How Fast Should You Pay Off Your Loans? – Episode 102

Should you pay down debt or invest? The sum of student loans, practice loans, equipment loans, and real estate loans can seem insurmountable for a dentist. So what’s the right pace to chip away at them? In this episode of Dentist Money™, Reese & Ryan explain how managing debt the right way can help you build wealth much faster. They also discuss the way debt should be viewed at different phases of a dentist’s career.

Show notes:
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Podcast Transcript:

Reese Harper: Welcome to the Dentist Money™ Show, where we help dentists make smart financial decisions. I’m your host Reese Harper, here with my trusty old co-host, Sir Ryan Isaac. It is always a pleasure, sir, to get you into to studio… to pull you away from your day, where the fans are raving, trying to take your time, and we just get you for this moment of truth revealed.

Ryan Isaac: Yeah, we just wing it for an hour and see what happens!

Reese Harper: I wish it were winging it. This is the latter part of nine hours of preparation for this particular episode, so winging it may be— that might be winging it for you. For some of us, that is the better part of our life.

Ryan Isaac: That is mostly what happens (laughs). Well, we have an interesting story today.

Reese Harper: I like it, but that is because I enjoy Indiana Jones.

Ryan Isaac: Oh, okay. He doesn’t like that, though.

Reese Harper: For those of you who do not get that subtle reference, we are talking about—

Ryan Isaac: He doesn’t like two things: he hates rats, but he really hates snakes. What does he hate more?

Reese Harper: Snakes are his worst fear.

Ryan Isaac: Does he hate snakes or rats more?

Reese Harper: Snakes. Not rats. Watching Indiana Jones over the years, I don’t recall rats being in there.

Ryan Isaac: No, he’s in that tunnel underneath and the rats are pouring out of the walls, and he’s like, “rats? I hate rats!” But, maybe he hates snakes.

Reese Harper: I think that’s an isolated scene in the sequence. Snakes are kind of his mortal fear.

Ryan Isaac: Well, we are going to start the show talking about snake venom.

Reese Harper: Well, real quick, just for viewers who want to compare Ryan Isaac to Indiana Jones, which is a common thing that happens… I would say, if Indiana Jones’ fear is snakes, your fear–

Ryan Isaac: It rhymes with snakes.

Reese Harper: Your fear is—

Ryan Isaac: Earthquakes.

Reese Harper: Earthquakes. You have a lot of fears, so I just wondered which one you would say. I’m not leading you here.

Ryan Isaac: Top five… earthquakes are in there.

Reese Harper: Second.

Ryan Isaac: Being late for an airplane.

Reese Harper: Third.

Ryan Isaac: Inconveniencing strangers in public.

Reese Harper: Fourth.
Ryan Isaac: Car accidents.

Reese Harper: Normal car accidents?

Ryan Isaac: I don’t know what is abnormal… uh…

Reese Harper: What is the most fearful car accident you could think of?

Ryan Isaac: I mean, I know you are leading me towards auto-pedestrian.

Reese Harper: (laughs) that is his worst fear. He has an auto-pedestrian fear. It happens. Is there a fifth you can think of?

Ryan Isaac: (sighs) no, that’s it. Those are the top four.

Reese Harper: I am going to give you a fifth fear.

Ryan Isaac: Okay. What is it?

Reese Harper: Me driving you places.

Ryan Isaac: Ehhh… we have done it enough. You’re fear is me being the map while you drive.

Reese Harper: You giving me driving directions is my first fear.

Ryan Isaac: It’s awful! I cannot read— and it’s not even reading a map— it’s holding a phone while it talks to you, and I can’t even do it right.

Reese Harper: Segway— snakes. Indiana Jones is fearful of snakes… Ryan is fearful of five things equivalent to snakes… leading us to this episode today. We are not going to tell us what it is about yet, but we will tell you that it is about snakes.

Ryan Isaac: Okay, well we are going to start talking about snake venom in particular. What comes to mind when you hear those words? Snake venom.

Reese Harper: My childhood.

Ryan Isaac: (laughs) actually it is true, isn’t it?

Reese Harper: Um… killing a baby rattlesnake.

Ryan Isaac: You were just telling us that story; that’s not a joke.

Reese Harper: Having a shovel with a bent tip and trying to kill a baby rattlesnake, but it getting wedged between the shovel and a cement wall. Attacking me. Me fighting it off. Fears of my childhood.

