Intro: Do you feel like you were meant to have a kick-ass career as a hairstylist, like you got into this industry to make big things happen? Maybe you’re struggling to build a solid base and want some stability. Maybe you know social media is important, but it feels like a waste of time because you weren’t seeing any results. Maybe you’ve already had some amazing success but are craving more. Maybe you’re ready to truly enjoy the freedom and flexibility this industry has to offer. Cutting and coloring skills will only get you so far, but to build a lifelong career as a wealthy stylist, it takes business skills and a serious marketing strategy. When you’re ready to quit just working in your business and start working on it, join us here where we share real success stories from real stylists. I’m Britt Seva, social media and marketing strategist just for hairstylists, and this is the Thriving Stylist Podcast.
Britt: What is up? And welcome back to the Thriving Stylist Podcast. I’m your host, Britt Seva, and today we’re talking about the five incomes and investing for wealth. And before anybody gets nervous, do not worry. I’m not trying to be your financial advisor here today. None of this advice comes directly from me. It actually comes from a friend of mine named Mel. So let me explain the story of how I met Mel and why I decided to do this podcast. So Mel and I met back in 2016. He is a CPA, a financial advisor to many. He lives down in southern California, and we actually met through a mastermind. And instantly I just thought he was incredible, just mostly the human that he is. He’s also, it’s like he’s an incredible human who also happens to be great with money. That’s how I would describe Mel. He’s just such a brilliant, beautiful, incredible man who’s taught me so much.
I always attribute, my husband and I bought our home in 2018, I believe it was, and I talked to Mel before I did that. I don’t know if Mel would even remember. And I was asking him about, “What should I do for my down payment?” One of the things you may or may not know about me, I talk about this pretty openly, is I basically took a leap of faith chance. I can’t even say it was super educated, but back in the early 2000s, this would’ve had to have been ’04 or something like that, ’05. I can’t remember now. A long time ago, maybe a little later, maybe ’06. It was pretty early.
I invested in Netflix. I had a retirement account through the Ritz-Carlton, Half Moon Bay. That’s where I was working at the time, and they had a, I think it was a 401k option. I opted in, and I chose to manage my own investments, and I chose to go all in on the stock of Netflix. Well, you can look at the growth of Netflix over the last 20 years, and Netflix has been very good to me. And at the time, I didn’t invest all that much money, a few thousand dollars. But you look at the rate in which that money has grown, and it’s significant. And so I had asked Mel at the time. I was like, “Do I use that for my down payment?” He just really walked me through what I needed to do, what I need to be prepared for. He’s just, the way he talks about money is brilliant.
Okay, so that’s my relationship with Mel. He’s helped me personally. He has helped me to plan for my retirement and my financial future and all of the things, literally on a friendship basis. So Mel just came out with a new book, and it’s called Building Your Money Machine. And before you are like, “Oh my gosh. Here we go. This is one of those podcasts where people just go on and on about books because they’re trying to sell books.” That’s not what’s happening here at all. You’ve probably noticed I’ve never done that before, and I have a lot of friends who have written books. The reason why I’m talking about this one is because of how much I learned from it. Mel’s writing style in this book is so effective, informative. He’s visual. There’s a lot of visual aids, and the way my brain processes, I really need that. He doesn’t talk to you like you’re stupid, but he doesn’t talk to you like you’re a finance expert either. The way he approached money management I just thought was very smart.
So I wanted to share. I get questions quite a bit from stylists and salon owners, industry educators saying, “I really want to build true wealth for myself, and I want to look at how I make money not in the salon.” People ask me about passive income a lot. I personally don’t have passive income beyond my portfolio, which we’ll get into in a minute. None of the income I produce in this business is passive. This business requires so much work. So I have not found passive income in my day to day at all, but I do have a portfolio, and that’s real passive income.
So we’re going to talk about, Mel has identified five different types of income. We’re going to talk about all of them. We’re going to talk about how much he advises you need to retire one day, how much you’re going to be able to withdraw off your retirement savings because that was a fascinating number for me. He’s got this great visual tool called the Wealth Priority Ladder, which is similar to if you’re a Dave Ramsey person, Dave Ramsey talks about the snowball. It’s similar, but I actually like Mel’s approach a little bit better personally. And then he talks about risk versus rewards, meaning the riskiest investments versus the ones that are safer but maybe won’t produce as much. So I just wanted to share some of the highlights I picked out from Mel’s book and share those with you just a bit.
So first I want to talk about the five incomes that he identifies. Let’s talk about the first one, which is going to be active income. This is when you’re working for the money. So this is in the beauty industry, it’s going to be cutting hair, coloring hair, applying eyelash extensions, applying hair extensions. When you’re working with your clients or you’re working the front desk even, let’s say. That would be active income. So most of us have an active income stream. Then there’s business income, and business income is different.
