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Guest: Pat Darby

Release Date: 2/25/2024

Welcome to Trulyfit the online fitness marketplace connecting pros and clients through unique fitness business software.

Steve Washuta : Welcome to Trulyfit. Pat, thank you so much for joining me Trulyfit podcast for the listeners who have not heard you on the first two or three times on the podcast when you quickly summarize your bio what you do in the financial world? Absolutely.

Pat Darby : Thanks again, Steve for having me back. I apologize. Anyone if I sound a little nasally? A little sick. But yeah, so Pat Darby. I’m a certified financial planner, I’m going to roll agent, a certified tax advisor to companies that I run and help mostly in the online fitness space. We have Darby wealth planning it registered investment advisory firm.

Pat Darby : And our sister company is Sin City CFO, where we do business tax consulting every with we do virtual CFO work, their tax advisory work, bookkeeping and tax filing. So we try to be a turnkey operation for online fitness coaches, but also online business owners in general, we try to work with the online service providers. So we’re here in Vegas, we work with some content creators, and obviously, pretty heavy in the online fitness space.

Steve Washuta : We’ll hit on all things in the financial areas. But let’s start on the tax realm what has changed from 2020 to 2324, this tax year that both small business owners should know but also maybe the general public,

Pat Darby : there’s hasn’t been a huge change between the last two years 2023 to 20. Obviously, we’re recording this February 2024. There haven’t been that many big changes, the one that is probably most impactful to people listening is the depreciation, bonus depreciation specifically, it was it’s dropping by 20% each year.

Pat Darby : So it was at 100% 2023 dropped to 80. Now and 2024, we’re at 60%. That’s, that’s going to impact the people who love that tick tock advice about go buy a G Wagen. And write the whole thing off. For most people, I don’t think it’s going to be as materially impactful, and there’s actually discussions, I believe in Congress, I haven’t seen that where the latest is to push it back to 100%.

Steve Washuta : So that changes the way that employers are paying out.

Pat Darby : Now it would be it’d be more for the business owner itself that that would be impactful for because it’s gives you the ability to buy a heavy vehicle and write it off. And bonus it as much as possible. The challenge, this is sort of a bit of a side but the auto depreciation I think is is miscategorized dramatically on social media.

Pat Darby : If the vehicles heavy than yes, all of those, that’s what gets lost in translation. If it’s more than 6000 pound vehicle, then that bonus depreciation is what everyone is excited about. The problem is when you run into luxury vehicles that are under that, the writing it off is actually horrible. Like if you have a two or $300,000 vehicle, the depreciation on it is, I don’t know 20 years to write it all off, because you get around like 50 or 60k in the first few years.

Pat Darby : And it’s like 7k in perpetuity until it’s down to zero. So the people who like those super luxurious vehicles that are not heavy, they’re usually in for a rude awakening when they sit down with their accountant and find out like now you’re not bonusing this like the bonus is like 20 grand the first year, which is nothing if you just spent like 20 grand on a car.

Steve Washuta :  So now and that and leasing, it doesn’t get you into those same write offs that you would get just because of the weight of the vehicle. Correct.

Pat Darby : Leasing actually does help you in in a way because it’s based on what you spent. It’s not based on the purchase price since obviously not purchasing, so leasing, you can actually do a little bit better. Again, I’m not a car expert. So I know that leasing comes with a pretty expensive price tag itself.

Pat Darby : But from a tax perspective, there can be it’s just not dollar for dollar because there is I forget the term. It’s like a lease exclusion or something. But basically the IRS adds back to your deduction. If it’s more than I think 65k or something like that is what they consider luxury.

Pat Darby : So if you have one of these very expensive vehicles, the amount that you think you’re going to deduct is going to be slightly less because there’s a formula your accountants gonna have to follow for every dollar over a certain dollar amount. The deductions lost to some extent, but it’s still going to do better than most purchases over a shorter period of time.

Steve Washuta : I’m obviously not in your world. This is more anecdotal. I don’t see the amount of tax returns and people’s finances as you do But in kind of casual conversations, something that seems to be said often, or at least more often than I would think, is that people say, hey, nothing has really changed from year to year, between this year and last year.

Steve Washuta : I make the same went through the same processes, the same sort of business model, whatever. But yet, the amount I owe or the amount I received back from the government was vastly different. What Why is that should that be the case,

Pat Darby : if you made the same amount of money from 20, at least from 2023, and 2024, in theory, you should pay less, because all of the like deductions and things like that are all indexed for inflation. So if you’d made no more than you’ll pay less, because the standard deductions and married filing jointly, those have gone up.

Pat Darby : And again, they’re even talking about increasing some of the child tax credits. So in theory, you’ll pay less. But since we work with mostly business owners, that’s paying less tax is the goal. But making sure you make more profit is, in my opinion, the more important goal, because tax deductions are just a coupon.

Pat Darby : So you know, if you’re going out there, depending on your tax bracket, let’s just say, between federal and state, if you’re in a top bracket, if you know, federal tops off at 37, let’s say you another, just keep the math simple 3% for the state, you’re 40%. So going out and spending 50k or 100k, on something you don’t need, all it did was just give you a 40% $40,000 deduction.

Pat Darby : Worse, versus if you didn’t need that item, there’s no ROI on it. I don’t agree with those strategies. That’s why like looping back to the vehicle, I don’t like when people that don’t need a vehicle or trying to go buy one. Because there’s other things you can do.

Steve Washuta : Like it’s not that these decisions aren’t made in a vacuum, they go, Oh, look, I can get some money back for this. It’s like, Okay, what else because you’ve spent that money on that could potentially bringing money into your company, or

Pat Darby : just open up a retirement account, and do it that way, you know, like pay yourself, you know, you still get the tax deduction. But again, you keep the money and defer taxes to later and that’s, that’s really the game like this, where I buttheads with a lot of CPAs that are more old school. Tax Planning is not trying to pay less tax this year.

