What we are taught is not true in terms of finances and savings, and good debt vs. bad debt
WHEN YOU THINK OF THE WORD DEBT, what comes to mind? Most people dislike debt, but if I asked how you feel about debt, what would you say? Just about 95% of the people who address their debt want it gone and they want to be debt-free. However, just about everyone who utilizes traditional financial planning (to be out of debt) is accumulating one of the biggest debts, heading into retirement, and paying off some of the last “good debt” that they should be taking advantage of.
Is a mortgage a good investment or good debt?
If you had a mortgage on your home that was $100,000 and you had $120,000 in the bank, are you debt-free?
Having the ability to pay off all your debt is a great position to be in — but are those decisions wise? I am often questioned on what good debt is and what “bad” debt is, and how to make the distinction between the two.
If you are a practice owner (business owner), your accountant’s job is to find every deduction you are legally allowed to take under I.R.S. regulations. That is what they do. That is why you pay them. But knowing the difference between good debt and bad debt can have huge implications for your financial picture when you go to retire.
What about student loans?
Like most practice owners, chiropractors fund their way through school with student loans. In 2010, the federal government saw the profits that private banks were making off those private loans and wanted those profits for themselves.
Those loans are now controlled by the government. The money borrowed put you through school, and allowed you to start a career (and in many cases your own practice) and earn a good living so you can accumulate money to live on and build up for your retirement. But those loans are used against you when it comes to home mortgages, business loans or anything else you need a financial institution to lend you money for. When they calculate your ratios, they are used against you.
Banks and lending
When do practice owners/business owners go to the bank for money? Whether it is for business expansion, line of credit, buying out a partner or whatever, if you do not have the cash reserves and you need/want to do whatever, you need to go to a financial institution to borrow some money. The process for that is exhausting.
They will require:
- The last three years’ tax returns;
- To run a credit check;
- A P&L statement, and;
- Current balances in all bank accounts.
They will have you go through three weeks of underwriting, and if they grant your request, charge you a “fair” interest rate, have you sign for it personally, hand you a payment booklet and send you on your way … provided you “agree” to their terms.
Keep in mind that the interest you are earning on your deposits with them is zero-point-nothing percent, and yet they are charging you exponentially more because they are allowing you to use their money. Does not seem too fair. However, there is a better way.
Should you pay off your home?
We are all ingrained with the thoughts of buying a home and paying it off as soon as possible. Many of us took out a 30-year mortgage (because that is what we had to do to get into our first home) to keep the payments down and so we could be within the bank’s “ratio.”
However, after a few years, we were enticed, or advised, to remortgage our homes to a shorter term at a lower interest rate. The goal is a paid-off home, and to be debt-free. However, if the mortgage interest we pay is tax deductible, why would we want to kill off one of the last tax deductions or good debt that we have?
If the value of our home goes up and it is worth more, who controls the equity within our property? (Here is a hint: It is not you.) The control is with any financial institution that is willing to give you a mortgage on that home. So, is a mortgage on your home good debt? I would argue it is.
IRAs and 401(k)s
Accumulating one of the biggest debts, heading into retirement and when utilizing traditional financial planning is contributing, on the advice of your accountant and financial advisor, as much as you legally can toward your IRA or 401(k).
If you had $1 million in your IRA, how much is yours? It is the balance left after the government (federal, state, social security and Medicare) takes what they feel is their fair share. You deferred (not postponed) the taxes on those dollars that you put into those accounts, based upon the advice you took from your accountant and financial advisor.
Keep in mind that if you believe that taxes (over the rest of your lifetime) will go up, you will be paying more taxes on the money you put away for your retirement that you thought you would have avoided paying.
Good debt vs. bad debt
Some of what we were all taught to be true turns out not to be true in terms of finances and savings, and business owners need strategies that put them in control of their wealth.
Utilize these strategies that allow chiropractors to take advantage of the tax code and put yourself in a much better financial picture come retirement.
BRIAN P. MICHAUD, CLTC, is CEO for Consult Encompass LLC and Encompass Group LLC, and a business consultant and financial strategist. He can be reached at 860-930-5330 or firstname.lastname@example.org.