So for those of you who are a salon owner, even as you’re working as an owner, you’re still in the business working. I’m not saying you’re an absentee owner. When you’re in the business working as an owner, ideally you have business income coming in. What do we call that in our industry? We call it the profit margin. So the profit margin is your business income. Now that doesn’t mean you don’t have to work to earn it, but it means it wasn’t just your work that earned it. You should have a team of stylists who are producing an income for you. They’re getting money, you’re getting money, and that’s business income.
Now, if you are a salon owner and the only income, the only profit, the only draw you’re taking is from the services that you are doing, then you don’t have any business income. And I understand if you’re like, “Well, the money I make behind the chair, I put into the company pot.” No, trust me. I got it. I understand that. It’s still not the same as business income because you were the service provider having to do the work to make that money happen. So that’s active income. Business income is the profit margin that comes off the business based on work that you yourself did not have to do. That’s business income. So that’s income number two.
Number three, asset-based income. So he describes this as real estate that generates rent or fees. So if you had an investment property, and you had renters in there, that would count as asset-based. Something that’s really trendy right now is the idea of… You’ve probably seen this. You put a vending machine at a local community college campus, and you restock it once a month or once a week or whatever, and then that vending machine makes money for you. That would be something. Or an ATM, ATM fees. You put an ATM somewhere, you own the ATM, you manage it, whatever, and that generates those fees.
Have you’ve ever used an ATM at the bowling alley or something, and you go to get cash, and it says, “The $3 service fee is going to be charged. Do you agree?” And we all click yes. That $3 goes to the person who owns the machine, and they may give a piece back to the alley. I don’t know what that agreement looks like for them, but that is the profit. It is something like that. Or if you have something I see people talking about a lot is if you have a place for people to park their RVs, and they pay $100 a month for you to store their RV for them, that would be asset-based income.
Then there’s residual. Residual income is white labeling or intellectual property. So there’s a friend of mine, I won’t say what his name is because I don’t know if he talks about this openly. A friend of mine has a coaching consulting business. Some of you might know this person for that. I don’t really know actually. But they also have corporate courses, courses not for the average person. Maybe it would be how Google employees can improve their communication with each other. I made that up. I have no idea what the courses are. I made that up. It’s fake. And so what he would do is he would create a course for X company, whatever it is, and he would license that to them. So he’s made it one time. Every single year, they pay him however much money to continue offering that course, like a licensure agreement. That’s called residual.
So this is where we start to become a little more passive. He did have to make it one time, but now he just collects the check every single year because they continue using the training. If anybody’s worked corporate, you’ve seen these trainings. You go in, and they’re like, “Okay, it’s training day.” And you sit down, and it’s terrible actors doing skits, and then you have to try to analyze what’s going on in the scene. His is not like that. He teaches actual skills, but similar idea. Companies will use the same videos for a decade, and every time they choose to use his video set again, he gets another licensing payment. So that would be residual income.
So just caveat, side note, a little bit different than most industry educators. Most industry educators are not licensing their content out like that. I don’t think the industry is a place, major education companies are not at a place where they’re interested in doing that right this second. So it could be possible, but money that comes from digital courses and stuff like that is not the same as residual. That would most likely be either active or business income.
Then we have portfolio income. This is the highest level of leverage. So this is the truest most passive income you could have, and he describes it as stocks, bonds, ETFs, index funds, mutual funds, and annuities. And he listed a couple of other things too. To be honest, I didn’t understand them, but you can read them in his book if you want to. But that’s truly passive income. And the way he describes it is, is it fully passive? No. You either have to be the one managing it or hire a team to manage it, and you check in with the team from time to time, and make sure that the portfolio is producing a rate of return that you’re happy with, but it’s the most passive you can get.
So in Mel’s book, the takeaway I got is we don’t all have to have all five of these things, and he even talks about it. He’s like, “Real estate’s a really risky investment.” We’ll get to that when we get to risk versus reward, but he’s like, “I’m not suggesting every single person buy a property and put tenants in it.” But what he was explaining is understanding the income that you have, where it’s coming from, and the work you’re doing to sustain it. So active income, working hard for the money, that’s obviously the least passive, the most active, which is why it’s called active. You’re working hard to make that come in. If you’re not there, the money’s not coming. Versus a portfolio, you don’t have to be there, and the money still comes in. So he talks about the difference between all five so that you can better understand, where is my money coming from and what shifts might I need to make?
Okay. So the next topic he covered was, how much money do you really need? And this is a question that really for me, from as far back as I can remember, has always weighed very heavy on my mind. My parents were not financially stable at all, not at all. And so for me, money has always been a scarcity thing and a scary thing. And the, do I have enough? Am I going to be okay? Is a storyline that’s always run through my mind. And Mel breaks down a couple different calculations that really help you to understand how much money you need to live your life.
