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If You're Paying Your Debt Off
Too
Quickly You May Be
Costing Yourself Money
 How
you handle debt will determine your financial fate.
Don't fund a sales person's retirement.
.
A recent paper
published by The Federal Reserve Bank of Chicago indicated that consumers that
prepay their mortgages and itemize their deductions would likely be better off
sticking the extra money into a tax deferred investment account like and IRA or
401k.
They defined a person
as a pre-payer if they have any mortgage shorter than 30 years. The Fed’s
argument is simple. You can get a mortgage rate lower than the return on an
investment. The investment vehicle they used for the study was a fairly risk
averse mortgage backed bond portfolio.
I have been saying
this for years. This same concept applies to practice debt. Paying off debt
before you invest is just mathematically wrong. Many dentists do it. This
mismanagement of the business and personal debt cycle is the cause of why so
many dentists will not be able to retire and maintain their lifestyle.
 Let’s face it. We will
likely live for 30 years if we retire at 60. If your investment portfolio is not
big enough you will be faced with a set of challenges you may have never faced
before.
How big does your
portfolio have to be? That depends on your lifestyle. In general you should not
spend more than 5% of your portfolio annually. If you stay within that rule, you
may never run out of money. This assumes you get after tax returns in excess of
5% annually.
So let’s say you want
$8,000 per month in retirement. You will need $1.9 million in your portfolio. We
are talking today’s dollars. If you retire in 20 years and we experience 3%
annual inflation, $8,000 per month is going to feel more like $4,500 today. This
is not enough money to “see the world” during your golden years.
It doesn’t have to
be this way.
The debt cycle of a
dentist is unlike that of any other healthcare professional. There are rules to
handling debt and if you break those rules you will lose money.
I have outlined a
typical 15 to 20 year debt cycle. It starts with graduating from dental school
and ends with the construction of your ideal office.
-
Student loans -
$150,000
-
Practice
Acquisition - $325,000
-
Home - $225,000
-
Car loan - $35,000
x 2?
-
Equipment upgrade
- $125,000
-
New House -
$500,000
-
New Office -
$1,000,000
Some of these debts
need further clarification. The Practice Acquisition is the purchase of your
first practice. If you are not buying, you may be doing a start-up. In that case
the acquisition debt becomes start-up debt. Your start-up may cost your more
money.
 The equipment upgrade
cycle is estimated at $25,000 per year for 10 years. If you bought a practice it
was likely filled with older equipment and you would spend money upgrading it.
If you did a start-up then you likely did not fully equip your office and will
spend additional money adding ops and technology.
Then I considered the
gadget factor. Dentists like gadgets and dental dealers know it. So when your
dental dealer gets one, he will sell it to you. Gadgets are good! However some
gadgets may just be a good way to transfer wealth from you to them.
The new house debt
arrives because you have earned more money and want a better neighborhood with
better schools. The last entry is the new office. If you are 45 or 50 and have a
great practice but it does not mirror your clinical abilities or is just too
small, you will likely move. If you lease space your move may cost you $600,000
or so. We have had clients spend $1 million on leased space.
If you construct a
building, your costs are likely to rise. We have had clients spend $1.5 million
on a new building. Since the amount you do spend can vary widely I have pegged
the number at $1 million.
Here is the question
for you. How should you handle all of this debt? Do you have a plan for this? If
you do what is it based on? I would argue that you should make your debt
management plan driven by your wealth accumulation plan.
 What is your wealth
accumulation plan? What is your plan based on? If you don’t have a plan, someone
else’s plan is going to sound really good.
Unfortunately that
someone else may not be working for you. They may be using you as a vehicle to
accumulate wealth for themselves. Now you may be asking what that means. Most of
the dentists I run into are taking advice from the wrong people. They are
listening to people who are selling them things.
That’s okay when you
already have a plan. But when you are plan-less, or naked in the jungle, someone
selling clothes really makes sense to you. If you have a plan in place, one that
is based on your practice cash flow, your lifestyle and your goals or the things
that have to happen for you to feel really great about the results in your life,
you are not easily sold.
