make sure they’re at the best possible efficiency.

When it comes to money, you have to be organized. You have this financial organization document that I have for you. You’ve been tracking your money for a while. You know what your average expenses are pretty well, at least, You’ve put the system in place, and you’re practicing the skill of using the organized data to become aware of what you have. You know what’s flowing in and out, and now it’s a matter of tweaks and improvements that can take place.

This is the fun part about personal finance. This is the part where we increase our knowledge base with some of these books on my shelf that you might read, such as Rich Dad Poor Dad. That book is mostly about mindset. There’s not much that’s super practical in there. There’s one called Think and Grow Rich, which is also a mindset book. Another favorite is The Richest Man in Babylon by George Clason. It’s a classic and an interesting parable about how to become successful with money. It’s pretty practical.

Heads I Win, Tails You Lose by one of my colleagues and friends, Patrick Donahoe, is super practical. It’s a good treatise on the monetary system that we’re all dealing with, and some of the pros and cons of using qualified plans like 401(k)s and IRAs compared to using life insurance. It discusses how things like that can meld together to be more efficient, to be optimized in how we do our retirement income planning at some point, creating an income from assets that we create.

There are books on my shelf about business entities and how to be efficient with them. There are so many cool things that can be done here. I’m going to go through some of the meat and give you some ideas on how to optimize. We’re not going to get personalized to your specific situation, but I’ll share with you a few anecdotal stories about ways over the years that I’ve seen consistently work to improve your cashflow, reduce tax costs, and get the most out of your insurance and getting the biggest bang for your buck.

Tax Strategy

Let’s dive in. The first thing that comes to mind for me as we think about this stuff is tax strategy. I have a book here called Tax-Free Wealth by Tom Wheelwright. Tom Wheelwright is a CPA and one of the advisors to Robert Kiyosaki. Robert Kiyosaki wrote Rich Dad, Poor Dad. It’s probably the most popular book on personal finance that I’m aware of, at least. It probably had the most printed copies. It’s one of the most influential books on the topic of shifting our thinking about how wealthy people think versus how the typical middle-class or poor mindset thinks.

That mindset is largely about buying things and depleting value, whereas those with a wealthier and more abundant mindset think about controlling assets and being good stewards or managers. They recognize that it’s not theirs. I don’t know if you experience this, but when I was a kid and even sometimes as an adult and I had something that was mine, if I’m angry or upset about something, I’m willing to break that thing. As a kid, I used to throw stuff. As an adult, I’ve tempered that, but there are times when I want to break something. There’s a stick in the yard and I own this yard, so breaking the stick, it feels good to do that.

Sometimes we do that with money. We’re like, “I’m so upset that I have to pay taxes. I want to go spend some of my own money and do something fun for once.” We end up in debt. “I’m so sick of scrimping and saving. I barely have enough to get by, so I’m going to go on this nice trip,” and we end up in debt. We are stuck in this mentality that we don’t have much control over our lives. I want to influence you to recognize the importance of when we’re optimizing things, we’re in control. We have some control over our financial life.

Aside from mindset, that’s part of being organized. When we read books like what I shared with you, that’s being organized. We’re organizing our thinking into something productive, something that’s going to be super beneficial for us. Once we have that more positive mindset, hopefully, you’re starting to shift that way. If you’re attracted to this show, I’m sure you’re starting to become a student of money. I’m going to reiterate that over and over again in all that I talk about. We have to become students of money.

It doesn’t just happen. We are the producers of the income in our lives. We’re the ones creating value for other people, whether it’s to an employer, customers, or clients. In exchange for that value, you are getting a receipt we call money. The dollars that end up in our bank account, the checks that come through our hands and get into our bank account, the Venmo transactions, the credit card transactions that then get transferred into our bank account, all of those dollars in the bank account are a receipt of value, a temporary holding place for value exchange with somebody else that now you’re responsible for. It’s not yours.

I want you to have the mindset that this money is not mine. I’m a steward, meaning a manager. I’m responsible for taking good care of it. If you can have that mindset of “this is somebody else’s,” and I’m a believer in God, I believe that all that I have, I am responsible for as a gift from Him to take good care of and care for my family. Some of you may not be believers in God, and that’s okay. If you can have the mindset, even if you just pretend that everything I have is not mine, but I want to be a steward over it, I want to be a good manager over it, you’ll be less likely to waste it.

You’ll be less likely to spend frivolously. You’ll be more likely to track, plan, and organize because if you can think of it as somebody else’s and you’re a caretaker for it, you tend to be more likely to do the right things. I even have this little course called the Personal Finance Essentials, where I talk about where financial statements come from, an income and expense report, a balance sheet, a cashflow statement, or what we call the company books, or the record of financial transactions that happen within an organization.