Pat Darby : Tax Planning is trying to pay less tax over a lifetime. And so sometimes you want to strategically pay more, because you’re forecasting how your business is going to do and trying to forecast where tax rates are going to go, which obviously we have no clue. Like we don’t even know where they’re going to be next year in 2026. But that’s the game. The best example of this was Peter Thiel. Are you familiar with him?

Steve Washuta : I am. Okay.

Pat Darby : So if you’re for the audience, he was, he’s like PayPal Mafia, if I’m not mistaken, where he made his original, his original like big money. But he was smart enough to put a lot of money into his Roth IRA when he was, I guess, getting started in business.

Pat Darby : So for people unfamiliar, your Roth IRA is post tax money, so you pay the tax, and then put the money in now, I don’t know. I’m sure he wasn’t a top earner. And he was probably in California. So his taxes weren’t low. But he was fully funding his Roth IRA, and he had a lot of money in there.

Pat Darby : When his opportunity came along to invest in Facebook, he invested through his Roth IRA, he put 500 grand into Facebook as like the seed investor, that balloon to whatever it is now 5 billion, 6 billion. And that’s all inside of his Roth, that’ll never pay taxes again.

Pat Darby : So like, that’s the gold standard of tax planning, because he bit the bullet and put it into a Roth IRA, you could have done a traditional IRA and taking the tax deduction, which I’m sure some CPAs are like, Yeah, you’re in California, you’re making millions take the tax deduction. He didn’t. And he will legally avoid taxes on literally billions of dollars. Because like so in my opinion, that’s like the gold standard.

Pat Darby : And that’s where you’ll get a lot of pushback sometimes with your tax professional, because they’ll want to take the tax deduction today. And I don’t think that’s always the best approach, especially your as a business owner, you have to be sitting down in November, and looking at what you expect to do next year as well.

Pat Darby : Because I have this conversation a lot with clients. It’s like, okay, we’re analyzing your taxes, and this is how much money you’re going to owe. But you have to look like what bracket are you actually following? And if you’re a married couple, the 24% tax brackets pretty big.

Pat Darby : So you might feel like your business is generating In a lot of taxes, and it’s expensive, and you want to like cram a bunch of deductions, but then you look at the projector trajectory of the business, and you’re on pace and 2024, to do way better, it’s like, don’t start swiping your credit card for all the trips and the things that you need in 2024 to lower 2023, when you’re likely going to push yourself into the 32% bracket easily in 2024.

Pat Darby : So those deductions, the exact same expenses that we agree are good for your business, like you need to take that trip, you need to hire that coach, you need to hire that mentor, whatever the case may be. That would be a much more powerful deduction in the future versus now.

Pat Darby : And that’s sort of like so that’s why tax planning is is more of a an art than a science, I guess, a combination of the two. Sure. But I think there’s a lot of lazy tax professionals who just try to ring the register this year. And that can be much more costly in your future. from a tax perspective.

Steve Washuta : I wish I came to armed with all the specifics here. But I don’t know if you know who Otani is one of the best baseball players, if not the best baseball player in the world, just signed a contract with the Dodgers.

Steve Washuta : And what they did was, in order for him to circumvent paying taxes, they basically said, you’re going to be making $3 million a year, instead of what you should be making $30 million a year, what we’re going to do is, when you are no longer a Los Angeles, Dodger, you’re then going to move to a different state.

Steve Washuta : And then you are going to get paid 200 million after that, that official year where you’re no longer Los Angeles Dodgers. So like, everyone, circumvents these taxes, he circumvented the California taxes and just shows that like, there, there are ways around the system, regardless of how much money you make.

Pat Darby : Yeah, I mean, especially since he had a business organization that’s willing to play ball. I’m curious. Obviously, they’ve smart people will work in those, but the states are aggressive. So I’d be what, what team does he play for? He plays for the Dodgers. So. So that’d be interesting, because California is aggressive. 

Steve Washuta : I wonderful, by the way, that it shows that you know, your stuff, because the first thing that came out, you know, upon reading about this is that the current laws like as is allow for him to do this. But that doesn’t mean between now and then that California can’t change their bylaws somehow, and then come after him.

Steve Washuta : So I imagine because they don’t want other people following down his path and California losing hundreds of millions of dollars for all of their athletes who live in the area that they’re going to close this loophole. 

Pat Darby : Yeah, like, as as a cautionary for anyone where like when if you’re sitting there, like, this is a bit of an aside, if you if you owe the IRS and you owe the state money, and you can’t afford to pay both pay your state.

Pat Darby : The states are way worse to owe money to from a tax perspective or be delinquent with because they’re smaller, they’re aggressive, especially if we’re talking some of the New York like the ones that you expect the New York to California and New Jersey, they charge a lot. They’re aggressive. They all have something in common. What is that? Yeah,  we all have something in common,

Pat Darby : they all share the same color. And so it’s, um, so yeah, like, in general, if you’re even if you’re moving out of those states, don’t try to keep a toe in the water. Because of exactly like this guy might run into an issue with if you have a successful business.

Pat Darby : And let’s say you’re in California, and you’re coming here to Nevada, or you’re doing the Texas thing, whatever it is, make sure you really leave because they’re looking for that, like they’re looking for people who pretend to leave. Like they’ll do things that like they’ll audit, like where your pet is going to the vet.

Pat Darby : Because like if you’re if you say you live in Texas, but your dog is going to a vet in LA like that’s that’s where you live like people don’t send their pet to like a different states that they live in to, to get his treatment.