Ryan Isaac: And because this is an Idaho farm, that is a normal enough thing that a parent is just like, “ehh, let ‘em deal with it,” basically.

Reese Harper: Well, I put my dog on it (laughs). He fought it off.

Ryan Isaac: What was the name of the dog, do you remember?

Reese Harper: That was the era of Jacques. He’s a miniature schnauzer. Full grown, though. Never groomed, and left to run in the wild, and he became a man in the brush.

Ryan Isaac: On the potato farms (laughs). Alright.

Reese Harper: Born from Scotland, raised, Idaho-bred.

Ryan Isaac: You think about trapping a snake between a shovel and the house, and the schnauzer named Jacques?

Reese Harper: Yeah.

Ryan Isaac: Snake venom— some people think of pain, and death, and bites, and fear—

Reese Harper: Some of us think of pets. Friends.

Ryan Isaac: (laughs) amputation. Yeah, okay. Not everyone. The term “snake venom” usually produces a lot of negative thoughts and emotions, which is very fair, and very justified, because it can do a lot of harm to people. But, a lot of our listeners may not know that snake venom is not always bad news.

Reese Harper: Really?

Ryan Isaac: I’m here to tell you! Snake venom is not always bad news. I found an article on a website called Engineer’s Journal— so, very official, okay? It’s the engineer’s journal.

Reese Harper: Yeah, if it is not official because it is an engineer’s journal, then I don’t know what journal might be.

Ryan Isaac: If it was like Engineer’s Blog? No. Engineer’s Journal? Very official. It says, “the venom of poisonous animals contains toxic proteins that attack the nervous system, the heart, and blood sells and circulation to kill prey.” That is how it works. “However, in small quantities, the same proteins that usually kill can relieve disease symptoms in humans and save lives.

Reese Harper: Really? So, snake bites are not altogether bad. So Indiana Jones… if he would have just let the snakes bite him, he could have been healed from those mortal wounds.

Ryan Isaac: Two stories in our office this week: someone here has a family member whose grandpa or uncle built up a tolerance over his entire lifetime to snakebites.

Reese Harper: Why? Was he testing that?

Ryan Isaac: I don’t know. It was one of the associate advisors. He would actually do it, because they lived in a snaky region, alright? That is real. Story two though, this week, we were talking about this, and Q has a friend who is a doctor, so also very official—

Justin Copier: Yeah, shoutout to Dr. Larsen.

Ryan Isaac: He called his other doctor friend, who was recently, funnily enough, was attending a snake bit conference, right? And he was telling Q about the process of making antivenom to make snake bites; it’s pretty fascinating. So, it turns out there are two snake farms in the United States: there is one here in Utah where they extract venom from the western diamondback and the mojave rattlesnakes, and then in Florida, they do the same thing with the eastern diamondback and the cottonmouth. So, here is the process: they take the venom from these snakes in these two farms, and then they send the venom to Wales, the place, and in Wales, they pull certain proteins out of the venom, and it is the proteins that liquifies the tissue and attacks your central nervous system. So, they take these proteins out, they combine the proteins from the venom of all four snakes, and make it into like this snake venom cocktail.

Reese Harper: Not for drinking, but it is a concoction; maybe that would be a better word.

Ryan Isaac: Shaken, not stirred. So then they take this cocktail of snake venom proteins, they send it from Wales to Australia, and then they inject it into sheep. From there, the sheep, in their bodies, they create these antibodies to fight the toxins that they inject in there. Then they extract the antibodies from the sheep, and then send those back to Wales, and then from there, they create antivenom, and then the antivenom is called CroFab. FYI.

Reese Harper: Which makes sense that it came from sheep, not crows.

Ryan Isaac: (laughs) but what is cool is that then they can take that antivenom, and then they take it back to the states, where it is used to treat snake bites, and not just those four snakes, but in those four snakes, the venom contributes to antivenom that can be the cure or the remedy for any kind of snake bit.

Justin Copier: In North America. That is what I was told.