Those financial documents are important to the accountability around money because larger businesses have boards of directors. They often are in place because there are multiple stockholders who are not necessarily workers in the company. Those stockholders have given money to the company to help it operate and be successful. To be accountable to those who are providing funding to the business so it can be successful, there need to be reports that can show the progress and the success of the organization.

Those are things that we want to do personally as well, and that’s why I’ve invited you to get yourselves financially organized and track your income and expenses, so you know what’s going in and out. This financial organization document that I have for you, which I often refer to as the financial scorecard, has a place for your income and expenses, your assets and liabilities, your loan details specifically, and your financial team, as well as the protection component of your financial life, which includes all your insurance products, estate planning, and things like that. When we have all that in place, then we can start to make tweaks and optimize.

Optimization is creating efficiency, it’s getting more out of the same resources. Back to taxation, if you happen to be a business owner, and you’re like me, who happens to be 100% owner of my company, and I’m in a service business, this works a little more efficiently as a service business than maybe as a retail operator, a real estate managing company, or something like that. If you happen to be in the service business specifically, oftentimes we can have an entity set up. More often than not, we start with an LLC. 

An LLC is called a limited liability company. It can be any type of entity. It can be a sole proprietorship, a single-member LLC, which in essence is a sole proprietorship just under a business name with a tax ID. It can become a partnership, a sub-S corporation, or a C corporation. There are five different things that you can have if you’re a business owner. If you are operating under an LLC and you want to get some tax savings, you can change it to an S corporation.

This is something I would recommend that you talk to your CPA about, and they should have some good ideas about this. If they’re strategic-oriented, they’ll have some good ideas around this. It’s interesting though, I’ve had a lot of CPAs over the years who have poo-pooed this idea, stating that the tax code is going to change, so it’s not worth doing. It’s more costly than it’s worth.

Yet I have other strategic-minded CPAs who will say things like, “Are you kidding me? This has been poo-pooed on for twenty years. Think of all those people who would have been saving a bunch of tax if they had followed this strategy twenty years ago today. They’ve lost $5,000 to $15,000 a year by not doing this.” It is an S corp. The difference between an S corp and an LLC is you can change the taxation on your income. Whereas in an LLC, a sole proprietorship, or a single-member LLC, which in essence is a sole proprietorship, you have all of your income subject to self-employment tax. As an S corporation, you can pay yourself as an employee and only your employee income that’s considered salary is subject to that payroll tax. Let’s assume you’re making $100,000 a year for easy numbers. You’re paying 15.3% payroll tax on that $100,000. If you’re a sole proprietorship or acting as a single-member LLC. That’s $15,300. that’s a lot of money.

If you become an S corp and you’re making that same $100,000, let’s say $30,000 to $40,000 of that, let’s just use $30,000, that’s your salary. Only $30,000 of $100,000 is subject to that 15.3% tax. I don’t have that number memorized, and I haven’t run the math for you. You’ll have to do that yourself. $30,000 times 0.153 will tell you what the tax is compared to the $15,000.

That other $70,000 in an S corp is taken as a distribution of profit or a dividend and is not subject to self-employment tax. You save 15.3% on that $70,000. This is just an example, so you can get the numbers using fairly round figures. That’s huge. It’s in the realm of $5,000 to $15,000, depending on the type of business you’re in and how much money you’re making every single year. That’s an optimization thing that can be done, a strategy that creates optimization.

Another thing you can do if you have children is pay your children. Children who are under eighteen do not have to file a tax return. Every individual, regardless of age, who earns around $14,000 a year does not have to pay any taxes. It’s called your personal exemption. If you’re a business owner and you have children who are capable of doing something productive for the business, you can pay them. The income that they earn is not taxable because it’s under that $14,000 threshold.

In essence, if you were going to pay for kids’ things anyway, and you receive all of that income yourself, you’re going to pay 24% to 32% federal income tax, plus your state tax, plus possibly self-employment tax. We’re talking about 40% cost of money to then take the remainder and help pay for your kids’ extracurricular activities.

What if you can pay your children into a bank account that you’re a joint owner of, you legit pay them, you write a check in their name, they’ve performed services, you have documentation of those services, and you move that money into a savings account for them? When you need to pay for their expenses, it comes out of their account into your checking account, and then you pay for it. You get 100% of every dollar instead of only 60% of every dollar that’s available to help fund the kids’ future and the day-to-day things you’re paying for anyway. That’s a huge optimization piece right there.

If you have multiple kids, we’re talking $14,000 times 0.24 or $14,000 times 0.32, that’s your federal income tax bracket, your percentage. That’s the savings you’re going to get if you’re able to pass through money that would otherwise be taxable to you to your children instead. It’s huge. This is something you need to talk to your CPA about to get the right strategy in place.

