The True Liability – Not Reaching Your Number!

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The True Liability – Not Reaching Your Number!

27 1/2 years left on a fixed rate 2.85% (student) loan … sweeeeet [AJC: queue Homer Simpson drooling] …

It seems that Scott is the poster-child for ‘big debt boy made good’ … what do you think?


In this next exercise, our main topic is to take a serious look at our liabilities, ie; who we owe, how much we owe and what do we intend to do about it.

My wife and have have started 2009 fresh from the beginning in what Adrian has called Money Making 201 . We completed our Money Making 101 by the end of 2008 by paying off the last of our consumer debt, or what many would call “bad debt”. In Making Money 101 , the whole idea is to clean up your financial act basically by paying off your bad, unsecured, consumer debt, such as credit cards, personal loans, car loans and any other similar debts that cause you a monthly liability. It’s also a chance to get yourself in position to obey various financial rules that will aid in you ultimately building your wealth as fast as possible, provided that you are also working on ideas for your growth engine, so you can begin generating some serious cash to invest, or start your own business.

It’s getting spending under control as well and getting into good money managing habits that will basically clear your “financial runway” so that you can build up some really good speed for a better takeoff to build wealth, and continue these new money managing habits in the future, even in Money Making 201 and 301, so that you keep your wealth once you’ve reached your Number by your Date.

We can certainly write the book now on Money Making 101. Just a few short years ago, my wife and I had a networth of negative $225k. This debt consisted of a mountain of credit card debt, two insane car loans, personal loans, my wife’s student loans (at an outrageous interest rate of 12%) my fresh new student loans and a few other blunders here and there.

Before ‘meeting’ Adrian online and talking to him about his ideas for 7 Millionaires In Training!, We had paid off a little more than half of this debt and we started the 7MIT program at I believe around negative 90k in debt or so. Since that time last year, we continued to plug away, paying off each debt according to the Debt Avalanche. We used a method similar to Dave Ramsey’s Debt Snowball to pay off the first half of the debt in which you simply list your debts from smallest to largest, pay the minimums on all the others except for the smallest, in which you throw everything but the kitchen sink at, then as it’s paid, you roll what you were paying on it onto the next largest debt in addition to the minimum that you were paying on it, and simply repeat until all debt is clear. Ramsey does this approach because he believes that you get quicker ‘traction’ on paying off your total number of debts faster, thereby seeing quicker results and keeping the intensity up.

It worked quite well for us actually, as we got excited month after month as we were paying off individual creditors and accounts fast, but to honor Adrian and his system once I was selected as a MIT, we switched over to the Debt Avalanche. With this system, you pay off your largest interest rate debts first, thereby giving you a faster ‘return’ on your debt payment and truly, mathematically paying off all your total debt the fastest. This worked excellently for us as well!

Now that we have paid all of this off, we still however do have 3 very distinct debts. The first one is my student loan. A couple of years ago, my wife and I planned to place that student loan in the mix with all of our other bad and unsecured debt and simply pay it off as fast as possible according to Dave Ramsey’s program as well. We actually did pay a large chunk of it off, but put the breaks on an early payoff for it shortly after I was selected as one of the 7 MIT’s. We had several discussions about this loan with Adrian and the rest of the 7million7years community and decided that we were not going to pay it off early because it is at an astoundingly low interest rate. I was able to lock it in a 2.85% shortly after I graduated, so you can see, average yearly inflation alone is eroding this loan on top of my minimum payment and there are so many other ways to get a return on our money of more than 2.85% that it just doesn’t make sense mathematically to pay it off early.

Our other 2 debts consist of the mortgage on our home and the mortgage on our rental property. If you haven’t been keeping up with our discussions regarding why you should NOT pay off a mortgage early, then you would definitely want to read up on those. So hence, we are not paying a single penny extra to any of these 3 debts above their minimum payments. All three are set up for 30 years(26 1/2 left on our rental, 27 1/2 yrs left on my student loan and now 29 years left on our home).

So you can see our main purpose right now is to continue to keep our lifestyle and living expenses exactly where they are, which is significantly below our monthly income, save every penny above those living expenses and use this cash to fuel a combination of small businesses, real-estate and stocks. This is the growth engine that Michael Masterson states is necessary to achieve around a 45% annual compound growth rate. If this method does produce us even close to a 45% annual compounding growth rate, we will pleasantly overshoot our Number or simply achieve our number faster than our Date!

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Reader Comments

So, basically, you have no plans to pay off your $90k debt early? Am I reading this correctly? Nice deal.

@ Diane – You got it. It’s actually at 139k on the student loan. I was stating how when I finished school and started practice a few years ago, we had a negative 225k net worth and got it down to negative 90k networth(that was our networth 1 year ago).