Ryan Isaac: In North America. So, shout out to the doctor who gave us the snake bit information; we appreciate it. So as I mentioned, this article also talked about how scientists are discovering ways that snake venom can be used to treat things like heart disease, cancer, and diabetes. Popular Science had a similar article; they use it to reduce blood pressure, treat central nervous system disorders, make brain cells light up for better brain scanning… it is kind of crazy. The point is— here is what we are getting at: there are things that we often to being bad, or evil, or painful, or just bad. Like venom, okay? But like we said, most people probably associate snake venom with pain and something bad for a good reason, but it also can be used for good. And that is what we are talking about today, it just depends on how you use it, and in what amounts. So today… perfect segway… just like snake venom, we are going to talk about how a lot of dentists have negative thoughts about debt, right? Kind of the same painful amputation reaction as snake bites, snake venom, they want to get rid of it as soon as possible, sometimes at all costs, but if it is used in the right doses, debt can be a really positive part of a financial plan; it can help you build your business and your wealth faster than you would be able to without it. So, that is what we are going to talk about today, how using debt in the right amounts can actually be a positive thing.

Reese Harper: Before we say anything, let’s say this: it is awesome to be debt-free, and all of you out there, shout-out to you people who are debt free. Love it. We would love to be there at some point in our lives, especially both of us on this podcast would love to be there. Neither one of us is at that point, and I think it is important for you to know the context from which we are coming from. We are not debt free… young, financial advisors at the healthy age of in our mid 30s. Many of you are going to be carrying a little bit of debt for a while; most of your student loans are larger than most people’s mortgages on their homes. So, there is just a simple reality to the life of a dentist that this is something you are going to have to get comfortable with. The way we look at people’s income… there is only a certain amount of your income every year that you even have the option to do something with, and some of that gets taken into standard living expenses. Taxes take away about 25%-35% or more. Your living expenses— some of you need to eat… some of you need homes.

Ryan Isaac: Kids cost a lot of money.

Reese Harper: You have basic living expenses. Even for the most frugal people out there, the income you earn every year, you probably only have the option to 30%-40% of it to do something with, and so the raw math is pretty daunting if you were to take all of your discretionary income and just throw it all towards debt. For most people, it is still going to be ten plus years to fifteen plus years to get out of debt, unless you are kind of a much higher income-earner. So, I don’t know. The idea, like, “get comfortable with debt” is kind of something that has been hard for me. I don’t know if you can relate to that too, but it seems like every time you take on debt— especially if you take on new debt, or more debt than you have had— to kind of grow your practice or expand it, there is this feeling of defeat, I think, of like, “oh my gosh, I just went backwards,” right? I think that is normal.

Ryan Isaac: Yeah, it is normal. I thought maybe we could start by talking about… how do businesses grow? Because the first point we want to make is that it is normal, like you said. There are three ways businesses can start and grow: you can bootstrap it, which means you just take the cash flow from the business and pay for the stuff that you have to pay for to grow—

Reese Harper: That is what that means? I thought bootstrap was actually taking the straps off your boots and whipping—

Ryan Isaac: I wonder what the story is behind that, actually.

Justin Copier: It is both.

Ryan Isaac: (laughs), yeah, I have heard it both ways.

Reese Harper: What is the second way you can do it?

Ryan Isaac: You can raise money. So, you can sell off pieces of your business, like a stock—

Reese Harper: So, you could sell it to an associate; you could sell it to a partner; you could sell it to a group of investors or individuals; you can sell stock in your small business, and get the value of the equity, and give away a percentage of your company.

Ryan Isaac: Yeah, why don’t you talk about that for a second, because we have been talking about that lately, investments in private business and things like that. What is the difference between a tech company that is building a software that can go raise some money from different partners and a one-location, six-operatory dental practice raising money from partners? Why is it different for the tech company and the dental practice?

Reese Harper: Well, there is a term in business called “cost of customer acquisition,” and the more expensive it is to acquire customers, or the harder it is to acquire customers, the more money it takes. And so, businesses that have a really small cost of customer acquisition can bootstrap and grow for quite a while; they can get to the point where they might not need large amounts of money. There is also a difference between a service and a product.

Ryan Isaac: I think that is probably the main difference in why a dental practice can’t go raise money that way.