Insurance

Let’s look at insurance. This is something oftentimes people say, “I hate paying for insurance. It’s a necessary evil.” That’s one of my worst phrases ever. Who wants anything necessary, and who wants to do anything with evil? I know it’s just a play on words, but if words have meaning and semantics do matter, I’d rather have something that’s my choice and that is good. I’d rather you choose to have protection rather than feel like you have to have protection. The state does mandate auto insurance if you’re going to drive an automobile. That’s a fair thing to do because there are a lot of accidents that happen on the road, and many people who don’t have insurance are the ones who are at fault.

Even though it’s a state requirement, oftentimes people still somehow get away with not having insurance. As producers in this world and those who are in the mindset of doing more good and bringing more to the world than we take from the world, we want to have protection because it’s way more efficient. The first thing about optimization is having good insurance. Why does that matter? 

If you break a car, a car is $5 to $50,000. That’s big numbers, but it pales in comparison to if you injure a person and there’s a concussion, broken bones, or things that need surgeries. You’re taking somebody’s livelihood away. They can’t work. They have to recover with the cost of medical care. You’re talking in the hundreds of thousands of dollars.

We were in an auto accident, my wife particularly, with all of our kids. It turned into a three-year situation and almost $200,000. We were rear-ended. The person had state minimums on their auto insurance. It paid out instantly within 2 to 3 weeks. We were wise enough to talk to our insurance agent about optimizing our own coverage. He said, “Are you more likely to control yourself or somebody else when you drive?” Of course, I can only control myself. He said, “You need to make sure you have uninsured and underinsured motorist protection on your automobile coverage. Make sure it’s at least equal to what you have if you’re at fault.”

We bumped ours up from state minimums in 2010 up to $250,000. Instead of $25,000 of coverage, we had $250,000 of coverage. He said, “To make this even more efficient, let’s get you an umbrella policy that has an extra million dollars of liability protection for both if you’re at fault for an accident, as well as if somebody else is at fault and doesn’t have sufficient coverage. That way, if they don’t have the coverage, you have a backup that you can recover losses.” I thought, “That makes sense. It’s only $300 a year. We’ll do that.”

I have ten times my auto coverage. Plus, I added this extra million umbrella, and I added a renter’s policy. This was back in 2010 when I first had this optimization conversation. I was paying about $60 a month. Now I’m paying $120 a month. While I doubled my premium for only $60 more a month, I had ten times my coverage. To me, that was a sweet deal to optimize my insurance. 

One of the ways I helped mitigate that though was by increasing my deductible from $250 to $1,000. Instead of paying extra premiums to have a lower deductible, because I had some savings on hand, I’d been following a system I’d been taught, similar to what I’m teaching you. I have cash on hand as a backup. What can I do? I can increase my deductibles. Increasing deductibles reduces your premium for the same coverage, or you can keep your premium the same and get higher coverage.

That is an insurance optimization. We want to have insurance because it’s a way to transfer risk to somebody else. Rather than withholding several hundred thousand dollars in our own wealth that cannot be touched for investing in our business or other things, instead of withholding and self-insuring, we can transfer that risk way more efficiently for only a few dollars a month. It’s way more efficient and way more optimized to do that. That’s insurance. You can do that in all areas of insurance. 

Cash Flow

With cashflow, I see this time and time again. Wise people prepare for the future. Your employer, if you’re employed, or if you are a business owner, might have your CPA or somebody else suggest to you, “You ought to have a 401(k) because it allows you to get tax savings, and you can prepare for retirement so that one day you can draw an income and earn money through compounding in the stock market.”

All of which have some truth. We ought to be saving for the future. We ought to have some money that’s building up in some growth vehicle. We ought to have the ability to prepare for a retirement income if we choose to stop working or just want to. All that stuff is true, but how we go about it isn’t always the right thing.

We ought to be saving for the future. We ought to have some money that’s building up in some sort of growth vehicle.

What I have seen over and over again is this idea, “My employer is matching my 401(k) contribution. That’s free money. I better take advantage of that.” People start to contribute to their 401(k), and they contribute maybe 5% or 6% of their salary, which gets them the maximum match. They’re like, “I’m doing okay. I think I can do more than that. I ought to do more than that. I ought to max this out for tax savings,” and then this weird thing happens.

I get these complaints when I take on clients, “I feel I have too much debt. I thought I’d be further ahead in life than I am today.” I say, “Why don’t we evaluate that?” When we get into the evaluation by looking at their financial organization tool and all the different components, we go, “You have X amount in your 401(k), but also look at the debt they’ve taken on. Why do you think that is?” “I haven’t had access to that money. It’s locked away. I’ve had to borrow money to buy these things instead of paying cash. When I’ve had a life event, I’ve had to go to credit cards instead of having cash to pay for it. It’s all locked away in my 401(k).”