Steve Washuta : What does that term when you move like a business like an LLC? And can’t you not do it in certain states? Can you not move a business to another state?

Pat Darby : It’s called yet domestication where you physically move your LLC to the new state and yeah, like not Most states allow it but there are weird rules. So you always have to talk to a lawyer and say like, What state are you leaving? What state are you going to to make sure that there is reciprocity there, but most states allow it like when I left New Jersey and came to Nevada, I did domestication.

Pat Darby : So what that means for your listeners, everything’s the same. Your LLC comes over your tax ID, your banking, everything stays the same. The only difference is now, Nevada recognizes your LLC and you’re dissolved in New Jersey. So yeah, California weird with that. Let’s

Steve Washuta :  stay on that real quick. So let’s go ahead and say you’re a virtual personal trainer and you live in South Carolina, and you move to Florida, midway through the year, and you you have an LLC, could you not maybe maybe you still own proper In South Carolina,

Steve Washuta : Could you could you not just leave your LLC in South Carolina? Do you have to does the LLC have to be where you are physically sleeping at night?

Pat Darby : from a tax perspective, so there’s two ways to tackle this from a tax perspective it should be. There was an article that a law firm gave me when I was living in New Jersey, that was called like how to move to Florida or something like that New York to Florida.

Pat Darby : And it was all this case law of business owners, and I think there was like, this one was like three brothers. So it was like a perfect case study of like, one move to Florida the right way, one stayed in New York and one fake move to Florida. Like he left some residuals behind the standard of selling the business for I think, like 20 30 million. So New York was like, we want our cut. The one brother was totally cool.

Pat Darby : Like he, he did all the things to get into Florida. The one brother obviously lived in New York, he owed the other brother that fake left, like he, he did most of the things, he ended up owing millions of New York State taxes because he didn’t fully leave. But to answer your question, you don’t need to take your LLC with you. You’ll still continue to owe taxes though. In that state, especially a becomes an issue.

Pat Darby : Like if you owe them something substantial, like you end up selling your company, like you’re living in Florida, the LLC still in South Carolina, and you sell South Carolina is going to expect their cut. But in general, you want an operational business as LLC where you live. Because that’s the misconception that’s out there, especially when you go to form your LLC.

PatDarby : That’s why I highly recommend people get their LLC is formed by lawyers, not like the big websites where you’re basically talking to a customer service person, because they’ll put you wherever you tell them. Or they’ll try to push you into like Wyoming and tell you all this privacy stuff. And the reason I don’t like that is because LLCs the way you think of an LLC is going to be different. I’m not a lawyer.

Pat Darby : So this is not legal advice. But the way to think of an LLC is really twofold. Is it for investment properties, or is it for an operational business, if it’s an investment property, like you’re buying rental real estate, you want that to be where the property lives, because now you’re just talking you asset protection.

Pat Darby : And if someone starts talking about Wyoming or Ohio, where the privacy laws are very strong, that makes sense. Because if you own an expensive piece of property, you don’t want the world to know you own it, you want to reduce your liability.

Pat Darby : Conversely, you’re running a fitness business, you want everyone to know you have that business, like you’re not hiding, like that makes no sense that privacy protections when you want the whole world to know that you exist. So it makes no sense to drop yourself into Wyoming and call it like privacy protections for an operational business.

Pat Darby : And more importantly, if you’re living in California, and someone told you to go to Wyoming, California does not care that you have a Wyoming LLC, you still owe them all the same taxes, except you’ve added a layer of complexity because now inside of California, you have to foreign register your entity there.

Pat Darby :So now you’re just adding more paperwork, and likely now you’re paying fees in two states to exist. So and you didn’t get out of any taxes, like if you’re in New York, New Jersey, California, and you’re trying to like drop your LLC in Florida and Nevada, all these like low tax states. You haven’t solved that you haven’t saved any taxes, you just made your life more difficult.

Steve Washuta : Let’s move on to the audits. Everyone’s afraid of the audit. What are things to do, that people can circumvent being audited? And I guess on the other end of the spectrum here, what are the things that ignite the red flag for one to be audited?

Pat Darby : So if you’re audited I don’t do audit work. But one of the things we’re always doing is just getting people prepared, if they ever are ARD, are audited. And that’s just documentation. That’s going to be so like the cheapest best bookkeeping you could ever do is just keep your receipts have everything organized.

Pat Darby : Because that’s the problem with with an audit is the onus is on you. The IRS has no burden on their end. It’s the only time where it’s guilty till proven innocent. They’re like this is what we think your revenue is. And they’re going and they’re getting those numbers from verifiable sources because they’re probably you’re probably getting paid on Cash App Venmo stripe, Pay Pal, all these things where the IRS can find out in two seconds exactly like what you received.

Pat Darby : So on their end, they’re gonna say okay, we know you received 300 grand, so you owe us taxes on three under K worth of income, it’s you The burden is on you to prove Oh, well, I only owe taxes on my profit, you have to prove what your legitimate business expenses are. That’s where receipts come in. So having actual receipts, and the credit card statement doesn’t count, because I’m trying to think of a national example.

Pat Darby : But like 711, for example, you can buy anything at 711. You could buy gas, you could buy alcohol, you could buy food. So if you’re on a road trip for business, and you’re swiping your credit card at the gas pump for like 50 bucks, the IRS has no clue you didn’t just go in and buy two cases of beer. So that’s why the credit card receipt is useless or better example might have been Amazon like, Amazon sells everything.