Reese Harper: Yeah, they are both relevant. If you think about how much it costs to buy a customer in dentistry, I mean, for most dentists, you could spend between $50 and $100 and probably buy a customer, or buy an appointment, or a visit. I mean, all you have to do is give away a free comprehensive exam, and they would show up. So, you can invest $100 to $150 to $200, and you are going to get a customer, and then, in the future, they are going to have all these visits that they will pay you for, and it is worth investing a little bit of money in. What businesses often look at is a break-even point, and they say, “how much money would I have to spend to get to the point where I can buy the target amount of customers I want?” So in a dental practice, if I want to get to 2,000 customers, then I just have to spend a certain amount of money to get that. If I want 2,000 customers, and each of them costs a hundred bucks, then all I’m going to be spending is $200,000. So if I had $200,000 to just throw at marketing one day, I could probably buy a whole practice worth of patients, if I could get that money to be used efficiently. And when you say, “well that is the limit of what I want to get to, and all it’s going to take is $200,000 to do that,” then an investor is going to say, “well that is not really an investable amount of money; you’re just going to go to the bank and get a loan for that 200, and put it towards marketing, and build your own business; you can keep all of the equity.”

Ryan Isaac: Yeah, because there is not an incentive for someone to be an outside-equity partner in—

Reese Harper: In one location. So sometimes, you will see dental practices— that is kind of the value of having a large corporate chain is being able to bundle a lot of people together, and you could spend more than that $200,000 to buy lots of patients for lots of practices, and in some cases, that could make sense. But services like dentistry… they definitely have different motivations and different economics for investors than a product-like software; you can’t just build it really fast and like, buy customers overnight, because a lot of these customers are making choices between a lot of dentists in their local community that they might want to go to someone else and not you. And I just think it is important for dentists to realize that, you know, there are two ways that you can go with getting started: you can borrow money to get started, or you can sell stocks to get started, but most dentists are not going to have the motivation to sell equity, because they are giving away too big of a piece of their company.

Ryan Isaac: And the upside for an investor… if you are talking about someone with one location and one producer for the practice, I mean, what is the upside for the investor anyway, compared to raising money in other businesses?

Reese Harper: Well, it would be great if they could get a dentist convinced to do it, because you could get half the profits for the rest of your life…

Ryan Isaac: So who is the dentist that would give that up, right? Versus the third way, which most dentists use to grow their business, which is through debt.

Reese Harper: Yeah. I think the thing to remember though about debt that kind of makes it useful is that when companies are starting out, they would love to have the opportunity that dentists have to borrow as much money as dentists can borrow to start, because by being willing to pay the bank that 6%-8% or that 5%-7% interest every year, you are able to start something that goes from zero to its full capacity, right? If you are doing a startup, you can go from zero to millions in collections within a few short years, and all you had to do was pay 7%-9% interest to go and get that all to happen.

Ryan Isaac: To build a full business. Yeah.

Reese Harper: And if you had to sell equity to do that, I mean… think about the rate of return to go from zero dollars to a million plus in value overnight, or you know, in a few short years. Those first few years of starting a dental practice, that is where all the return is earned. It’s those first few years, and then after that, it is a nice return if you are working there. I mean, it is a 15%-20+% annual return on the value of the business, but getting it started and going from zero to that point where it is full… there is a lot of return that happens in those first few years. And so, I guess the point is, if you can think about how much more expensive it would be if, when you got done with building that, you weren’t able to get debt… you had to sell stock to a partner, or you had to sell equity to someone, like most businesses have to, and you get to that point where it is at capacity, and you have given away half of your profits. So your return instead of being a 20% return— the reason I said that number is because a lot of dentists, after they pay themselves normally, they might have 15%-20% profit— imagine if you had to give half of that away because you had to raise through equity or another medium up front, you know? You give away this 30-year stream of half of your profits. So debt is something, though, that seems expensive, because you are paying 7% or 8%… you know, 5%, 9%… but the equity that you own in that practice, if you own all of it, I mean it is paying you 20% a year just to hold on to it.

Ryan Isaac: The equity is, yeah, which is why it is not worth selling.

