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Is There Balance in Your Balance Sheet? – Episode #326


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What’s your wealth building reality? Are you on the asset-accumulation-fast-path, or a living-for-today-crawl? Here’s how to know how you’re really doing. On this episode of the Dentist Money™ Show, Ryan and Matt explain what a balance sheet can tell you about your financial progress. Are you over-leveraged with debt, are you over-exposed to risk? Your balance sheet knows.

 

 


 

Podcast Transcript

Ryan Isaac:
Hello everybody, welcome back to another episode of The Dentist Money Show, which of course, is sponsored by Dentist Advisors, which is a no commission fiduciary, comprehensive financial advisor, just for dentists all over the country. Check us out at dentistadvisors.com. We even invented a special financial planning system just for dentists. It’s right on there. It’s called The elements, check it out. Today on the show, Matt and I, who I lovingly refer to as the Hollywood Mountain, we discuss putting the word balance in your balance sheets and what that means to have balance in your balance sheet in all the different categories. And the big question is, what kind of a net worth are you building and are you meaning to. Is it intentional or are you accidentally building a balance sheet that is not really what you want it to be, really kind of interesting discussion, and many thanks to the Hollywood Mountain for being here, lending his insight and his knowledge and experience with us, and many thanks to all of you for joining us. A lot of you come back weekly, and a lot of you are new to the show, and thank you for that.

Ryan Isaac:
That’s super cool, and we love to have you. And we hope this is really helpful in your journey of making financial decisions as a dentist, and if you have more questions for us, you can go post a question any time in the dentist advisors discussion group on Facebook, we’ll answer it, and we’ll usually use it for our podcast later, and also you can talk to us directly go to dentistadvisors.com, click on the Book free Consultation link and schedule a chat with one of our friendly advisors. We’d love to hear from you, so thanks for being here with us and enjoy the show.

Announcer:
Consult an advisor or conduct your on due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is sponsored by Dentist Advisors a registered investment advisor. This is Dentist Money. Now, here’s your host, Ryan Isaac.

Ryan Isaac:
Welcome to The Dentist Money Show, where we help dentists make smart financial decisions and avoid the bad ones along the way. I am a guy, and my name is Ryan, and I’m here with another guy, and his name is Matt, the Hollywood Mountain Mulcock. What is up Matty.

Matt Mulcock:
I have one bone to pick with you.

Ryan Isaac:
Let’s do this, pick bones.

Matt Mulcock:
And I got this license from a client, he gave me full license, shout out to Alan, you know who you are. I’m not gonna give a full name.

Ryan Isaac:
What did Alan say?

Matt Mulcock:
Alan, I just talked to him last week and we had a meeting. And Alan said, “You know what, you tell Ryan that His name is Sir Ryan Isaac, and he’s like, “And I wanna make sure… I want you to make sure you tell him that.

Ryan Isaac:
And welcome to the show, my name is… I am a guy named Sir Ryan Isaac.

Matt Mulcock:
That is right.

Ryan Isaac:
And I’m here with Hollywood Mountain Mulcock. There we go. Sir Ryan Isaac. Well, thanks, Matt, for being here. We’re excited.

Matt Mulcock:
Yeah, of course, I’m just sitting here. I will… Full disclosure…

Ryan Isaac:
Eating string cheese.

Matt Mulcock:
I’m eating string cheese.

Ryan Isaac:
Here’s the thing I want the people to know about you. There are two kinds of people in this world, there are those that I love and that are worthy of grace and love and respect, and then there are those who eat string cheeses by just biting chunks off of the end of it without peeling it.

Matt Mulcock:
Like my daughter; She’s a savage.

Ryan Isaac:
Those are the two kinds of people in this world, and one is deserving of love and respect, and…

Matt Mulcock:
And you’ve been noticing that I’ve been peeling it like a gentleman.

Ryan Isaac:
So just for the audience, Matt is a string cheese peeler, just so you guys know.

Matt Mulcock:
I am a peeler.

Ryan Isaac:
I would love to know who is a biter.

Matt Mulcock:
I’m not a sociopath.

Ryan Isaac:
Well, first of all, we just wanna thank everyone for being here and tuning in. We were informed, we still have a lot of listens after all these years, and that makes us very content.

Matt Mulcock:
It feels good.

Ryan Isaac:
It feels good. It’s validating that we are liked.

Matt Mulcock:
Yeah, I love being liked. What can I say?

Ryan Isaac:
We really love being liked, but thank you for… Obviously, there’s new people joining us, so thanks for joining us, we hope this is helpful and new episodes every Wednesday, and if you have a topic or a question you like us to cover, then just go to the easiest place to be, go to the Dentist Advisors discussion group on Facebook, and then just post a question in there and we’ll usually answer it there, and then use it for podcast fodder, if you will.

Matt Mulcock:
The old fodder.

Ryan Isaac:
The old podcast fodder. So today on the show, we’re gonna talk about something by starting with something I saw on Instagram, and it was a friend of mine who is a health and nutrition coach who posted this, and so it was like in a health and fitness context, it’s attributed to James Clear, came from his account. This might be a thing he does. It’s like a Monday morning question. Does he do this? Do you follow that at all?

Matt Mulcock:
So I’m not on social media.