For example, if you
have a plan that calls for you to save a certain amount of money per year, then
you are less likely to derail your plan with foolish spending like buying an
annuity from an insurance sales person. Or how about a new $15,000 gadget from
an equipment sales person? Or a $1.5 million 2,500 sq foot office from an office
design sales person. There is nothing wrong with any of these purchases unless
they derail your plan.
The plan and a coach
to help you stick to it, is just the armor you need in a world of expert sales
people. If you recall, we started this article by suggesting that paying your
debt off early may be costing you money. Let’s provide some proof.
Wealth is created
through a simple formula.
A x T x
R
A = amount, T = time
and R = return
These three variables
work together to compound money. When you begin, the amount (A) is the most
important variable. The return is not very important until you get to Milestone
I. Milestone I is defined as the point where your returns on your money equal
the amount you are investing annually.
Let’s say you are
investing $40,000 annually into your qualified plan. When your portfolio grows
to $400,000 and throws off say 10% annually you are at Milestone I. Your Amount
equals your Returns. When you hit Milestone I your rate of return becomes more
important.
 Milestone II arrives
when your Returns are equal to two times your Amount. For example, if your
portfolio is $800,000 and your returns are $80,000. At this point the amount you
add is not going to have as much impact on your results. Your returns are going
to have a significant impact.
Milestone III arrives
when your Returns are equal to three times your Amount. In our example that
would be $120,000 in returns on a $1.2 million portfolio assuming the amount you
add annually is $40,000.
You must make it a
priority to get to Milestone II as fast as possible. Failure to do this will
result in a poor existence during your retirement years. If you under 50 and are
at Milestone II than you don’t have quite as many things to worry about.
The rich invest half
of their income annually. They do this because they are beyond Milestone III.
They have investments throwing off cash that equals 50% or more of their income.
That cash is reinvested and continues to work for them. They have an army of
soldiers all working on their behalf. That is how the rich get richer.
How are going to
get to Milestone II if you use all of your cash to pay off you debt?
The wealth equation
does not have an asterisk next to it with a footnote that says start when your
debt is paid off. The equation tells us that getting money in sooner means we
get to put less money in and end up with more money later. You would be better
off investing for 10 years and then paying off your debt versus paying off your
debt and then investing for 16 years. You will be twice as wealthy after
investing 60% as much.
I can show you how
this works. Just send me an email and tell me you want proof. If you don’t know
exactly how you are going to pay off your debt, generate enough money for
retirement and meet all of your goals, then you need a plan.
 If you want help with
your plan, then you may want to consider The Financial Health Assessment™. This
is our process for helping you understand if you are currently financially
capable of achieving your goals or the things that have to happen for you to
feel really great about the results in your life.
We take your practice
cash flow, you life style and your goals and place them in our proprietary
models. Our models are uniquely qualified to point to areas that can be
optimized so you can achieve your goals.
Let’s say you want to
move your office. How do you know how to size it? The new office should not
interfere with your current lifestyle or other goals without you knowing it in
advance.
How about building
your investment portfolio? What type of plan should you put in place based on
your practice? That’s a question that can only be answered based on analyzing
your current practice cash flow, your lifestyle and your goals.
The Financial Health
Assessment™ creates the action items to optimize your financial life only after
contemplating your lifestyle expense and your goals. It is the ideal tool for a
dentist.
 Once The Financial
Health Assessment™ is completed you can use it as a tool to make decisions.
Let’s say you do need to upgrade some equipment. Does it make sense to do that
this year? Next year? Should you finance it? If so, how should you finance it?
If you have a plan,
you are less likely to be sold something. Get the plan, get focused on your
goals and move confidently through your career.
No other firm in the
country offers The Financial Health Assessment™. Since most financial planners
do not look at your practice financials and most accountants do not focus on
wealth creation, you are not likely to find our unique approach anywhere else.
The Financial Health
Assessment™ comes with a money back guarantee. If you do not feel that it was
worth the money you paid we will refund all of your money.
Get a plan, get to
Milestone II and you will be on your way to a comfortable and confident future.
Have
a question or a comment for me?
Send
it to david@financegeeks.com.
Finance Geeks
provide unique wisdom and expert advice to healthcare professionals. Their
strategies help dentists create and maintain wealth. David Catalano has over 20
years experience dealing with dentists.
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