Reese Harper: Yeah, and it is really a good deal. Like, even if you have financed your practice your whole life, and you never ended up paying off your debt, you are paying 7% to own something that is making you 15%-20% every year, if you are willing to just work in it. Or even if you hired an associate and you just kept holding it. I mean, it’s a really good thing that financing in the dental industry exists like it does; it is not a common thing for any industry. And so, I think sometimes, dentists probably don’t think about utilizing debt properly; they think about it in terms of one loan, and that one loan getting paid off, and when that loan is paid off, then I’m done with my debt, and if I get a new loan, that means that— you know, I don’t want to have new debt. Now, you could see the problem of thinking that way. The problem is that most businesses, the way they operate, a public company especially, they look at a percentage of their balance sheet and say, “if my business is worth a million dollars—” let’s take a dental practice worth a million dollars— they say, “I’m gonna always have some of my business leveraged, and some of it not.” So I have maybe an equity of 700, and debt of 300. And the way a public company is valued is by that debt-to-equity ratio, or the equity-to-total-value, they call it “book-to-market”… there is a lot of different ways to look at the value of a company, but there is always some mix of debt and equity that when you add those together, that is how you get to the total value of the company. The equity plus the debt is the total value, or the total value minus the debt is the equity, right? That is the math. And so, if you think about your business more in terms of, “look, if my business is kicking off this percentage return every year, and the whole thing isn’t leveraged…” I mean, if you had a million-dollar practice, it should be kicking off about $200,000 in profit if you are a GP—

Ryan Isaac: Not including the production.

Reese Harper: Not including what you make; you should be making 30+% as a producer, right? 25%-30+% as the producer, or an associate should be making that, and you should be capturing 15%-20+%, depending on the market you are in. Now if you are a specialist, those ranges are going to vary slightly. So, ortho is a little bit different, and ortho, and OS, pedo, and endo probably have slightly better profit margins, and a little bit higher producer costs, and so if you look at that, you can go, “okay, if the whole million-dollar practice had— 100% of it was debt, and I’m paying 8% on that…” you know, the whole thing. It’s 80 grand a year in interest. And I had to buy it, and I had to pay an interest-only loan for 50 years—

Ryan Isaac: To kick off your 15%-20%.

Reese Harper: To kick of that— even if it’s just 15%. So, if it’s kicking off 15% for you to own it, and you never pay the debt off, you are making $150,000 in profit, and you are paying 80 grand a year in interest payments, what is wrong with that investment? That’s a great investment! Most people looking at a business— those would be good returns! All you have to do is sign up for this debt, and you get the return on that, which is going to be healthy for you. There is also what is called a tax shield that these public companies look at, and they look at the $80,000 dollars in debt in my example that they are going to be paying, and say, “well that really isn’t costing my 80, because I’m paying taxes, and that interest gets written off for my taxes.” So, the tax shield… you take 30% off, or 35% off, so you are probably really only paying 55,000 to get 150. So you have 100,000, or a ten percent return, just because the debt was there. Which person is in a stronger financial position, the person who has their million dollars sitting in an account invested, it’s liquid, or the person who paid the practice off with cash and has not liquidity, but they have a little bit higher fixed income coming in every year? Well if that practice declines, and the practice blows up, or the practice doesn’t do as much in collections, or the associate bails–

Ryan Isaac: They bear the full liability of it.

Reese Harper: You bear the full risk! So, the reason companies use debt is it protects their liquidity— we will talk about that in a little bit— it protects their liability risk, because it allows the business to bear some of the financial risk of going down and breaking, and a lot of companies will use debt for those two reasons. They also use it for that interest and tax shield that we talked about, because by borrowing money and riding that interest off, it improves the rate of return you are going to get on the practice that you own. These are really simple simple finance lessons, but I don’t think they are understood that well by most of us.

Ryan Isaac: You know what is interesting, this makes me think about how a lot of dentists are involved in real estate, and most dentists go get loans for their real estate. I mean, just the math of it on paper, levered real estate returns are a lot better than paying cash for your real estate… the returns of it, mathematically. And people see that pretty easily. Like, “yeah, of course. I will get my down payment, but then the rest of it the bank is going to finance, and we’ll rent it out,” or whatever you are going to do with the real estate. But dental practices are view differently that way, like it’s a burden, or a mistake, or it shouldn’t have happened, you know?

Reese Harper: Yeah, “I’ve gotta get rid of this, I have this huge debt…” Well think about, like, which one are they most likely to pay off quickest? Which one are you most likely to pay off faster?

Ryan Isaac: Between a building and a practice? The practice.

Reese Harper: It’s usually the highest interest rate, and it’s almost always the practice, right?

Ryan Isaac: Yeah, it it’s the least tangible thing, which is funny.