Ryan Isaac:
Oh, yeah, you [0:04:36.4] ____ go on there.

Matt Mulcock:
But he does do… So I follow his newsletter, so I get a weekly newsletter from him, and he does a lot of this stuff.

Ryan Isaac:
That kind of stuff, okay.

Matt Mulcock:
Yeah, he just like post quotes and stuff, Yeah.

Ryan Isaac:
Okay, so it was a Monday morning question. And this was the question, and it’s so deep, the question is, If someone could only see your actions and not hear your words, what would they say are your priorities?

Matt Mulcock:
Oh. So good, man.

Ryan Isaac:
I read this in a context of health and fitness, so my friend was posting this… Re-posting this like, Hey, you say health and fitness is important to you, but if you couldn’t say that and someone just looked at your actions during the day or during a week or over the course of a month, what story would that actually tell? Would it be congruent? Would it be like, Yeah, health and fitness is important to you because look at your actions, like the way you healthy sleep and food and lots of water and exercise, or would it not tell that story.

Matt Mulcock:
I mean, and let’s be real, in today’s age of social media, this is like as an important of a question as it probably ever been with the things that people are putting on social media versus how they’re actually acting when they’re not posting stuff on the social media.

Ryan Isaac:
I know, yeah. Or, yeah, you just post something and that was five seconds of your day, and then the rest.

Matt Mulcock:
Yeah it’s like a quick little highlight, and yeah.

Ryan Isaac:
I thought about this in terms of like if someone looked at your average… Yeah, someone looked at your average day, like just generally, how you spend your time, what would they say are your biggest time priorities, like would your biggest priorities have something to do with people. Do you spend a lot of your time with relationships, would you be a person who works a ton. Maybe you say that there’s important things to you, but you work way too much. Health… What about fun? Like fun and hobbies. I feel like there’s a point in life, like you grow up in your teenager or maybe through your 20s and like fun is a priority, and then… I don’t know, somewhere in your 20s through your 30s. I feel like it takes a back seat unfortunately, or in the concept of financial decisions, like if someone just looked, well, we do this, so we’re kind of The Creeper here, but if someone looked at the last 12 months of your spending by category.

Matt Mulcock:
Which we do.

Ryan Isaac:
Which we do, sorry to say, We don’t know…

Matt Mulcock:
We tend to not break it down but we don’t look at transactional data unless we have to re-categorize something, but… Yeah, we have access to it.

Ryan Isaac:
That’s not the default. We’re not like, did you know what you’re spending at Nordstrom every month that’s now the default.

Matt Mulcock:
It’s not like we’re all sitting around laughing at what people spend all day in the office.

Ryan Isaac:
No, but we’ll go there if something looks off. We’re like, Okay, now we have to dive into categories, ’cause something is not clearly like we’re measuring… We’re trying to measure what does someone spend in a whole calendar year, not only just what are your bills every month, but what do you spend on top of that, and sometimes if it’s really off, we have to go through and look at like, Why is it off, what’s getting mis-categorized or over-spent somewhere. But if someone looked at your spending, that’s kind of like the vote of what’s important for your dollars that you earn, so if they looked over 12 months, where does the bulk of your spending go? Is it…

Matt Mulcock:
Yeah, it’s like, what’s the saying? It’s like, Don’t tell me what you value, show me your checkbook and I’ll tell you what you value.

Ryan Isaac:
Oh yeah, where’s that from? I’ve heard that…

Matt Mulcock:
I don’t know.

Ryan Isaac:
A version of that. Is that you? Did you say that?

Matt Mulcock:
No, no, it’s not me.

Ryan Isaac:
Who is it? Like Michael Scott, it’s like show me what you value Mulcock whatever…

Matt Mulcock:
Yeah. Exactly, it’s like the quote from someone else that I’ve been. No, I’ve not taken credit, but I don’t even know, honestly, I don’t know where it came from, but it’s kind of the same idea of like you’re saying with actions versus your words, it’s the same thing with what you tell me you value with money does not mean nearly as much as what I see you spend money on.

Ryan Isaac:
Yeah, I mean, is it housing? Is it travel? Are you a foodie? An Amazonie?

Matt Mulcock:
Are you… Come on man, everyone’s an Amazonie.

Ryan Isaac:
An Amazonie. So anyway, yeah, that’s a good thought. Today, we’re gonna focus on something kind of similar, and it’s a thing that most dentists, unless they’re nerdy like us, which isn’t most people, or if you have to fill out a loan, you have to do this once every time you fill out a loan. But today we’re talking about the balance sheet, and we’re talking about what story would your balance sheet tell if you couldn’t talk? What story would your balance sheet tell about the way that you are accumulating wealth and the way that your net worth is growing? ‘Cause it does tell a story, I think to begin, we should probably just basically explain what is a balance sheet? I said it’s something that we all have to do when you get a loan, but Matt, how would you describe, maybe a new dentist just jumping into all this in their career and they’re saying, well what’s even a balance sheet? What does that even mean? Why is important? What would your answer be? What would you tell them in your gentle way?

Matt Mulcock:
I’d say in a very gentle way. So a balance sheet is what documents your net worth. They’re kind of used interchangeably. So a balance sheet is a documentation or a summary of all of your assets and all of your debts, and so again, you can use balance sheet, net worth really interchangeably, you take all your cash, all your investments, all your real estate, all your crypto, all your playing cards that you collect, all your collectibles, you add all those up, and then you subtract out and you list all your debts, and then comes up with your total net worth, which all is tracked on a balance sheet.

