Income v. Wealth
One of the reasons over 90% of interior designers retire with no significant savings is that they spend their entire working lives, well, working! In too many cases, they create hard-working, almost minimum wage jobs for themselves instead of focusing on creating wealth. There’s a huge difference between the concepts of income and wealth, and as in any endeavor, what you focus on is what you’ll get.
This point is proven easily enough by interior designers who spend all of their time agonizing over the next “job,” the next deal, the next month, or the next check due to be received. And when they do think about the future, if they think about the future, they think about “making more,” which almost always relates to more income…which they believe is the direct result of selling more, and more, and more…and more!
Trading One Time Suck for Another
So they are too often tempted by the next snake-oil salesman with their surefire approach to blogging or social media, or “knowing your value…” And the result is trading one futile tactic for another, one time-suck for another, when what is needed is not a tactic at all: It’s a new state of mind! It’s knowledge and awareness, and it’s no further away than studying those who have created wealth, or those who are on the fast track to doing so.
That’s where I’m able to help because I’ve worked closely with many designers who consistently take out $200,000, $300,000 and even $400,000 each year. These designers are no different from you. Some of them are sole proprietors, while others have as many as 20 employees. Though most focus on high-end residential properties, some are in commercial niches, while others specialize in beachfront condos, yachts, and jets.
What I’m describing are principles that are not temporary, not trendy, not dependent on the latest fad… Rather, they are like the laws of physics of business. They are the bedrock, never-changing principles that are always necessary for success, no matter how much lipstick others try to put on the pig. Even with lipstick, the pig is still a pig, gravity is still gravity, and certain laws of business are always the laws of business.
The Three Critical Phases
There are three critical phases to building a business worth building, and they must occur in precise order. They also happen to follow the “Three levels of cash flow Hierarchy” I created for my coaching clients. To create wealth through the practice of interior design, you must become familiar with my very simple, three-layer hierarchy.
The first level, the base, is the free cash flow generated by your business that is sufficient to pay all of your bills. We can loosely define this as the “breakeven” point. Accounting textbooks tell us that the breakeven point is where total sales = total costs, and that’s good enough for now. Or, to get away from accounting, we could simply think of this as the level of sales at which, “…the business is paying for the business.”
At the next level up in the hierarchy—once over and above the breakeven point—your business must continue to generate free cash flow because this is the source from which you will pay yourself. This is your owner’s wages or owner’s draw and it is this amount upon which you will afford the lifestyle you require in the present moment. Sure, you may have dreams for the future, and to a large extent, that’s what membership in The Edge is all about. But you’ve got to live somewhere today. You’ve got to drive something today and send your kids (or grandkids) to some school today. So whatever you need to justify the amount of work you’re doing and the risk you’re taking, that amount goes here in what I’ll call “owner’s living wage.”
And lastly, furthest up the pyramid, is Excess Cash. I originally coined that term in my 8 Steps program many years ago and have only become more and more convinced over time of the ideal nature of that name. This is the amount of positive cash flow that is left AFTER the business has paid for the business, and AFTER the principal has paid for the principal’s present lifestyle. It is the amount that the 95% of designers never see a penny of…but you can!
The Source of Your Wealth
The Excess Cash level is the point at which the business pays for your future and is the source of true wealth. It is the source of savings, of tax-deferred retirement accounts, of real estate and stock investments…of all of those things that, alone, can one day make work optional. Work is optional when you can stay or you can go, and either way you’ll still be drawing the amount you need to fund your chosen lifestyle…forever!
Excess cash makes work optional, and how else could one declare a small business a success? If not for some level of accumulated wealth, then we risk looking back and wondering, “Were we just killing time?” “Had we just created a job for ourselves, one without the benefits of having just worked all those years for, say, Starbucks?” I’m sure they have a nice set of benefits, but that’s not why creative people like you risk so much and work so hard.
And it is never too late. Sure, the best time to plant an oak tree may have been fifty years ago…but the second best time is today. Or, as a piano teacher once told me about her adult students, “They’re wondering how old they will be when they can finally play. I tell them, the same age you’ll be if you can’t. The only difference is whether you make the effort.”
How Old Will You Be?
How old will you be when your business has finally provided you with a financial safety net? The same age you’ll be if it hasn’t. The only difference is whether you make the effort and understand the intricacies of the methods and strategies of the Top 5% of design earners, which is the primary reason I’ve created The Edge and the many other fine courses available through Interior Design MBA.
Sure, I’ve heard the arguments for wanting to own your own business for reasons such as fulfillment, artistic expression, and giving back. And I don’t want to sound like a cynic, but I can tell you none of those are going to mean squat if at age 70 you find that you can’t afford health care and are stuck in the month-to-month lifestyle I described above…except now you’re no longer able to, or wanting to work…but work is NOT optional.
Where will future income come from if you have not created wealth through your business? I’m stunned at how obvious this answer is, given how few so-called consultants ever mention it. Perhaps they’re too busy telling you how to do things they’ve never actually done themselves, or why you need to add just 57 apps and social media platform to the 46 you already have.
For now, I’ll just tell you what you need to know—90% of those who become millionaires in this country do so through modest excess cash flow and prudent saving and investing. There’s no magic to it. And while it may not sound very sexy, they keep their personal overhead low and their businesses lean. They understand that the only money that matters, what I call “excess cash,” is that which is left over AFTER all business expenses have been paid, including your salary, and AFTER all necessary retained earnings to grow the business have been left in the business, and AFTER all taxes are paid.
For now, I’ll just tell you what you need to know—90% of those who become millionaires in this country do so through modest excess cash flow and prudent saving and investing. There’s no magic to it. And while it may not sound very sexy, they keep their personal overhead low and their businesses lean.
After that…after all of that…then you can take what’s left and begin building your personal savings and retirement accounts. In other words, you can begin creating wealth. And once you understand and begin to adopt this mindset, you’ll be inspired by how quickly the flow of excess cash can begin.
Then, and only then, if you want to increase your lifestyle, be my guest. But doing so before a financially independent future for yourself is absolutely certain, is the heart of personal irresponsibility. Don’t do that.
And by the way, even if you are already wealthy from inheritance, partnerships, etc., I still challenge you to let the ability of your business to generate wealth over time be the ultimate definition of “business success.”
Don’t tell me how you “did” last year, or how much you “grossed,” or even how much you “took home.” Tell me how much your IRA or 401k or equity in real estate increased! Then, I’ll have a feel for the true success of your business. It’s not how much money you spend that matters, it’s how much you keep.
So, if you’re ready to embark on the life-changing venture of creating excess cash and thereby, wealth, it’s really pretty easy: Give me an hour a week to dedicate to your membership in The Edge.