Reese Harper: But truthfully, that is the one where there is– the highest rate of return is occuring in that practice. Now, I’m speaking specifically right now to people who want to aspire to own more than one practice or expand to multiple locations, okay? If you want to own one practice, and you want to keep it simple, and just dial things in, and not have the stress, I totally understand that; Ryan understands that. I mean, there is a big lifestyle choice difference that you are making when you say, “I’m gonna have a few locations instead of one,” or whatever. But if you are trying to get to the point where— if you have this investment, this practice you could buy, and you could earn 15% or 20% return on it, on the cash that you outlay or borrow to buy… I mean, the spread between the 7%-8% you are going to pay on the loan— that is high, by the way, right now—

Ryan Isaac: Yeah, today’s rates aren’t like that.

Reese Harper: It’s like, maybe 6.

Ryan Isaac: Well, practice rates were like 4s and 5s, yeah.

Reese Harper: I’m trying to like, present the worst case scenario here on practice debt. So, let’s say 6% interest on a million-dollar practice today. I mean, you are making three times the amount of return than you are paying in interest to buy it. If you are at 15% or 20% profit— and maybe that is the key: some people are not running a 15% to 20% profit, and we have to acknowledge that. Some people are like—

Ryan Isaac: All their profit it just their production.

Reese Harper: Yeah, they are making 30% on the whole practice, which is what they should get paid as a producer. So there is just some overall optimization that would have to occur for these numbers to pan out properly. I am just trying to paint the picture of how important debt can be when you are trying to be aggressive as an entrepreneur, and try to pursue some risk and take some advantage of some opportunity; it’s just not going to happen without some financing. In industries where you can’t get debt, you are going to see a lot of equity financing; in industries where you can get debt, like dentistry, you should just take advantage of it, and then figure out the right way to reduce it over time, the right way to back out of it. But here is my point: I’m not saying that you shouldn’t pay off your debt, I’m just saying even if you did not pay of the debt, ever, and all you did was take the money and build up your liquidity, and build up your retirement plans, and get more deductions through building a pension, and putting your money towards retirement, if you had a fully-leveraged practice your whole career paying an interest rate that was more market average, we’ll call it six to seven or seven and a half even, which, we are not even close to it at this point… even if that were the case, I mean, it is still a very profitable difference, and sometimes, paying that debt down doesn’t actually make the practice make you any more money. If you are not taking advantage of all of your retirement plan contributions, if your income is higher than it should be, if you are wasting money on taxes, if you are not improving your practice’s competitiveness, if you are not investing in marketing, if your space is dated, if you are losing patients, if you are paying off your debt at the expense of not doing those other things… you could actually be lowering your net worth, even though you think it might be better.

Ryan Isaac: Well, I think this is a really good point to bring up; we can kind of close out this part of it. If the return is great in this asset that you have built, you don’t want to make any decisions that will jeopardize that return. You want to do everything you can to make sure that return stays as long as you are working, and you have protected the value of this asset the whole time. And, I mean, everyone knows the stories of the older practices where the debt was paid off, and nothing was reinvested; no cash, no debt was reinvested for the last twenty years of the thing. The inside is old; there is no technology; there is no marketing; patients have dropped; the value of the asset was not protected, and it has now dropped significantly. Some people will just walk away from practices. And then the income wasn’t protected either, you know?

Reese Harper: I just think that keeping those numbers in mind of like, “huh. What is my return on my practice? Not what am I making off of my own production, but what is the profit that I am making off of this practice? Is it fifteen? Is it eighteen? Is it twenty?” Because a lot of times what you will see is people will pay down their debt and try to get rid of the debt, but it will come at the expense of that margin going down. So, a practice who always carries debt but always is able to maintain a 20% profit margin is going to be in better shape. We were just looking today at our profitability metrics for general dentists, and there is a big spread! In GPs alone, there are people who are experiencing a 22%- 25% profit—

Ryan Isaac: Total profit.

Reese Harper: — on top of their 30% of production, that they are earning off of their own production, and then there are people who are earning a total, between profit and production, of like 25. I mean, you have a massive difference!

Ryan Isaac: Which is like a low-paid associate.

Reese Harper: Yeah, and there is just a huge difference between those two practices. And what I often see is that people who are not willing to carry a little bit more debt and reinvest in their practice, they are not as competitive, and their practices aren’t as healthy, and their technology is dated—

Ryan Isaac: Well you are not protecting that investment.