Ryan Isaac:
Yeah, that’s what a balance sheet is. That number is not your total worth as a human. It is your total financial net worth.

Matt Mulcock:
No. Like I said, like I wrote recently, your net worth is not your self-worth.

Ryan Isaac:
Dude, that was in your latest article, right?

Matt Mulcock:
I don’t know if it’s the latest, but one of them.

Ryan Isaac:
One of them…

Matt Mulcock:
Am I plugging myself now? Oh my gosh.

Ryan Isaac:
That’s the blog that Matt writes it’s called…

Matt Mulcock:
What is wrong with me.

Ryan Isaac:
What’s it called?

Ryan Isaac:
Money Matters.

Matt Mulcock:
It’s called Money Matters. Yes, it’s cheesy.

Ryan Isaac:
I love it. I think it’s the raddest title ever. Sorry, Jake. But money matters has his name in it. So it’s really good. Yeah, so yeah, of course, it’s not your whole worth, but that’s your monetary net worth. You know what’s interesting? Let’s say you do that calculation, you add up all your stuff, subtract all your debts and you get a number of a million dollars. Is that good or bad? Like if someone asked you that, Matt, like, Okay, my net worth is a million dollars. Is that good or is that bad? How do you answer that question?

Matt Mulcock:
I’m gonna give you the worst answer ever, but it’s true, it depends.

Ryan Isaac:
On what?

Matt Mulcock:
Are you 21 years old? And so the age is being one factor, 21 with a million dollars, gets pretty dang good. Yeah. Are you 72 and with a million dollars, not as ideal, depending on the situation, how much do you spend?

Ryan Isaac:
Spend.

Matt Mulcock:
What is made up of that net worth? Are you a million dollars all in your personal residents or are you a million dollars all in investable assets?

Ryan Isaac:
Oh, yeah. That’s what we’re gonna get at today. Yeah, I was thinking of that. When people ask that question, it’s like, well, it depends on what you spend. I know, and you know people, we all probably know people who are really frugal, just super grateful, really frugal, simple lives, and like a million dollars in retirement account, they finally stopped working like 70 and that’ll last them. A million bucks plus some social security.

Matt Mulcock:
Yeah of course.

Ryan Isaac:
They’re good, they’re fine. Other people, a million dollars would be gone in two years. Actually, two years.

Matt Mulcock:
Yeah, exactly.

Ryan Isaac:
500 grand a year. Oh yeah, for sure. So yeah, the answer it depends, is totally true, you just have to compare the results to different things, and that’s how we really know, but what we wanna get at today though is, is this concept of what James Cleary was talking about. If someone can only see your balance sheet, what would that balance sheet speak about you, about your priorities and about where your money is going? So for one, let me ask you this question, Matt, the word balance in balance sheet, just from a financial perspective, I know there’s kind of a bigger picture of life balance, which I think is a cool subject, putting the balance in balance sheet, it’s very, very clicky. That’s clickable.

Matt Mulcock:
Oh, I like that. Yeah, it’s very clickable. Yeah.

Ryan Isaac:
But just from a financial standpoint, for a dentist, what comes to mind for you when you hear the word balance in a balance sheet, what would balance signify to you for a dentist?

Matt Mulcock:
Yeah, I look at the asset side of things, mainly when I’m looking or when I’d be thinking about balance of a balance sheet would be, Are you too over-exposed to any one asset class. Are you really real estate heavy? Are you cash heavy? Do you have all of your assets in qualified accounts, like a 401k and no cash or no brokerage account.

Ryan Isaac:
We’ll go through those scenarios too, that’s what I was just thinking too, is like…

Matt Mulcock:
Yeah, and on the debt side, are you over-leveraged in different areas, do you have massive credit card debt on the balance sheet. That’s vastly different than saying, You’ve got a practice loan and a small house loan, I’m looking at the balance in that respect.

Ryan Isaac:
Yeah, for sure, man. But just thinking like you look at a dentist balance sheet and… Yeah, you ask these questions like, Is this good? Or is this balanced? And really what we’re getting at is this, the balance sheet will tell the story of what is important to you financially, where your money is going. For a younger dentist who buys a practice, the balance sheet will usually look like the asset side anyway, if you made a pie chart out of the asset side, it would be like practice value, hopefully over time starts growing, you know, maybe in the beginning that practice one is bigger than the value of the practice, but that’s normal, that’s okay.

Matt Mulcock:
Possibly, yeah.

Ryan Isaac:
You got heavy practice value on the asset side of your balance sheet and you got your house, and then everything else is pretty small in comparison, unless you also buy a building with that practice, but right off the bat, most dentists… I mean this is pretty true for most dentists early in career, right off the bat, on the asset side of the balance sheet is very heavy business and real estate value, ’cause you got a house, a building and a practice, and then the debt that goes along with it, but the assets of it… That’s why… And we’ll get to this, catching up to those other assets by building liquidity over your career is just such a priority, not only for the benefits and the convenience of having liquidity, but because just right out of the gate, you’re behind… Still afraid you’re behind the eight ball. I don’t even know what that phrase is supposed to mean. Like why that’s bad to be behind the eight ball.