Pat Darby : You can’t just show the IRS a credit card receipt says Amazon they want to know like what you buy, did you buy an office computer? Did you buy, you know something personal. So that’s, that’s the main thing, and is the receipts. And then one more component of the receipt is the 1099. We just had that deadline of January 31. So for every one for 2023, you have the 1099 your vendors.

Pat Darby : So it’s the same thing. Like if you have a vendor that works for you, and you pay them through Xcel, for example. And let’s say you pay them $5,000 Because l is not a payment processor, they’re not going to do tonight for you. So that’s going to be a critical component of showing IRS like this is my by 1090 9am. That’s your receipt, they could disallow those legitimate expenses.

Steve Washuta : Good information, let’s move on to potentially bad information. And that is tick tock finance, I always rail on tick tock fitness, not that it’s all bad. But you know, when you’re a professional like that, and I, there’s always caveats, because there’s so many variables that go into every situation. And we’d like to individualize information.

Steve Washuta : Yes, we have, I guess you would say overall principles we try to stick to, Pat has them in finance, I have them in fitness. But ultimately, we can’t always make suggestions for people. And so we have every single bit of criteria, but this is sort of the Tiktok finance has been floating around. I just want to get your, your macro view on this. The one thing is the 5030 20 rule that goes from necessities to wants to savings in general, is this a good idea?

Pat Darby : I love that, how people break it down, I think varies by but I think the budgeting concept doesn’t get talked about enough. Especially recently, I heard an article from Gen Z yesterday that it was like they were saying self care is more important than budgeting for like buying a home or something like that.

Pat Darby : And I’m not Gen Z but I don’t understand. Like linking it back to fitness, it’s like well, it’s like that same concept, like well, I cheat on my diet. So with one slice of pizza, so I’ll just go ahead and eat the rest of the pizza. And so it’s like, Well, okay, if things are expensive, and inflation is high, and buying a home and buying a car is expensive, how is blowing more cash going to help?

Pat Darby : You know, so I’m all for budgeting how people do it, whether they use those specific metrics, or, like I’m a big fan of separating things out into variable costs monthly, so I break it down into monthly and non monthly, and then also variable versus fixed.

Pat Darby : So in my opinion, everyone each month has fixed costs, like things that you know, you’re going to pay for your cell phone, your your home, your rent, most insurance policies, things like that, then you’re gonna have your variable like which are harder to track, like going to the grocery store, going out to dinner, at the dinner out for drinks, things like that.

Pat Darby : Those are both monthly, so you have a ballpark and where you’re going to be with those. And then you have your non monthly expenses, like some maybe your property taxes or even budgeting for things that you know will come up but you don’t know when so like for me since I’m not a big fashion guy.

Pat Darby : Like I put clothes in that bucket because I don’t know am I gonna buy like a bunch of clothes in one month and then a few months not medical, like, I could go months or years without going to the doctor but I put non monthly budgetary expenses there.

Pat Darby : So those are the three categories I like to do how people break it down, percentage wise is totally up to them. And I know it’s harder. Those percentages are much harder for business owners. Because if you get a W two paycheck, it’s pretty easy to do the math on like Okay, after taxes, you see what your pay stub is, what’s left, what are my expenses, what am I? What’s my income, what’s leftover.

Pat Darby : As a business owner, that’s much harder because you could end up having a really good year or a really bad year and so that’s why I like to really We get down to like, what do you truly have as expenses?

Steve Washuta : Moving on to cash stuffing, if you don’t know what this is apparently, it just means using cash for everything that the new generation is saying, Hey, I’m going to put cash into envelopes. And that’s the cash, I’m going to use to purchase things. Because if I see the cash in front of me, I’m less likely to use it as opposed to a credit card, which just seems like plastic.

Pat Darby : What are my thoughts on that I, I personally don’t like cash. So for two reasons, one, because I’m just so used to the convenience of swiping a card. But that being said, I like using a credit card for two reasons. One, I get the points, I don’t hold the balance. So for me, it’s great, I just get the points, I don’t pay them any interest.

Pat Darby : But the other advantage of a credit card versus a debit card, for example. And you’re just using the cash is that you have more creditor protections, if someone steals your credit card, the working with them to get the money back or getting the charges removed, versus if someone cleans out your debit card account. It’s very difficult. And then obviously like your steals your cash. Right? Exactly.

Pat Darby : Cash, you’re probably completely screwed debit card, you have a chance. But that’s that’s what so me personally, I don’t like that. Again. Also, I’m I’m like OCD with tracking things. I track every dollar in the business in my personal life, because I’ll use like apps like mint.com that link to my accounts, and I don’t stare at it all the time.

Pat Darby : But anytime I need to go back and reverse the numbers, like if I’m updating a budget, or whatever the case may be all that data is there, if you paid cash, if you want to go back and do the do your homework, you’ve no clue, like the cash is all over the place, especially, especially in your business. Using cash is a disaster. 

Steve Washuta : In my opinion, I would say that as a budgeting tactic. As a micro budgeting tactic, it could make sense. So let me let me put this forward to you. May be I am 23 years old, I struggle to you know, not just swipe my credit card at all times. And I’m going to the bar tonight with my friends.

Steve Washuta : So instead of taking my credit card, I just take $80 or $120, or whatever it is that I think I can afford that night and say, well, this, it’s like gambling in a sense, right? It’s like if you only go to the tables with this amount of money, that’s only amount of money I could lose. So now I’m going to take this $80 with me, which now I know I’m only spending that $80.

Pat Darby : From that perspective, I do like it if it’s I’m a controlling mechanism, or discipline, a force discipline mechanism, that I love it like any any way that people put financial barriers in their life to help them hit their goals. I’m all for it, how you do it. I personally just don’t like cash. But again, I would never discourage someone from something that works for them.