Reese Harper: You are not protecting that investment, so your return of that investment goes down. You used to be at a 15%-18% profit margin, but now you are at like, a five, because you refused to—

Ryan Isaac: Which is a really interesting way to look at it, because what if your 401k had a 15% return your whole career, and now it’s down to five? You’d do something about that!

Reese Harper: Your practice is by far your biggest investment, but a lot of people don’t treat it like the financial instrument that it is. They are just happy that they have a job, and that it pays them well, but they don’t look at it and say, “how much do I make from this practice versus how much I make as a producer?” and “is my return on this investment going down or up? Has it been going down 15% a year for the last five years?” Because you can go from 15% profit, to 13, to 11, to 9… it’s dropping 20% a year in terms of profit, and you are just probably not even aware of that. But you have been paying off all your debt, and your debt is going down, and you are happy, because you don’t have any debt anymore, and your practice debt is gone, and you’re debt free! Well you’re practice… unfortunately, the profitability has declined quite a bit, and it is because you haven’t been investing in marketing, you haven’t been keeping up with your technology, your building is starting to get dated, you have had turnover in your front desk staff, no one is scheduling appointments properly, no one is booking treatment, no one is making sure that— anyway, long story. I just feel like that is a really crucial subject to be aware of, and to know that debt is not the bad guy, but that debt is the thing that gives you the flexibility to protect that practice profit margin, and over time, you will get rid of it. I mean, we’re not saying, like, refinance every year—

Ryan Isaac: No, it will go away.

Reese Harper: The debt is going to be going away, even if it is one the slowest reduction term possible. It’s just, at what expense are you accelerating your debt reduction?

Ryan Isaac: Or, at what expense are you willing to not have any more debt? If you need some new equipment and it’s the last five years of the practice, get some new equipment! Protect that value and that margin before you sell it.

Reese Harper: Well and I think that it is important to acknowledge that emotionally… how do you think that people carry debt differently?

Ryan Isaac: And that’s the other point, too… debt is such an emotional thing; it feels so tangible to pay off debt. Even if someone pays off a low interest rate loan, it feels more tangible that putting it in a retirement account that theoretically is supposed to get a higher return, you know? Even if it is triple the amount or something.

Reese Harper: Let’s talk about this a little bit: do you think that debt is really the biggest stress that people have? When they are thinking about their finances, and they feel stressed, and they want to fix something, they usually go to debt. But is debt really the biggest stress?

Ryan Isaac: I don’t think it is. It is definitely one of the biggest things on their mind. I mean, it’s definitely one of the bigger pieces of their financial plan in the overall puzzle, but I don’t think it is the biggest problem, you know?

Reese Harper: I think that it is the thing that people will blame when they feel like they are stressed with their money. What creates financial stress, do you think? When someone says, “man, I’m just stressed out. My financial picture just doesn’t seem as healthy as I would like it to be,” what is usually the reason for that?

Ryan Isaac: Well, the first thing is, I don’t even think people know how to define that. There is a feeling behind that, like, “I don’t think I am heading in the right place where I want to be,” or “I don’t think this is going where it should be,” but I don’t even think people can define that, really. So I would say number one is not being organized, and not having some quantifiable data on what you are worth. What is your net worth, and how much does it grow every year that you go to work, you know? So I would say number one is organization: having everything laid out in front of you so you can admit what it is, on paper, in front of you, with data, quantifiably… I think that is step one. Step two, I think, is a lack of liquidity. I think if everyone had exactly the same amount of debt as they had today, but they were a lot more liquid, you know, many years worth of their spending liquid that they could get at, and it was organized… like, they knew where stuff was going, and they knew when money came in. You see a tax return and you say, “I made 500 grand this year, I have no idea where the money went,” or “I feel like all of my money is going to taxes.” If you actually knew those numbers, and you had liquidity, I think those two things would completely get rid of that anxious feeling of debt. And it usually does! I mean, we have seen clients who get to that point and they want to make some drastic changes just to get rid of debt at all costs, and we encouraged them to be balanced and give it some time, and it is interesting how even a couple of short years later, when they have liquidity, and they have savings, and it is automated, and they have a plan, they know where they are headed, they are tracking things… how the debt doesn’t bother them anymore. It is not even the issue.