Matt Mulcock:
It’s just typically.

Ryan Isaac:
Are you a billiards guy?

Matt Mulcock:
No, I’m not a pool guy. So… Yeah.

Ryan Isaac:
So yeah, but I mean you’re already behind the old eight ball.

Matt Mulcock:
just figured out that rule.

Ryan Isaac:
By starting like right off the bat, so there’s just so much ground to make up in other categories of a balance sheet, so that’s just… It’s an interesting picture of… Someone might say like, I’m a dentist and I really care about making a profitable business. That’s probably true, but if your balance sheet tells the story of multi-million dollar real estate everywhere, then you might have to re-think… Something’s not lining up, maybe that practice is just new and just takes some time to balance things out, or maybe like you say, the practice is really important, but you just keep buying really expensive houses and buildings. Vacation rentals, right.

0:16:07.8 Matt: Exactly.

Ryan Isaac:
Which is also okay, that’s not evil, but I’m just saying that that wouldn’t align with the mindset like, Oh, what’s really important to me with my wealth is building a really big practice, like multiple locations, so maybe it’s either earlier, but maybe it’s just not lining up, or someone who might want a lot of liquidity and then kind of measure this and go, Oh yeah, I literally compared to these other categories, I have like no liquidity on my balance sheet at all, so that’s kind of what I’m just getting at, and the point we wanna make… And we’ll go through this a little bit, is just how crucial it is to pay attention to this stuff and be deliberate. It’s really, really easy as a dentist to make financial decisions that kind of pigeon-hole you into parts of your balance sheet that might not be the most ideal for you, it’s really easy to be like, how are we gonna move, so I guess I’ll just buy that building. Well, buying it might not be the best decision for you and your net worth and your balance sheet, but it’s easy to just do that ’cause that’s what your peers do. And that’s just… It’s just what you do.

Matt Mulcock:
Or you have no plan.

Ryan Isaac:
There is not a big plan, yeah.

Matt Mulcock:
There’s not any strategy there, you’re just like, “Oh, they’re offering me to buy it up.” Sure. Yeah, I’ll buy it, sure.

Ryan Isaac:
Someone told me that like that’s how I’m gonna make wealth, and so I don’t know, they seem like they know what they’re talking about. So let’s just… Let’s see that. I mean it’s kind of like we talk about random acts of finance, but the balance sheet can be the victim of just random acts of wealth building. I thought we could walk through a scenario, so if you wanna follow along with this, and you’re not familiar, if you are, you know what I’m talking about. On our website, dentistadvisors.com, you click on the services button, and then there’s in the middle, there’s a thing that says elements, click on that. Elements is the system that we built in Dentist Advisors, which is now a separate app that financial advisors around the country are using with their clients, like it’s cool. We built something that is useful, but elements is…

Matt Mulcock:
Is this where we bring up Drake and we say, we started from the bottom…

Ryan Isaac:
We did start from the bottom.

Matt Mulcock:
Now we’re here.

Ryan Isaac:
I don’t know, Where is here? Do we know…

Matt Mulcock:
Now we’re here.

Ryan Isaac:
Now we’re in this place.

Matt Mulcock:
We’re somewhere, yeah. We’re at this place.

Ryan Isaac:
We’re at this place. So on the bottom row of the element… The elements, by the way, if you don’t know, you can see it all there, but it’s just basically our definition of what financial planning should be for a dentist. It’s the areas that should be organized, should be benchmarked and should be tracked and analyzed every single year, and sometimes in some of those areas, multiple times per year for a dentist, so the bottom row of that, you’ll see five bricks there, and that is all net worth. It’s your total net worth, and then it’s how your net worth is comprised and the four components to a net worth, if you just break them down into four sections, you have liquidity, you have what are called qualified retirement plans, so that’s like IRAs, 401ks, profit-sharing, it is retirement plans, that you could get the money, but if you do before age 60, you’re gonna pay a penalty and taxes, you have a business net worth, so usually practices or some people have side hustles or other businesses, but net worth that’s tied up in a business of some kind, and the net worth that’s in real estate, so liquidity, qualified retirement plans, business and real estate.

Ryan Isaac:
Those are the four areas. The forming building blocks, if you will, of a net worth. Let’s talk about these building blocks. And I just wanna maybe give just some context to what a balance sheet looks like when they’re concentrated in these areas, and we started this with, what is a balanced balance sheet? So let’s just start with what we call LT, liquid term. It’s just basically a measurement of how much of your net worth is liquid and liquid, meaning you can get your hands on the money, get the cash from it, let’s say within a couple of business days with no penalties. That’d be a good way to describe this. So a checking account, a savings account, a brokerage investment account, where you can call the advisor or just go push a button and say, sell my funds and send me the cash in a couple of days. That’s liquid, that’s liquidity. We measure that in our firm with this tool, liquid term, that just, it compares it to how much you have to spend.