Steve Washutam : Tick tock investing, sticking with percentages, they say 4030 2010 respectively, ETF large cap growth and Penny stocks is this nonsense information or are not too bad.

Pat Darby : I don’t think there’s any right or wrong if you if you’re going with a diversified portfolio. When it comes to investing. When I sit down with a client, it’s about it’s about putting a plan together that will work when everything’s going wrong. Because there’s there’s a term called the behavior gap.

Pat Darby : And I don’t know if your listeners are familiar with it. It’s basically describing what an average index does, let’s just say for hypothetical purposes like the s&p 500 historically does 6%. And like I know Ramsey will say higher but depending on the years you use, but I just use a conservative number.

Pat Darby : So let’s say it does 6%. And then someone sits down says Well, I’m only averaging 3%. And I’m invested in the s&p 500. So what the hell, usually that difference between the six that should have given you and the three that you’re actually getting is your human behavior. And they call that the behavior gap.

Pat Darby : Because that’s like you messing it up. Like I can’t tell you how many clients have sat down with me. And they’re like my two best investments were a 401k that they had no access to. They were just the money was going in good times and bad. Maybe they even left the job and forgot about it for like a decade. And their second one is usually their home.

Pat Darby : And often, sometimes the third could be like an insurance policy. And what all of those three have in common is that you didn’t have a choice when things were crap. The you still dropped in your 401k investment, you still paid that month’s mortgage, you still had to pay that policy premium, or they would have lapsed on you. So really the difference is you didn’t deviate from the course, when the stock market was really high.

Pat Darby : And like you were like, Whoa, maybe it’s expensive right now, or when the sky was falling, and you’re like, Oh, my God, the markets going to zero? I shouldn’t be here anymore. You still kept the course. So I don’t, I don’t think it matters as much. I think it’s quite similar to fitness. And that what you do, like there’s obviously a million diets out there.

Pat Darby : None of them are bad if you could stick with them long term. If you if there’s a diet. Again, I’m not a dietitian, but you get what I’m saying. Like the purpose is the discipline to do it for the long haul. And so if you have an out an investment allocation that you are comfortable with, you’re young, you’ve the time horizon, you’re not going to mess with it, when like, the next scary thing in the economy happens, then I think it’s the right allocation.

Pat Darby : Because that’s where that’s where people get messed up is they panic, buy they panic sell. And that’s when they start making mistakes, in my opinion.

Steve Washuta : Yeah, well, part of it is because it’s fun, let’s be honest, like they’re trying to forecast what’s going on or judge the market. It’s a it’s a form of gambling, in a sense. So I think people who are on I don’t know, like, like Robin Hood or something, right. And they’re their buyer, or they’re using cryptocurrency, the buying and selling is, is fun for them.

Steve Washuta : And I think that’s that that comes into play. But you have to have somebody who knows more than you about the stuff. And ultimately, you have to be humble to know that there’s, if there’s no way outside of luck, that you’re going to time everything perfectly, it’s much easier to just let it you know, let it ride, you know, and go go for the long haul. 

Pat Darby : Yeah, and in terms of market timing, when I was first introduced Alex, her mosey one of the first things I heard him say, which made me love him, obviously. Now he’s even bigger than when I first was starting to see his content. I think he had said something I wish I could find it. It was a podcast episode where he’s discussing that he doesn’t believe people should be actively managing their assets.

Pat Darby : And I’m paraphrasing this, they shouldn’t be actively managing their assets until they’re worth like $100 million. Because it ends up just becoming a distraction to your business. He’s like, basically, I forget his math who essentially saying like giving people the benefit of the doubt saying the stock market returns 10%. If you’re a kick ass active trader, maybe you’re returning 20. But that extra 10%, you gained? How many hours that take away from your business?

Pat Darby : And if you put that back, how much more money would that have been? If you doubled, instead of doubling your investment return? What if you doubled the revenue of your company. And and he was saying, do that each year. And that’s that’s I think that the math that I agree with the most where it’s like, if you have a business, that’s one of the best assets that you could split put your time into, versus you could put other things not trying to time and investment. And just focus on growing the assets that are most under your control, meaning your business,

Steve Washuta : whole life insurance and borrowing against it. This has been like a huge social media thing for the last six months to the point where it almost comes off to this like multilevel marketing way where there’s like people who push it and then they sell courses and they have other people push it underneath it, explain what it is why people do it. And if you think it is a good strategy.

Pat Darby : Okay, so excuse me. I feel kind of strongly on this. And I buttheads with friends of mine. So like I’ve a friend, probably two people that I think in the insurance space, share two things, knowledge and ethics. I think the vast majority people selling life insurance have only one of those. And that’s the problem.

Pat Darby : Because most people that I know that are in insurance are really good people, but they’re part of a program. That’s essentially a sales program. They don’t it’s not comprehensive. They teach you what you need to do to sell, they get you licensed. So they have all the ethics in the world, but they are only as good as what their sales training taught them.

Pat Darby :  And then conversely, you have people that work for companies that like the big companies and they really know their stuff, and they’ll push things at you that you have no business buying. And so that’s the issue in general with that being out there. They pay lot like they’re called IUL, like, and so Indexed Universal Life is what you’ll see out there a lot.

Pat Darby : And the concept is good. Because they’re basically saying you put your money into these accounts, it’s guaranteed, because it’s an insurance product. So they can use the word guarantee. And it’s going to give you X ray return and all them are different. So make sure you do due diligence. The rates of return are going to be fixed, or at least have no downside.

