Improving cash flow, securing the future
The founder of a successful mortgage company gets advice on building his assets.
(FSB Magazine) -- David Zugheri is one goal-oriented guy. In 1997, when he was 27, he cashed in his retirement savings ($4,000) and co-founded his business, First Houston Mortgage (firsthouston.com).
The firm was profitable within a month. Next, Zugheri designed a plan to save $100,000 in cash and stock by age 30 and to comfortably retire by 35. By working long days (often spending all night in the office) and scrimping to extreme (he lived on ramen noodles), Zugheri reached the $100,000 goal by the time he was 28. Then, thanks to savvy investing, he increased that sum to $280,000 one year later.
But his race to wealth hit a wall in March 1999 when the Internet bubble burst and he lost his entire portfolio in two weeks. (He even needed to wire an extra $10,000 into his brokerage account to cover losses related to a margin call.)
"After that I realized the only way to get rich was one day at a time," says Zugheri. He also changed his philosophy on investing: "Why should I invest in a company if I don't even know what it does? Why not invest that money in myself?"
With that epiphany, Zugheri abandoned his plan to retire at age 35 and refocused his energies on building First Houston. The company, now ten years old, has 70 employees and does about $8 million in revenue annually. It recently opened new offices in Arizona, and Zugheri, 36, expects to go national in the next five years.
Zugheri now has several million in liquid cash in the business, yet he and his business partner, Dana Gompers, each take average salaries of just $100,000; Zugheri wants to ensure that First Houston maintains adequate liquidity - both to fund its growth and to qualify for lines of credit. At the same time he's concerned about paying for personal needs, including private school for his daughter, Mia, 6. He also wants to ensure that he earns enough to allow his wife, Adrienne, to continue as a stay-at-home mom, and to save for the future.
"The worst thing about being a business owner is that you're worth a lot on paper, but cash flow is tight," says Mark Nash, a personal financial services partner at PricewaterhouseCoopers who works with high-net-worth individuals and closely held businesses.
Nash suggests that when the business generates excess cash, Zugheri and his partner should take extra compensation to build wealth outside the company. "The place to stockpile is not in the business; it's in other savings vehicles," Nash says. His reason: Moving money into investments outside the business will protect Zugheri's assets in the event of a lawsuit against the company. It will also help diversify his portfolio, lowering his risk.
Nash is pleased to learn that Zugheri's only debt is his mortgage ($2,300 a month, which includes taxes and insurance) and a small car loan. He also says Zugheri is on track with retirement savings of about $155,000 and a well-mapped plan to save more. First Houston recently established a matching 401(k) plan, which Zugheri maxes out, contributing about $20,000 a year. Last year he also opened a variable universal life (VUL) policy, a type that builds cash value as well as tax-free gains for the policy beneficiaries. He has put $50,000 into the VUL and plans to make yearly $20,000 contributions. All smart moves, says Nash.
Zugheri also has an IRA worth about $90,000. He no longer contributes to it, and while the 401(k) and VUL are invested in low-risk mutual funds, he uses his IRA to speculate in stocks he picks himself. Nash calls that a risky strategy and says he's surprised to see it, given that Zugheri was "bit in a big way before."
Nash suggests that Zugheri move the money in his IRA into more stable long-term investments. If he has a yearning to play the market, Nash advises opening a separate brokerage account and funding it with $1,000 a month. That way he's not gambling his retirement, and his losses, if any, will be deductible against capital gains.
Zugheri has about $18,000 saved for Mia's education. Some $12,000 is in a 529 plan, a tax-advantaged savings account for college costs, and $6,000 is in an educational IRA (now renamed the Coverdell), a tax-free savings vehicle that can be used for elementary- and secondary-school expenses in addition to college costs. That's important for Zugheri, who pays $1,000 a month for Mia's kindergarten. "It's out of control," he says. "I'm more afraid of private high school than I am public college." Because there are limits on the investment one can put into the Coverdell ($2,000 a year, after tax) and earning above a certain income makes a family ineligible to contribute, Nash suggests opening a supplemental account to help fund lower school. "You do not want to be incredibly aggressive here," warns Nash, "because you will need this money soon."
Nash praises Zugheri for his foresight on many planning issues, including his decision to have a Split Dollar Key Man insurance policy as part of the VUL, which will protect each business owner in the event of the other's premature death. Nash recommends adding a buy-sell agreement that will enable the healthy owner of the business to buy out the interest of a disabled or deceased co-owner. ("Disability covers income but doesn't address what to do [with the profits and the business] when someone is busting his ass and the other isn't," says Nash.)
After speaking with Nash, Zugheri feels positive about the plans he has in place and says he will follow some of Nash's suggestions for the future, including the buy-sell contract. "We do a lot of stupid stuff: We jump out of planes, we scubadive, we snowboard," says Zugheri. "Mark is right- we need something in writing to address the possibility of one of us becoming incapacitated."
As far as Nash's plea to get him to stop day trading in his IRA, that's a harder pill for Zugheri to swallow. "I know it's a no-no, but it's like a doctor telling me to stop eating sweets," says Zugheri. "My appetite is not satisfied with a boring mutual fund or a boring bond. It's very tempting to go in and day-trade for the short term."
Zugheri likes Nash's advice to open a separate account to day-trade, but says he'd need to take more money from the business to fund it, and that's a risk he's not willing to take. "The company is the goose that lays the golden egg. We need to keep the goose alive - without it, we don't have a 401(k), or private school or anything."