Debt-Free or Asset-Leveraged: Which is Best?
By John Fitzgerald, D.C.
We will be writing a series of articles on how to manage
cash flow, investing in assets vs. liabilities, and which investment
vehicles we recommend and why.
The first article deals with a paradigm shift from being debt free to a
more powerful position of being asset leveraged.
For years, many chiropractors have listened to the echoed sentiment by
many financial gurus who have preached that the path to psychological
well-being in private practice is to accelerate debt repayment and to
ultimately get “debt-free.”
This financial school of thought teaches you to pay cash for your cars
and homes, and to get that student loan paid off as quickly as possible.
Teachers of this philosophy would have you believe that this approach to
managing your finances will decrease your stress and put you in control
of your financial portfolio.
However, there’s another school of thought that focuses on leveraging
assets rather than focusing on becoming debt-free.
How many of you know of a chiropractor who has paid cash for everything
he or she owns, is debt-free and is financially independent? They are
few and far between. The average doctor owns too many liabilities and is
working his or her tail off to support them. What if this doctor’s
income was to decrease or somehow go away? How could he or she afford
the property tax, the car insurance and the tuition payments? How will
he or she ever retire?
The answer lies with investing against your debt to the degree that your
investments passively support your monthly payments on your liabilities.
The key to financial independence for the chiropractor is to invest in
assets, not liabilities. Let the bank own your house and car, and the
government your student loan — and you will have more liquid cash at the
end of each month to invest in yourself.
Would it really matter if you were $100,000 in debt at 12% but were
worth $1,000,000 and had it invested wisely at 20+%?
The difference between middle class and wealthy is more than just
psychology; it is a raw application of how to take an income and make it
work for you. The fact of the matter is that every doctor, every day, is
either getting richer or poorer.
That middle-class doctor who saw huge returns in the late ‘90s is now in
the year 2001, starting to realize that the stock market is indeed a
cycle.
It has been proven many times that a well-diversified portfolio on
average will yield 8% to 10% annual growth over 40 years. Another word
for a diversified portfolio is a mutual fund. Mutual funds on average
won’t keep up with inflation rates after you have accounted for fees and
capital gains taxes. But guess what many financial advisors and brokers
recommend for their middle-class clients? Yep, mutual funds. And many
people choose them because they were told they were safe. That depends
on your definition of “safe”: There were some people who lost money in
2000 on funds that did 25% the year before.
Not only must you invest, you must seek out those vehicles that will
secure you the returns that will allow you to meet your goals, yet not
assume more risk.
In short, the answer is to focus on asset building, rather than being
overly concerned with paying off debts and liabilities.
Consider, for example, a doctor who is $100,000 in debt and has an
income of $120,000/year ($10,000/month) and fixed monthly expenses of
$5,000.
If this doctor followed a plan focused on debt reduction:
• After fixed expenses, this doctor would have $5,000 per month of “play
money” (disposable income).
• The doctor would then take the $5,000 of “play money” and accelerate
payment on a debt like a car, house or school loan.
• After 2.5 years, this doctor would be debt- and asset-free, therefore,
the doctor’s net worth would, for all intents and purposes, be zero.
• In years to come, this doctor would save funds in a money-market
account and buy all future liabilities with “cash.”
• This doctor would always be dependent on his or her current income to
support the liabilities bought with cash.
If this doctor followed a plan focused on leveraging assets:
• After fixed expenses, this doctor would have $5,000 per month of “play
money” (disposable income).
• The doctor would then take the $5,000 of “play money” and contribute
it to an investment vehicle that could secure 30+% each year.
• After 2.5 years, this doctor would still have a debt in the
neighborhood of $80,000, but if the investments made 30%, the doctor
would also have an asset portfolio in the neighborhood of $180,000;
therefore, their net worth would be $100,000.
• In years to come this doctor would continue to sock away $5,000/month
into his/her asset vehicles, not accelerate debt repayment, and not
taking on more liabilities.
• This doctor within 15 years will have an asset portfolio in the
neighborhood of $1.4 million and will be able to retire knowing that all
the liabilities can be supported by the passive interest made by the
asset portfolio.
To sum this article up, we will list these action steps:
1. Stop buying liabilities and do not accelerate payments on
liabilities.
2. Start buying true assets, which are things that make you more than
15% minimum APR with your disposable income. We like the true assets
offered by GMI (currency traders) and TLA (gov’t loans through tax
liens). Look at our website www.madisonfinancial.com for details on
these companies.
3. Sell off liabilities and take that money and invest it into true
assets.
4. Turn your equity into assets. Many of you own commercial buildings or
homes that could have a line of credit taken out on it. Take the money
(equity) from the property and buy true assets with it. Now your money
is working for you.
5. Cut out this article and keep it in a 3-ring binder for reference.