Pat Darby : So you might not get below 0%. If the markets negative 2020, and you’re at zero, so you’re like, alright, that’s great. Now, you’re also capped on the upside, when the markets plus 20, you’re getting your, your six or seven, whatever, whatever is your policy. And they call it the Infinite Banking because you can borrow from it in like a participant, participant loan. And so the concept is, they’ll only let you borrow so much.

Pat Darby : So the policy will never blow up. And because you’re taking a loan, sorry, because you’re taking a loan loans are not taxable. So you’re banking with yourself until you die, and then the loan gets paid off and the bat the difference between what the loan was and the death benefit goes to your family.

Pat Darby : That’s the concept. Again, the problem is it’s, it’s sold by a lot of predatory people. And so there’s the there are applications for it. And where I’ll buttheads with my colleagues that I think are actually very knowledgeable, very ethical, is the series of events. And that’s what I talked about before. If you’re a business owner, and you’re not fully funding your retirement vehicles, I don’t think insurance is the right spot yet.

Pat Darby : But if you’re telling me that you are a very successful business owner, or multi six figures, seven figures, whatever the case may be, and you’re like, I’ve maxed out every retirement account. I’m already buying investment properties, things like that, like, where do I put the rest of the money, I don’t see a problem with that being a third vehicle.

Pat Darby : Because one, it’s got some guarantees to it, which is nice, and to their creditor protection. So the more money you make, the more assets you have, having another bucket of money that if God forbid, you got sued, or if your kids do something that get you sued, like you have this big pot of money that a creditor can come after. Now I’m on board again. But I think it gets sold too often to young business owners, it’s getting

Steve Washuta : sold to young business owners and I would even say people who are not even working right like part time workers, people who lost their job, people who are down and out as this, like, Oh, this is your this is your trick to get out of your bad financial situation.

Pat Darby : You’re 100%, right. And I also dislike these a lot because I was sold them before I was in finance. So when I was like 20, to come out of college, I was sold these types of policies. And after two or three years, when I was explained to me what I had, I was given two choices to like continue paying forever, which again, I was like 23, I had no beneficiaries.

Pat Darby : So I could either pay forever, or surrender what I had, and just so whatever the couple 1000 bucks or so that I put into it, I just had to walk away from there was I literally left with nothing. Because someone pitched this to me as like a great retirement investment.

Pat Darby : Again, like if instead if I was putting all that money into 401 K or Roth IRA or anything, I would still have it today. So that’s, that’s what I don’t like is that people that sell these will do the math and say, Okay, you’re capable of $500 a month forever. And like those Infinite Banking things that they’re going to tell you about taking out the loans.

Pat Darby : Typically, that doesn’t happen for five to 10 years, because the policy needs to be able to sustain itself. Again, like when a policy originally gets written, they, the company is essentially losing money because they have insurance, they have sales reps that are involved in marketing, they have all these internal costs of underwriting so the insurance companies immediately underwater.

Pat Darby : And so that’s why though they won’t let you access your money for a certain period of time. That’s why for me I was like two years in or like, you just have to walk away like there’s nothing, we won’t give you your money back. So that’s the other thing that people I think get misled with because they’ll hear like, oh, well 401k Suck, I can’t touch it till I’m older. But there’s a lock up in insurance as well.

Pat Darby : And to when it comes to retirement vehicles. It depends what you want to use the money for because like You could use your retirement vehicle to buy a company like Peter Thiel, like we talked about, he bought Facebook with his 401k. So that’s, that’s one of the things I, I don’t hate them as an investment product, but they’re so oversold to people that don’t know what they’re buying.

Pat Darby : And they’re probably, they’re probably other things that would be less, less detrimental just because like I said, like, there’s a commitment to it. Versus if you start funding your Roth and the business hits the skids, you can just stop funding your Roth, you can’t stop funding these policies or the lapse.

Steve Washuta : We’ll always talk about the crossover between fitness and finance. So let’s go over a few of those things and how I might deal with it in the fitness world and how you deal with it correspondingly in your world, I might have a client who I have to have a tough conversation with them, because they’re not meeting their goals due to the fact that they’re making bad decisions.

Steve Washuta : So maybe their goal is to lose 15 pounds and get stronger. And we have conversations every other week and weekly check ins and I can tell that they’re drinking too much, or that they’re off their diet, we have to have these tough conversations, do you feel comfortable doing that in your position, not even from just an investment perspective, it might not be somebody who has a lot of money, you’re like, hey, I don’t think you should invest in that. But from a spending perspective, also.

Pat Darby : Maybe they spend too much to keep the railing their plans.

Steve Washuta : Correct. They’re spending too much on areas where you’re maybe even for the business, you just don’t see it as being the the responsible choice, and maybe the sole reason why they’re not meeting their goals.

Pat Darby : In the beginning of my career, that was a problem, like clients would come to me and they would say, this is what I’m going to do. And this is my goal. And they were constantly jacking it up. And a lot of that’s actually going away. I don’t know, I don’t know why. But that was also, I wasn’t, that was the beginning part of my career when I wasn’t working as much with business owners.

Pat Darby : So now it happens less with business owners, but it’s harder for me to articulate why I have more compliant clients now. Maybe because we spend so much time focusing on their goals. You know what I mean? I know, fitness is the same way. But I don’t set any like clients goals. So it’s important for them. 

Steve Washuta : And so that’s what we just try to tie everything back to like what you’re saying, like they have their own intrinsic motivation to make a successful business and to do these things. And they’re hiring you as a professional, they, they’ve invested money in you and all these things. So they don’t really need sort of a slap on the wrist. They’re they’re doing the right things anyway.

Pat Darby : Right. And not only that, I mean, when we sit down and build your goals, we can extract those KPIs and put them on reports to clients. So I don’t have to, like it’s literally the top page of the report, like you said, this is the amount of profit you want. This is what it is and says and like big red, like percentages, like, this is how much you were off on that.