Now, as of this month, our networth is positive 170k and the only debts we have are our home mortgage, our rental property mortgage and my student loan of 139k. We simply chose to pay only the minimum payments to all 3 of these per month, so that we could maximize investing.

Since the 139k student loan is fixed at 2.85%, it doesn’t make sense to pay it off early when we could get a far greater return than 2.85% on 139k(such as using my required vehicle of choice, according to Michael Masterson of real-estate with stocks and small businesses, returning somewhere in the neighborhood of 35-45%)

Does that make more sense?

@ Scott – What’s in your ‘Other’ ($151k) of your NWiQ Profile?

I’m keeping any businesses that I own in the ‘other’ category as I accumulate them. These will be realistic re-sale values of these businesses, so the numbers will remain quite conservative. Included in those will be my interest or shares in any clinics that I own.

Right now that is my total business interest in the practice that I run. Up until recently, I was an associate in a practice that I was simply paid a salary. Recently I helped to start up a new clinic that I later negotiated to ‘move to’ and takeover ownership. This is a deal I will continue to own just 50% of for a little over 2 1/2 more years, at which time, I will take over and own 100% free and clear. The practice is valued conservatively at a little over 300k right now if it where to be sold.(I do over 1.2 million in services per year at that clinic, so that gives you an idea of just how conservative this number is).

@ Scott – I presume that you had a GOOD attorney draw up the docs? 😉

LoL, yep.

@ Scott – So, it looks like we should be expecting to see your cash balance growing steadily (current savings rate LESS current loan minimum payments/servicing costs) until:

1. Time to close on the other 50% of the practice, and/or

2. Time to purchase some more RE, and/or

3. ????

Your only ‘liability’ will be how well you can just stand by and watch the cash sitting in the bank without getting an itchy trigger finger 😉

Hehe, you’ve got it Adrian. Actually, I won’t have to close on the other half of the practice. In just over 2 1/2 years it will be mine 100% at no additional cost. My ‘cost’ is that he is 50% shareholder right now and enjoys 50% of the net revenues for the next 2 1/2 years. This is how i’m effectively ‘buying out’ his shares. By doing this, I was able to get into my own practice and own it 100%, much faster than if I had come out of school, worked as an associate in someone’s office for peanuts for 2-3 years, then went to a bank and tried to get a loan for several hundred grand and opened a ‘fresh’ clinic from scratch and tried to build up patient volume over a couple of years.

In 2 1/2 years, not only will my networth go up by around 152k instantly(in the ‘other’ department), at no additional cost, but my income(which is substantial) will also effectively double. The practice will be a business asset that I can move on and pay an associate to run while I pursue other business interests and still earn more than I am now passively for as long as the associate wants to run it, or I can sell it for a little over 300k, add the cash to my investment portfolio, or whatever gets me to my number faster. The numbers say keep it, let an associate run it while I make a 6 figure passive income and repeat the process by building up another clinic that I will hire an associate for, etc..

My monthly cash savings will be steadily building up between now and then and will be used as down payments on additional properties, the purchase of my building, possibly refinancing my current rental to get a lower fixed rate, buying other businesses or practices, etc..

@ Scott – Makes sense; you made a very smart decision – and, ran a great negotiation to back it up – way back when 🙂

Now, or soon, it seems that you have a decision to make: what’s the best source of your additional cashflow stream now, and when it ~doubles in 2.5 years time: cash accumulation (perhaps to build up working capital for the next practice? How much do you think you will need to start/capitalize?); debt repayment (if so, which one)? Another investment (if so, what?)? Or … ?

Knowing what I know now, I believe I can get another practice up and running from startup to cashflowing positive in 6-8 months of hard work, blood, sweat and tears. And do it for under 150k this time around, with the knowledge I now have about the business of building and running a practice. I think it would be the wisest choice for me to do so asap and own 2 practices free and clear within the next 3-3.5 years.

Yeah, those are the questions that are running through my mind right now. I’m really thinking I should make sure and have the cash saved up and ready to start up another office when I take 100% ownership of my current one in 2.5 years. I may be able to swing a downpayment on the building my current practice is in and at least secure ownership of it between now and then, or perhaps a couple more investment properties, in addition to having the cash ready to start up the second clinic. I can have an associate under my wing, trained and ready to run my current practice in the next 2.5 years as well to allow me to hit the ground running on the second practice.

@ Scott – In the current environment, others would say ‘diversify’, but I would recommend buying the building that you are in … you know the tenant is secure 😉

Side benefit: if/when you sell the business, you will make sure that it comes with a solid lease, converting some of your active cashflow into passive.

@Scott – You are steering the ship very well! I’m impressed! It’s all hard work but applied to the right things.

@Adrian – I agree about having a secure tenant. An accountant will help you setup something that will help with taxes tremendously.

Thanks Mark, it’s been a really tough road to get this far but well worth the trip in what i’ve learned.