Accidentally, we’re trying to do the right thing by preparing for our future, using the 401(k) as a vehicle to invest in our future. We don’t fully recognize what that is. It’s a partnership with the IRS. It’s a partnership with the government. They say, “If you are willing to contribute to this, we’ll allow you to not save, but defer your tax into the future. When we defer it into the future, we don’t know what the tax rate will be.”

For example, you’re contributing $10,000 a year into a 401(k). You get a deduction. Let’s take $10,000 times 0.24 or 0.32. That’s where most of you probably are in the federal tax system. You’re saving $2,400 to $3,200 in tax that year. Let’s say it correctly. You’re reducing your tax bill by $2,400 to $3,200 that year and deferring that tax into the future at an unknown time at an unknown tax rate. You had to give up $10,000 of liquidity and put it at risk in the stock market to save that tax that year. You didn’t just give $2,400 to $3,200 but that didn’t stay in your bank account. It was invested. You’ve lost access to $10,000.

If you haven’t planned properly, if your system’s not in place, if you don’t have reserves sufficient to deal with life events, you either have to pull that money out early in the form of a loan or a withdrawal. You may have to pay a penalty tax for taking it out early. I see this happen all the time, or if you’re not willing to do that because that penalty is too much to bear, we go get 24% cost of money credit cards. I see this a lot, 24% to 30% cost of borrowing on credit cards. We might be earning 6% to 8% in the stock market in an account that’s not yet been taxed.

How does that make sense? This might be the first time you’ve ever thought of this possibility, but I have done this for almost two decades and I’ve seen hundreds and hundreds of cases like this. This is reality. To optimize cashflow, it might make sense to completely stop your contribution, even though there’s a match. You need to build reserves and pay off debt. By paying off debt, you guarantee yourself to free up payments. Anytime you make a principal payment on a credit card, you’re reducing the balance that has a payment due, thereby freeing up cashflow.

If you have a system in place where you’re putting money through the wealth capture clearing account, then all of those freed-up payments stay there and you only move what you need to the personal operating account to pay the next bill. You’re going to start freeing up cashflow that stays in that clearing account and builds up reserves. As you build that up, you’ll be able to pay things off in full. You’ll be able to get ahead. You’ll be able to have the reserves back in place. If you choose to and you understand the partnership you’re getting into, you might continue the 401(k).

W-4 Exemptions

You don’t have to because there are many other ways to prepare for retirement, but you might. It’s one option that comes back on the table. It might be a temporary way to free up cashflow. Another thing is back to tax. Oftentimes, people are over-withholding on their W-4 exemptions. If you’re an employee, you may need to adjust your W-4 exemptions and withhold less so that you do not get a refund or at least a substantial refund each tax year.

This happens over and over, and it’s frustrating and sad in a way, those who look forward to their tax refund build up credit card debt for living expenses, trips, and things. When they get their tax refund, they pay those things off. They’ve been bearing interest costs with no interest earnings from the IRS. It’s inefficient. It’s wasteful. I want you to be in control of your money. I want you to appreciate what you have. I want you to be Money Masters. This is one of those things. 

You want to adjust your W-4 so that you have as little withheld as is necessary so that you break even on your tax bill. Just enough is withheld that you don’t get a refund. Instead, you get to build that up in your own savings account so that when the right opportunities are there, you can invest. Wouldn’t that be fun? You could make a down payment on real estate, get into a duplex, choose a specific stock if you follow that stuff, or a cryptocurrency, or a third-party investment in somebody else’s deal, or start your own business.

All of these options become available if you have cash in your possession that’s not under government control, that is not illiquid, but instead in your system of wealth creation. I’m so excited for you. How about this? I’m looking at my notes here, and I’ve covered everything I planned to. Let me settle on this for a second. Optimization. Nothing immediately comes to mind here. I suppose we’ll wrap up this episode.

One of the funniest things that I get to do with clients is all kinds of interesting ideas come up. I’m certainly not the one to come up with all of them. Sometimes my clients will come to me and say, “What do you think about this?” I’m like, “I never thought of that before. That’s pretty cool.” Let’s run it by a specialist if we need to, or let’s move ahead and do that.

I want you to have fun with money. I want you to be in love with who you are as an individual and the fact that you’ve created value for other people and that the money that flows into your life is yours to manage. Be accountable to yourselves and your spouse if you’re married. Think of this money as a pool that you are responsible for. It’s not yours to waste. I want you to be very productive with it.

 

I want you to have money that you can go play with. I want you to have money to create memories. I want you to have money to invest. That’s what the next episode will be about, maximization. When we’ve optimized, we’re creating more money in our wealth capture clearing account that’s available when the timing is right, when you have clear criteria to invest and learn the skill of turning cash into more cash and cashflow. I love you. We’ll see you in the next episode.

 

Episode Resources

• Financial Organization Toolkit
• Heads I Win, Tails You Lose
• Think and Grow Rich 
• The Richest Man in Babylon
• Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes

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