Pat Darby : So the good news is most of the clients that are off track, they want to fix it just as much as I do. They’re not. It’s not It’s rarely like self sabotage. It wasn’t like I don’t, I’m thankful that I have clients like well, I wanted to make this but I ended up going on a $30,000 vacation. It’s usually like, Oh, we lost some clients. We hired this person, they’re not working out. And so it was never like sabotage, it was like Alright, we just we got to figure this this issue out.

Steve Washuta : Sure. Well, staying sort of on the these topics here. Short Term Goals sometimes hinder long term goals. I know you’ve talked about this in the past, and you can elaborate on this with with clients, I have to let them know that sometimes their short term goal, whether it be vanity, or maybe they want one particular muscle to pop and they don’t understand that I have to say.

Steve Washuta : Well, there’s antagonist muscles that are going to be affected by this. We have to make sure that you’re, you’re well rounded on both sides. What do you see as like the biggest short term goal that your clients ask for that the general public tries to reach for in the finance world that hinders their long term goals?

Pat Darby : Probably the biggest issue would be kind of I guess, my go back to the vehicle. I feel like sometimes a vehicle screws clients up the most, at least, I feel like that’s where I’m always trying to talk them out of it. Like if they don’t need the vehicle, and they could buy an actual asset or allocate that towards their first home or their first rental property.

Pat Darby : It’s usually the vehicle and again, I try not to impress my person because I’m just not a car guy. So I try not to like put that on people because I get it like Some people love cars. And that doesn’t excite me. But I do try to bring that up when it’s like, financially speaking, if a client is not printing money, and it’s like, well, you’re sacrificing x for y. So that’s that’s one.

Pat Darby : But other than that I don’t have a lot of my clients get derailed by a short term goal. I think sometimes the problem is for business owners, just the shiny object syndrome, like what do you do? Like the challenge I have clients run into is where to invest the money? Sure, because on one hand, like this year, I really wanted to max out my 401 K, but it would really help me out to have another Junior coach.

Pat Darby : So that’s the calculus that we’re looking at, like, which goal is is more important to you? And that gets into like, more than the CFO world like, well, what’s the what’s the higher rate of return you’re gonna get here? So that’s, but again, I suppose to kind of go back to the car thing, that’s, I think, the short term goal that Jack’s people up if they don’t need it, if it’s more of a vanity purchase. 

Steve Washuta : Yeah, I mean, I would argue that cars are always a vanity purchase, I don’t understand. I mean, I, you know, I think you can get a six year old car with all the bells and whistles, for typically half the price of the new car. And in this day and age, they’re just as good, right? So like, your 2017, whatever, even like a Lexus truck is gonna run just as good as your 2024 Lexus truck.

Pat Darby : I’m the same as you. I know, people feel very differently about it. That’s why like, I don’t push too hard on clients who really want to buy a car because I realized, like, I just don’t get it. Like, I’m not like I, for me, it’s point A to point B, where some people it’s like, the whole experience, it’s like, that’s cool, I get that there’s things that, you know, we’re different. But But yeah, that’s probably the only one that I can think of off the top.

Steve Washuta : And I guess if you’re saving money in certain areas, it doesn’t matter in other areas, meaning like, maybe you’re a car guy, you just have to have the latest and greatest. But everywhere else, you’re really frugal, and you’re really buttoned down and you have a budget for everything where I’m the opposite. It’s like, if there’s a food that I want, if I go out to eat, I’m going to get whatever thing I want, I don’t look at the menu and go, Oh, this is 14 this is this is 24.

Steve Washuta :  I’m gonna get the $14 one No, I don’t go out to eat a lot. So I get whatever I want on the menu, regardless of price. Whereas for is something I would never I would never buy a new car because of because of the cost differential I can get with a used car. Right?

Pat Darby : And I try to also remember like, because like we’re fitness people. For some people, they probably think it’s crazy. Like, and I’m sure you have friends like this, like they spend hundreds of dollars, multiple gym memberships, like, all this stuff. Some people like oh my god, you spend more than a car payment on like two or three luxury gyms in the area.

Pat Darby : And we’ll do it all day long. Because we’re like, yeah, like this gyms for content, this gyms for this, this gyms for whatever. Whereas the average person, like if I spend more than 10 bucks at Planet Fitness, that’s too much. And so. So I get that it’s like different strokes for different folks. 

Steve Washuta : Well, I will say this on a car, it could go either way. So I had a client of mine. I won’t say their name, but they’re a successful business owner. And they had a very, very nice, expensive car that did not break the bank for them at all. And they sold it. And now they drive an older minivan around. And I asked why no kids left in the house either.

Steve Washuta : The minivan is mostly just to you know, just just so you can load it up and stock it with stuff. And they said they were getting a lot of snippy comments from people because they’re in a business in which people have to pay them about how much money he or she potentially makes because of the car they drive.

Steve Washuta : And maybe in some industries, it’s good, like the real estate industry because it shows that you’re a good real estate agent you’re selling a lot of. But in other industries in this particular industry, I’m not going to say it wasn’t good for my client, because people were almost like reluctant to pay them. Because they go Oh, you already make so much money. Why do you need this little amount of money from me for the service?

Pat Darby : That makes sense? Yeah, like again, like, in my opinion, the car is a utility. So like I’ve had people say you should have drive a nicer car make you look good. And I was like, Yeah, but I mean, the vast majority what I do is virtual so like, it’s very rare that people even notice that. I mean, I think my car is nice, but it’s not. It’s definitely not super luxury.