Ryan Isaac:
And how many years of spending do you have liquid? And as you can imagine, here’s what I’ll say, out of the four areas, liquidity, qualified retirement, business assets or real estate assets, if you had to retire and be just super top-heavy in one category, just for the pure convenience and ease of living, being super super liquid would be my preference, because as we’ll go through in other places, like if it’s tied up in a business, that’s a different story, if it’s tied up in real estate, it’s a different story, or qualified retirement. I’d love to have 5 million bucks in a brokerage account that I’ve already paid taxes on except for capital gains, and then just be like, done that’s great, ’cause then…

Matt Mulcock:
Yeah, I wouldn’t mind that.

Ryan Isaac:
If you need 50 bucks or 50 grand, you just get it.

Matt Mulcock:
Yeah.

Ryan Isaac:
It’s kinda… You can’t call your rental house and be like, I need 50 grand out of you.

Matt Mulcock:
Right.

Ryan Isaac:
Yeah. You can get a loan and stuff. But…

Matt Mulcock:
Yeah, yeah no, I would agree. I think liquidity is like the default there, if you’re saying, we get that sometimes, where someone says, “If I’m gonna be overly exposed to one or the other, I think liquidity is the answer.”

Ryan Isaac:
What should the bias be, if there’s gonna be a bias?

Matt Mulcock:
Yeah, the thing to consider here too though, is business term, the equity you hold in your business, and we’re measuring that will… You would generally speaking outside of something weird happening that will then eventually trend. If we’re talking about dentists, eventually you will sell that business, I would imagine.

Ryan Isaac:
Yeah, turn it liquid.

Matt Mulcock:
And that would transition to liquid term at least at some percentage, right?

Ryan Isaac:
Yeah, it’s a really good point…

Matt Mulcock:
After tax.

Ryan Isaac:
It’s a really good point. Liquidity is kind of like the catch-all bucket that a lot of things end up turning into eventually, when you’re done working one day, I would say most dentists will sell their practice as opposed to hold on to it forever, but it is becoming an increasingly more popular model where multiple partners have smaller interest stakes in the business and they don’t sell, they just… They hold on to it like a…

Matt Mulcock:
Sure.

Ryan Isaac:
Business in perpetuity. But it’s still the majority of dentists will sell their practice, cash it out, it becomes liquidity.

Matt Mulcock:
Or at least a portion of it. Some percentage of it, even in the scenario of partners.

Ryan Isaac:
Yeah.

Matt Mulcock:
Or adding partners. Eventually, you’d be cashing out some of that equity in the business.

Ryan Isaac:
Yep. Real estate is funny too, because most people purchase real estate with the intent, commercial real estate with the intent of holding it for a long time, and just anecdotally, we find that when dentists are nearing selling their practice, they also like to just wash their hands of the building too.

Matt Mulcock:
Almost every time.

Ryan Isaac:
Every time.

Matt Mulcock:
Yeah.

Ryan Isaac:
And mathematically, the return, when you are the sole occupant of the building you own and there’s a loan against the building, the return on that is not… It’s not a great asset return, the return becomes enticing when you are not the tenant and there is no loan and a tenant is paying you a fair market rent. That’s when the actual math of the return becomes pretty enticing, but that means that you have to work in there and practice in there, and then you retire, the notes finally paid off and someone else comes in, but you hold that building well.

Matt Mulcock:
It took you 30 years.

Ryan Isaac:
Yeah, yeah, you gotta hold the building for another 20 years after that person buys your practice, and most dentists just don’t wanna do it, even though it makes the math work out and what’s kind of crazy there are… It’s newer to dentistry, it’s not a brand new business model, but there are very large firms out there now doing sale-leasebacks with dental spaces, a lot of you have probably been approached or maybe even have done it. We’re gonna be interviewing some people on that coming up on the show soon, but that’s shedding light on how much… How often people buy, which is kind of a crazy thing, it’s a really interesting quirk of the dental career, is how often you buy gigantic like multi-million dollar properties, commercial real estate properties, which is not a normal everyday person thing to do.

Matt Mulcock:
No, not at all.

Ryan Isaac:
But the second there is an opportunity for liquidity, how fast people do get out of it. At retirement or now, these groups are coming in saying, “Hey, well, you’re gonna work another 10 years, we’ll cash you out now for above-market rates,” and then just sign…

Matt Mulcock:
Yeah.

Ryan Isaac:
And sign a 10-year lease with us.

Matt Mulcock:
What you’re saying, it’s weird that all of a sudden someone’s presented with, let’s say 2 million multiple seven figures of cash.

Ryan Isaac:
Take it, man.

Matt Mulcock:
All of a sudden they switch their, maybe I don’t wanna hold on to this building so much.

Ryan Isaac:
Yeah it’s like what do we… We’re not trashing on real estate, we’re just saying what an interesting dynamic to be in a career where purchasing like a seven-figure piece of commercial real estate is a normal thing to do, even though you really might not want to do it at all, they just kind of do it, it’s kind of like being an entrepreneur in dentistry, you just… You might not even wanna do that, but you just do it ’cause that’s what it is.

Matt Mulcock:
That just kinda comes with the territory.

Ryan Isaac:
Yeah I guess we’re saying is, maybe we do agree with one thing Ramsey always says, which is cash is king.

Matt Mulcock:
Yeah.

Ryan Isaac:
Liquidity is king, oh let’s call it Queen though, it feels more powerful. Liquidity is Queen.

Matt Mulcock:
Liquidity is Queen Bee.

Ryan Isaac:
Yeah.