So there’s all kinds of calculations in the book. I’m not going to go through all of them, but he’s got some lifestyle calculations that he walks you through. The one I want to talk about today is what he calls your ballpark number. So the ballpark number has to do with how much you would need at time of retirement in order to be able to retire successfully. So what he has you do is take your expected annual lifestyle spend times 25, and that becomes your retirement goal. So let’s say at retirement, I’m going to use easy math. Let’s say at retirement, and you’re like, “I need $100,000 to spend every single year at the time of retirement.” You take the $100,000 times 25, you’ll need to have $2.5 million invested by the time you retire in order to be able to pull that off.
Where does that number come from? A couple different things. There’s some calculations in Mel’s books. The calculations are too complicated for me to explain here on the podcast, but he’s got some calculations in there that help you to understand, how much will I be spending once I retire? What will it take for me to sustain my lifestyle? And don’t forget about inflation, by the way, because $100,000 today is not going to be the $100,000 in 30 years.
Go back 30 years. $100,000 in the early ’90s, oh my gosh. That was like, you might as well buy a mega yacht. That was some money versus today, they’re saying that’s not even what gets most of middle income by. They’re saying it’s just not what it used to be. So when you think about what $100,000 is going to be 30 years from now, again, it’s not going to be what it once was. So you factor in inflation and all these things, and you figure out what are you really going to need to live off of? Now, for some of you, $100,000 is going to be plenty. $100,000 a year, you’re going to be fine. For some of you, it’s not enough. So he runs through that.
But again, how is that number calculated? There is a widely accepted 4% rule. Sorry, this is a lot of numbers. Hang with me. It’s worth it, I promise. That says you can withdraw 4% of your retirement savings annually, and it will last you for 30 years. Now, I was just saying on a coaching call the other day, I plan to be a super fit, super healthy, 110-year-old, so if I might need more than that. But depending on how long you plan to be retired for, if you want to retire by the time you’re, I don’t know, 55, whatever it is for you, okay, that’s fine. But you might need 35 years worth of savings or 40 years worth of savings. You want to project forward to make sure that you have enough.
So 4% of your retirement savings allows it to last. So let’s do the math. Let’s say we were just tossing around the number $2.5 million. Let’s say at retirement you had $350,000, and you’re like, “Okay. That’s not a small amount of money.” 4% of that. You could take $14,000 out of that every single year. Now for some of you, if you have access to things like Social Security, which we don’t know if it’s going to be around for decades longer, we have no idea at this point. Maybe $14,000 plus Social Security would be enough for you to get by. Maybe you own your home, your cost of living is pretty simple. That might be fine. For me, I wouldn’t be able to retire in California on that. There’s no way. But maybe if I was to go somewhere else, it would be fine.
But that helps you to have a target too, because I know some people very near and dear to me who were like, they retired with $600,000, and they were like, “I’m good.” And then they were shocked at how fast that money burned because they weren’t following things like the 4% rule. It’s so easy to spend like you used to and now you’re on an extremely fixed income. Now I will say one of the things that Mel is big on is creating true wealth so that you never actually touch the initial investment. Mel likes to help people get to a place where they can just live off the residuals if possible, so that he calls it the money machine. The money machine can pay you for as long as it can. But as soon as you start dipping in too deep, you’re simply going to run out. No matter how it’s invested, no matter what rate of interest it’s giving back to you, if you’re withdrawing it at a faster rate than it’s earning, you’re going to run out.
Now, the other thing that he talked about that I thought was really cool was called the Wealth Priority Ladder. So this is the thing that’s a little bit Dave Ramsey-esque. So if you’re a Ramsey follower, you’re like, “Oh, I understand that.” But I’m going to go through Mel’s version because I really like it. Let me go through all the stages. He wants you to shoot for comfort, then consumer, then peace, freedom, property, college, and affluence. I’m going to go through each one. So the first thing is your comfort fund, and pretty much any financial adviser will tell you about this. It’s $1,500 in savings or one month’s of expenses. So if you spend $3,000 a month, he wants you to have $3,000 a month in savings. Then the consumer, which is eliminate all destructive debt.
So again, he gets into the book about, what’s destructive debt? No debt is super healthy, but what is acceptable debt? He unpacks all of that. Then there’s the peace fund, which is 9 to 18 months peace of mind, meaning if you didn’t… No active income, you would live just fine for 9 to 18 months. Then there’s the freedom fund, which is where you’re investing 20% to 25% of your income into your investments. Imagine investing 25% of what you make into your investments. That’s where he believes true freedom starts to grow. Then there’s property, and that’s where he suggests you accelerate payments on your mortgage. So for a lot of us, I know I’ve been tempted before like, “Oh, maybe I’ll put an extra $5,000 towards our mortgage.” Our interest rate is so low, I’d be better off investing that money. But you find that out when you actually learn what investing looks like. So accelerating payments on your mortgage once you’re already investing 25% of your income.