Steve Washuta : All the people I know who are best with their money and who are frugal drive shitty cars. Everyone, right? This isn’t just a one off like everyone I know who is either some sort of like someone who has is in the space of money. Maybe they’re maybe they’re an accountant for a particular company. Maybe they’re a CFO, maybe maybe they’re just someone who comes who makes a lot of money, but they’re frugal. They all drive not not very nice cars and I think there’s something to be said about The fact that that’s that’s the case,

Pat Darby : I have a former client, he passed away, he was in his 80s. And I really liked talking to him because I feel like his mentality is so like the key to wealth, he had a net worth, I don’t know 14 15 million, his dividend income alone from his stock portfolio is half a million a year,

Pat Darby : Just the dividend income, regardless of the stocks rose or fell, we were having lunch, or dinner one night, and he was like, I want to buy myself a new car grant seems like at three years old, more money than he could ever spend more income than he could ever need. Like, I want to buy a new car, but I feel really guilty doing it. And it’s like, he could buy his car in cash and like one month worth of his dividend checks.

Pat Darby : But in his head, he’s like, I shouldn’t do it. I don’t need it. And so like that always stuck with me, cuz I was like, this dude is why, like, there’s a reason he has like this huge net worth. Because these are the math decisions he’s making when he’s like, like, you could buy a new car every month, and you would still die a millionaire. So I just that always stuck with me.

Steve Washuta : And I see that too. And I’ve seen that with clients over time, I will say there comes a point of where that’s not great. There’s diminishing returns, it’s like, well, you don’t necessarily also want to die at 85. With, you know, $140 million in your bank accounts, like you should have lived a little bit and spent that money.

Steve Washuta : What? So? Okay, so what about conflicting goals? I’ll give you time to think about it? Well, I’ll give you sort of an explanation among conflicting goals. Sometimes I have clients come to me and go, Hey, I want to lose 15 pounds, and we’re gonna put on 10 pounds of muscle, it’s like, well, that means if we’re gonna lose 15 pounds, the easiest way to do that is to cut your calories. If you want to put on all this muscle, it’s very difficult to do if we’re cutting your calories.

Steve Washuta : So we either have to separate these goals, we have to do one and then the other. Like, we can’t do both of these goals at the same time. Do you have that in finance? Or do you see that just in the general public where they they’re doing things that they say they want to do, but they’re just too naive? And they’re, and they’re, they’re making a mistake?

Pat Darby : Yeah, and that’s, and that’s why we try to bring it back to a goal that’s bigger than the goal they hired us for. So for example, we try to push past like, oh, well, I want to make a lot of money. It’s like, Well, okay, for why, like, what is that money going to do? Like? What is it buying your time? Is it buying you resources?

Pat Darby : And that’s what we try really hard to, like, kind of leave the business side and get more back to the wealth management side, or it’s like, what are we doing with this money? Because that ultimately will help answer the question when they get very in the weeds with like, what do I do with this decision? Because the best analogy I always use is like a parent who’s got young kids and like.

Pat Darby : I want to spend time with my kids while they’re young. It’s like, okay, well, you just said, we like, what are we going to allocate this profit towards, you could put in your 401k, that does nothing for your kids while you’re young. You could hire someone. Okay, that’s a potential situation, because now maybe you have more time to spend with your kids.

Pat Darby : Or you could take that money and go on, like, a cool vacation with the kids while they’re yelling at Disneyworld or something, you know, like, so like, that’s why it starts like, widdle us back, like, what are you actually trying to do? Because if you have like a goal, that’s really like, the real goal, that usually will drive the decision, because it’s very easy for clients to get like in the weeds with like, oh.

Pat Darby : I want to make more money. And I want to take this tax deduction. I want to do this. It’s like, well, what are we doing this for? And so that that’s usually how we try to like, break the tie. Just push them all the way back to like, what’s the what’s the real reason you’re doing this?

Steve Washuta : Yeah, I think that’s a great explanation. When you brought up the parent who wants to spend more time with their kids, their first inclination might be, hey, Pat, I gotta make the most money I can to deal with the situation. And you’re thinking, Well, no, actually, maybe we just want to make sure that your business is really stable, so that you can step away from the business, right?

Steve Washuta : So you don’t have to worry about getting calls all day long, your business is up and running. And it could just basically run on its own, you could hire some employee for $14 An hour and it’s stable. Whereas if your goal was to make this most money, it would actually be us opening up a new second business, and we don’t and that would mean more of your time. Right?

Pat Darby : Right. That’s usually where again, we’ll let the client remind themselves what they’re actually trying to do. Like for example, we have clients trying to like spend money on certain things and I’ll zoom back to like the goals like you wanted this amount of money like so you can sleep at night like this as a cash reserve.

Pat Darby : Now you’re trying to spend it so like do you no longer have that that anxiety at night? If the if the answer is no like for whatever reason you don’t have any more cool let’s spend it but you told me this is like keeping you up at night. So we finally have this pot of money. You should use still spend it and I put the onus on them like I can I don’t tell them what to do with their money I just remind them what they told me.

Steve Washuta : That has been great information as usual want your direct my audience and listeners to where they can find more about you and your businesses?

Pat Darby : Absolutely. So I’m pretty active on Instagram at the Pat Darby same handle on Tiktok, but I’m more active on Instagram. My website is sensitivecfo.com And those are the three main areas I have my podcast myself, build your wealth muscle on on all the podcast places. And yet there’s three main areas.

Steve Washuta : My guest today has been Pat Darby. Pat, thank you for joining the Trulyfit podcast.

Pat Darby : Thanks for having me.

Steve Washuta: Thanks for joining us on the Trulyfit podcast. Please subscribe, rate, and review on your listening platform. Feel free to email us as we’d love to hear from you.

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