Matt Mulcock:
Beyonce.

Ryan Isaac:
And look, on a balance sheet, if I had to opt for being overly imbalanced in one area on a balance sheet, I would most definitely do it in liquidity. What are the cons of being super liquid? Trying to be objective here. If you held too much liquidity, let’s say you opted for brokerage accounts over 401ks and profit-sharing, we could spreadsheet a mathematical answer where that’s probably fine up until the point where maybe if you could do a profit-sharing or a pension plan, but chose not to, and chose to do it after tax, you’re probably leaving some tax dollars on the table, you don’t have to. If you chose to have liquid money in a brokerage account, stocks or bonds or something versus, let’s say that second location in investing in marketing and capital and people, it’s possible that your return won’t be as high because in a private business, your return could have been higher which could affect the enterprise value of the whole business and your net worth, so your return could be lower.

Ryan Isaac:
Private business will always be the highest returning asset class. You could give up some return, and I was thinking, if you opt for real estate over liquidity, the pros of that could be… Let’s go with some possible tax savings when you get a chance to do like a cost segregation study on a building or maybe do exchanges on building properties when you roll one into the other, you can defer taxes maybe a little bit easier. Not easier, but it’s possible you can. So that would be maybe some of the pros to be objected there.

Matt Mulcock:
Yeah, and on real estate as well, people like the bond, like aspects of it, where like you were just saying, it takes time, right? You build up a portfolio of real estate. The reason people do it is this whole idea of, yes, I’m gonna say a passive income, we hear this all the time, and people equate that term with real estate. It doesn’t mean that it only has to be real estate, but that’s like where it got its name, passive income. And it’s true, like you can build up a portfolio of real estate assets that pay you a very, very predictable amount of money every month, every year. You can still get that in other assets, it’s just generally not gonna be as predictable potentially, so I think that’s an advantage of it, people want some predictive…

Ryan Isaac:
Yeah, over-liquidity.

Matt Mulcock:
Sure.

Ryan Isaac:
Or if you just have an interest in it.

Matt Mulcock:
Yeah, you just like it. Yeah.

Ryan Isaac:
There’s three main legit sustainable actual asset classes that can work for a dentist to build wealth, and you don’t have to have one or the other, you can have all three in some mix, and most do. It’s public market, stocks and bonds, it’s private markets, which is basically private business, your practice, and it’s real estate. Those are the three main asset classes. Tried and true, they’re sustainable, they’re long-lasting, they have track records. To a degree, they’re predictable, like you know what you’re gonna get out of these things over long periods of time. So, yeah, if you have interest in one or the other, but I guess to wrap up the liquidity part, I guess I would just say if I had a preference to over-emphasize a part of my net worth, I would just… Just me personally, I would want it to just be liquidity.

Matt Mulcock:
Within the kind of bucket, the liquidity bucket or brick on the elements table there, it’s not all created equal. So if I see a balance sheet, we can say, “Oh, you’ve got $2 million in liquidity, that’s liquid, but it’s all in cash… ”

Ryan Isaac:
But sitting in your checking account.

Matt Mulcock:
Yeah, that is vastly different and tells me kind of what… Again, without speaking, if I’m just reading a story here, if I’m like, “What does your balance sheet tell me about you?”

Ryan Isaac:
A picture book. Yep.

Matt Mulcock:
Yeah. It’s a picture book, and I see that. That tells me a lot. And also, I’d say it’s not as ideal to have… Again, dull relative, but if you have $2 million sitting in cash versus a brokerage account…

Ryan Isaac:
Yeah, where it’s liquid matters.

Matt Mulcock:
Where it sits within that bucket definitely matters.

Ryan Isaac:
And I was gonna say on that note, go check out episode… References a lot, episode 280, the Laws of Liquidity. There’s also a webinar on our website, dentistadvisors.com to talk about the priority of where to hold cash and how much and then invest the rest of it. So I’m glad you brought that up, Matt. Yeah, all liquidity is not created equal. Matt, it’s time.

Matt Mulcock:
Time for what, Ryan?

Ryan Isaac:
It’s time to book a free consultation at dentistadvisors.com. Just click on the big Book Free Consultation button on the homepage and talk to one of our friendly advisors today.

Ryan Isaac:
So our other category, qualified term, this is retirement accounts that you can’t touch without a penalty until you’re 60 or older. Honestly, it’s kind of hard to over-save in this category because they have limits, IRAs have limit, 401ks have limits, even profit sharing and pension plans have limits, and so I don’t… The only time I see a dentist be over-imbalanced in this area, and it’s not imbalanced compared to real estate or practice equity, but imbalanced compared to liquidity is if all of their monthly savings is going to, let’s say a 401k, and then there’s no outside of 401k savings going on. That’s the only time when I can see this being imbalanced, but really, a dentist with healthy profitability, a good income and a healthy savings rate is splitting… There’s caps on these types of accounts anyway, so they can’t even fit all their savings in there anyway, and they’re forced to save in another area, usually building up liquid after tax outside of 401k type accounts, so it’s hard to overdo it in this area, right?