Then funding educational accounts. So he says 529s, custodial Roths, all optional. So that’s that college piece. He really leans into that being optional. It’s kind of like a luxury thing, which why for him is way up higher on the ladder. The reason why I think it’s important is I’ve talked to a lot of people who are like, “Oh, and then my advisor got me in this college savings thing for my kid.” I think it’s interesting that Mel puts that way later. Mel wants to make sure you’re investing for yourself first and then invest for your kids. I can appreciate why he does it. As somebody who has had to help support my parents, it’s very uncomfortable for everybody involved. And I think for most of us, we don’t want our children to have to support us one day. And so I understand that paying for education is a beautiful gift to our kids. There’s no doubt about it. I’m not denying that.
But if ultimately they’re going to have to take care of you in your later years, was that really smart? Or is it better for you to take care of yourself, and then maybe down the line you can help them pay them off? Or something else. Take care of yourself first is a really big thing for Mel. And then affluence. So living out your affluence vision, give generously, and have legacy wealth. So those are the stages of his Wealth Priority Ladder, which I love it. It really clarified for me a lot of, am I on the right track? There are some areas in that where I definitely need to do some work, and it was a reminder of how can we all be better?
Okay. The last thing I want to leave you with was his risk versus rewards investment schematic. This is in the savings versus gambling versus training versus investing chapter. And I think even just by the title, savings, gambling, trading, or investing, this is so invaluable. So for those of you, high yield savings accounts are really trendy and sexy right now just because they’re at a rate that we haven’t seen in a really long time. Then there’s people want to get into the stock market, trading versus investing. So he unpacks all of that, but he has this diagram in there. I’m going to describe it as best as I can. He’s got risk running along the bottom and returns running along the side. So it shows what is low risk, high return, high risk, high return, high risk, low return, all the things.
So what he basically says is just holding cash in a savings account is the lowest risk. You’re not going to lose it. It’s there, but there’s also no return on it. It’s just sitting. Then there’s a money market account, which is lower risk, lower return. So you’re guaranteed to get a return, but it’s low, a few percent. It’s something though. It’s certainly better than just sitting in a stagnant savings account. Then he gets into treasuries, fixed income, ETFs and indexes, equity ETFs and indexes, real estate. And now as we hit real estate, we’re getting higher up. So he’s saying higher returns but much higher risk. And he does get quite a bit into real estate investment in the books, and he talks about how this is another thing. Over the last few years have been very trendy. Has anybody seen people really pushing, “Airbnb, buy a property. Sign a lease, and you can Airbnb it out.” A lot of real estate type of investment coaches and courses and all that stuff going out there.
What he says is real estate can be a wonderful investment. He tells a story about a tenant he’s had since 1996, so he’s had the same tenant for what does that end up being? 30 years or something like that, coming up on it. Probably a good investment for him. However, he was like, “Investments can be troublesome because what if your tenant leaves? What if they trash the house? What if it springs a leak? What if the…” There’s all of these additional unintentional expenses also, and he unpacks that. Then he goes into single stocks, which is high risk, high return. So again, I shared at the beginning of this episode I struck gold with Netflix. I have struck coal with lots of other things along the way. So high risk, high reward, but it’s high risk because you could lose a lot of money on it too. So it goes both ways.
And then alternative investments. Some of the alternative investments that I’ve heard him talk about personally are the ideas of going in on property. Maybe this falls into real estate. This would be a good question for Mel. There’s certain places where you can invest in commercial real estate as collectives. You don’t own the building, but you’re almost going in on a mutual buy-in of a commercial real estate property. And then you all share in the profits of that. There’s just so many different ways to invest that we don’t even think of. And the reason I wanted to break down this episode is because I learned so much from this book, and listen, Mel is a friend of mine. I can shoot him a question if I want to, but what I loved is he left no stone unturned. There’s a lot of books out there about managing your business money. There’s books out there about investing. This is everything.
So to Mel, I’m super proud of you, my friend. I think this may be the first book review I’ve ever done like this. Thank you for creating something so exceptional that really I believe serves my market and my industry. It’s called Building Your Money Machine. The author is Mel Abraham, CPA. You can find it on Amazon. If you buy it, I get nothing. But if you enjoy it, Mel would probably love a DM on Instagram. Let him know that you think it’s amazing. He’s incredible. I learned a lot from it. If you’re looking to get a little sharper in your investments, if you’re looking to have your money work for you, if you just need clarity on what it looks like for you to retire, 10 out of 10 recommend it. And as they always say, so much love. Happy business building, and I’ll see you on the next one.