Matt Mulcock:
Yeah, I was gonna say, if I’m seeing large balances in the qualified bucket, the first thing that it tells me is they’re probably older for this very reason. And I’m talking like seven figures, right? If you’re in the seven figures in qualified assets, it means that you’re… You’ve been at this for a while, you’ve been doing this for 15, 20 plus years. Because of your point, you’re restricted from putting in so much versus like a 35-year-old, a 40-year-old could have, wink-wink Ryan, about 40 millions of dollars in a brokerage account, ’cause there’s no limits to that. So that is one story you would tell me, is probably, you’ve been in your career for a long time, you’ve been disciplined, and you’ve been saving in the qualified assets to build up a pretty sizable balance.

Ryan Isaac:
Yeah, what’s cool is another episode, but you can do qualified savings at different phases of your life. For example, early on, you might only have IRAs and that might be the most appropriate thing, like no plan at the office, then you might have some 401ks, but later on, once you pay down debts and you’ve built up a lot of liquidity outside of this, you might be in the later part of your career, and then it makes sense to have a big pension plan inside the practice, cash balance or a big profit sharing, and then you really put a lot of money. Maybe most of your savings goes in there just to fund it like crazy for the last five, seven years of your career. That’s okay, because when you zoom out, the big picture is still a really healthy balanced balance sheet. I like retirement plans at the office purely for the behavioral interaction that people have versus accounts that they feel like are their…

Ryan Isaac:
They are more liquid, so they feel like there’s just… There’s more play there, there’s more control or more of that little gambling betting kind of feeling that goes on, I don’t know, I like 401ks. No one thinks about them, they don’t even care, stocks are tanking they’re like, Yeah, I don’t even leave the 401k.

Matt Mulcock:
Not the 401k, that’s my long-term money.

Ryan Isaac:
That’s my long-term money.

Matt Mulcock:
So is your brokerage account. Well, it’s sorta sorta.

Ryan Isaac:
This is the same thing. Because you can have it, it makes it feel like you should do something with it, the 401k they know they can’t even touch it so they’re like, I’ll just leave it. The next one is private business, private ownership, usually for most dentists it’s practice ownership, and I would say that this category it tends to… We already said this for the next two, for real estate and practice ownership, when you’re a brand new dentist, you buy a practice, you got a house and if you buy a building, the asset portion of your balance sheet, if it were a pie chart, would be overwhelmingly business and real estate, so you have a lot of catching up to do on liquidity and retirement accounts, and you can afford to really emphasize those because the other ones are so big. Right out of the bat. And so right off the bat. Right out of the gate, right off the bat. Not right out of the bat.

Matt Mulcock:
Out the gate, off the bat, behind the eight ball.

Ryan Isaac:
Behind the eight ball on top of it all, we only see people have imbalanced balance sheets, like tilting towards high practice values and equities, usually when it’s like someone’s purposely building like a DSO.

Matt Mulcock:
Yep.

Ryan Isaac:
And that’s like you don’t… That’s just where… Unless it’s early in the career, eventually it’ll balance out for most people who have a couple locations or just one location. It’s not usually a problem.

Matt Mulcock:
Yeah, and even early in career, it’s not too exposed there either or fill that bucket because it’s counting the debt.

Ryan Isaac:
Yeah.

Matt Mulcock:
So it’s like when we talk about that brick, you’re factoring in of the business term, we’re factoring in just net equity you have in the business, and usually early in your career, you got a million dollar practice, you gotta close to a million dollar loan, you’re gonna have minimal equity there, it’s gonna be showing on the balance sheet.

Ryan Isaac:
It’ll be small. The real estate category, we already said this, because dentists are faced and they’re just faced with more real estate purchasing decisions than the average person is. And because of higher income and ease of capital, it’s just so easy to get more real estate, and so there’s nothing wrong with that if you’re a real estate person, or that’s the way you’re choosing. You’re building your net worth and it’s intentional, that’s fine, but what we’re saying is, it’s quite often very not intentional that a dentist ends up piling up lots of real estate assets on their balance sheet, and they don’t really want that to be the case, but the value of their house and the building, and maybe the vacation home dwarfs anything else on their balance sheet.

Ryan Isaac:
And they’re saying, I’m not a real estate person, I want liquidity or I want a big practice, like, Well, we have to very consciously make some different decisions here, but I think that’s only the case where I kind of just like… I don’t wanna say accidental, but it just happens that way unintentionally, a lot of times people don’t really want to, and like we were saying, it’s funny to watch what people do with their commercial buildings, they’re getting rid of them basically, as soon as they have a chance to.

Matt Mulcock:
Yeah. As soon as the conversation starts of exiting, and I’m not… We’re not exaggerating. It’s almost every time…

Ryan Isaac:
Yes. Oh, yeah.

Matt Mulcock:
We start the conversation about exiting to practice and that starts, let’s say five years out or in that range you start having… Or maybe seven years out, we start having the conversations, and initially it’s like… They own the building initially. It’s oh, no, no, I’m gonna keep the building inevitably.

Ryan Isaac:
Especially if you build it from the ground up and this thing is a beauty…

Matt Mulcock:
Absolutely.

Ryan Isaac:
It’s gorgeous.

Matt Mulcock:
Yeah, but as that conversation progresses and we get closer and closer unsolicited almost every time they circle back around be like, Oh, man I think I’m just gonna sell this, I don’t wanna deal with it.

Ryan Isaac:
Yeah, that once gorgeous brand new construction piece on raw dirt, it’s now the 30-year-old building that’s down the street who you thought was ugly, so you built yours, now yours is the 30-year-old building that’s ugly.

Matt Mulcock:
Exactly, which by the way is only… It’s only… It’s basically, it’s a dental practice, that’s what it is, it’s built out to be a dental practice, so it’s very specific in its use.

Ryan Isaac:
Yeah, now they’re a whole other episode, if you’re the person building an eight space commercial building, and there’s seven other tenants besides you, that’s a whole different analysis and investment, than you’re gonna occupy.

Matt Mulcock:
Well, that’s a real estate investment that’s not like you own your building ’cause you’re a dentist.

Ryan Isaac:
Totally different. Yeah, so that’s just what’s interesting though is very unintentionally, people who build up a lot of real estate assets mostly ’cause we gotta live in homes, and dentist can buy their buildings a lot…

Matt Mulcock:
Or a van.

Ryan Isaac:
Or you can live in your van, is very true. I would recommend 10 out of 10. So anyway, those are the four categories, this is going along, what I wanted to maybe end with is just a few tips for just being intentional about this, and the number one tip is it corresponds with the number one mistake dentists make which is not being organized, so we’ll say organization first track and monitor everything, and if you’re not constantly looking at your balance sheet and it is shifting every day, it’s growing, if you’re not constantly looking at this, you might get into a position where a decade later you’re like, Oh, I didn’t mean to be so illiquid, or so inefficient with my tax strategy, or I didn’t mean to be so real estate heavy, and when you are organized and you’re tracking and monitoring this stuff and talking to someone about it frequently, it’ll just help you make better decisions because I’ve had that conversation a lot where someone’s like, I think I want more real estate, I don’t really know, and then you’ll show them the pie chart, Well, here’s the pie chart of your assets, and 70% of it is real estate, it’s all shaded blue…

Matt Mulcock:
Yeah, you got no liquidity.

Ryan Isaac:
We’re like, Well, do what you want, but here’s what it’s telling you so far. Does this change anything for you? Does this new piece of information or just a different view of the context change anything? And a lot of times it will… I’d be like, Oh yeah, that’s a good point. Maybe we need to work on something else. So anyway, being super organized, one thing I’d like to point out a lot, we say this all the time, just remember, first and foremost, you’re in the dental business, more than likely, if you went to school and you paid for it and you bought a practice and you’re in a million…

Matt Mulcock:
Chances are you’re in the business of dentistry.

Ryan Isaac:
You’re in the dental business, so be in that business, and if you’re in that business and you don’t truly have big passions to do things outside of it, which is great, then let your investing outside of your dental business be hands-off in a passive way, and not taking your stress and anxiety and your time and your energy and your focus like you’re in the dental business, so every decision you make is dental business decision making. Everything else is after that. Another thing I was gonna say is, we say this all the time to debt, since you are in the dental business, debt is a tool and used wisely in the growth of a dental practice. It’s okay.

Matt Mulcock:
Yeah.

Ryan Isaac:
It’s been so long since the rates have been good rates contextually, historically, that it’s just like, Just get a loan and grow and move on, go produce, go add four more chairs, get a loan and add four more chairs and then produce like crazy, like who cares? Move on.

Matt Mulcock:
Yeah, and in a lot of cases, it’s like if you wanna do that, the only way is debt, it’s very rare that even just to get to where you are as a dentist, it’s a pay-to-play, it’s a requirement for you for 99% of dentist, it’s like that is a big part of your life for the first 10, 15, 20 years of your career.

Ryan Isaac:
It is.

Matt Mulcock:
And again, it’s not a bad thing, it’s the reason why you are where you are.

Ryan Isaac:
It’s a tool. Last thing I’ll say here, is the term accountabuddy… Find an accountabuddy.

Matt Mulcock:
You have T-shirts on that?

Ryan Isaac:
I don’t think we ever made them yet.

Matt Mulcock:
We need to get them.

Ryan Isaac:
We still… The liquidity is my spirit animal, and I’ll be your…

Matt Mulcock:
Accountabuddy.

Ryan Isaac:
I’ll be your accountabuddy like the… What’s that show? I’ll be your Huckleberry.

Matt Mulcock:
Oh my gosh…

Ryan Isaac:
Tombstone.

Matt Mulcock:
Tombstone? I was like, it was like one of my favorites, Tombstone.

Ryan Isaac:
Get an accountabuddy long-term, having someone… We talked about this before, it’s not likely that you will consistently track and monitor and organize this kind of data to make decisions as you go along, if you have someone whose job it is to do that, and if you have appointments with that person throughout the year it’s gonna get talked about in your decision-making, will, at the very least, just be less stressful, but probably better decision-making, and that’s what we got for you today, really, thanks for joining us if you’re new listener, and if you ever wanna talk to us directly, you just go to dentistadvisors.com, click the book free consultation link and we’ll chat with you. We’d love to do that. We love talking to people. Matt, thank you for being here.

Matt Mulcock:
Thank you.

Ryan Isaac:
As the mountain. I’m glad to be here as sir.

Matt Mulcock:
Sir Ryan.

Ryan Isaac:
And we will catch you all on the next episode of the Dentist Money Show. Take care everybody, bye bye.

 

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