Reese Harper: I think your right. For me, that is the biggest source of financial anxiety that I have as a business owner: when I feel like I don’t have the liquidity that I want inside my business or personally to feel really comfortable, like I can make the right investments in my business. And I think that is where dentists get, too. When they have plenty of liquidity, you can have conversations about the importance of hiring the right team, and building the right team, and maybe investing a lot more than you have previously invested into marketing, or to an office manager who has more experience, or a treatment coordinator who is able to really book treatment, and think about treatment effectively, and how they are going to schedule that. And then, if you don’t have liquidity in the practice, and you don’t have liquidity personally, you could have a really high income! Like, your income could be super high, but if you don’t have cash sitting there like, many months— and in my personal experience, it’s not months, it’s years— if I have years worth of liquidity where I’m like, “you know what? If everything goes bad, I’m still gonna be able to last like four or five years,” that just changes so much your ability to invest in your business and yourself, and if you don’t have that kind of liquidity, you are not able to take the same amount of risk in your practice.

Ryan Isaac: Okay, so one of the last things to talk about it how to deal with the debt at different phases of career. Someone who is at the end of the career will have a lot of different options to do something with their debt than someone at the beginning, you know? So, maybe we could talk about that for a minute. We get a lot of calls from people in the first five years of their career, and they are kind of wondering, you know, “I’ve got the practice, and I’ve got the house, and I’m starting to pay taxes, and I’ve got these student loans, and this practice loan, and you know, maybe a building loan… how do I think about this? What am I supposed to do?” So maybe we could just break it up into phases for a minute, and kind of just give some general recommendations for how people could think about their debt during these different phases. I would start with the beginning by saying— and this is something we tell a lot of younger dentists— that there are a lot of priorities in those early years that need your time, and your money, and your resources, ahead of paying off the student loan faster. For example, if the business is new, then learning how to be a good business owner is probably a skill set that probably never ends, the learning curve, but learning as much as you can in those early years about running that business— you know, about your books and your accounting, managing people, and keeping up on your clinical skills in those early parts of your career—

Reese Harper: Getting your financial tracking down so you can actually know if you have profit versus if you are just making money as a producer; knowing your financials in really crucial.

Ryan Isaac: Yeah, those are the early years, and a lot of people are buying their first homes during that period of life. They are maybe going from the startup location of a few chairs, and they want to move, and they need to move, and they have maybe a goal of a down payment to save that could include the house too, you know?

Reese Harper: Getting that liquidity built up that we talked about… it’s a big time to sort of say, “okay, I want to get that year plus personal living expenses saved up, and I want that solid three to six months worth of overhead in my practice,” and maybe even having— beyond your house down payments, and your remodel down payments, or your future dream home down payments, just make sure you still have that year to two years worth of liquidity. It really will change— all of you are going to need to have liquidity in your career if you are going to be able to make a tough decision in your practice at some point. As a business owner, there is never going to be a point where you are going to be 100% comfortable with the amount of money that your practice is going to require out of you. You are never going to be like, “oh it’s fine, just another $20,000 dollars.” There is always going to be this demand that if you are going to grow it and protect it and keep it healthy, it is always going to be uncomfortable, and you are going to have to keep feeding it money in order for it to stay competitive. That doesn’t mean that you should over-invest in it, but it means that most of you are probably going to be hesitant to give it the money that it really requires to keep it competitive. And so, if you don’t have that liquidity in those early years built up already, you just won’t be able to be quite as— I don’t want to say aggressive, but even, we’ll call it conservative— being conservative as a practice owner means giving your business enough money to sort of protect it, and if you don’t have the liquidity, you just can’t. So those first few years are all about liquidity.

Ryan Isaac: Yeah, super crucial. That is a time where you are getting used to you new tax bill, cash flow… I would just say, take care of those priorities first. Make sure there is cash in the bank; make sure there is personal liquidity, that you are taking care of some of these big items, and that you are ahead of your taxes. I mean, we have talked to a lot of people who are in those first few years, and every year is like a catch-up tax bill, while the student loans got money. The student loans got extra money, but then we were catching up on taxes, so… those are just really crucial years to put the first priorities first, and you know, even if you are not in a position to pay down debt faster during those years, those are good times to look for better refinances, you know? It’s not evil to stretch your loans out. If start out with a seven-year practice loan, and it’s choking with you, and you don’t have anything left over, it is not the worst thing in the world to move it up to a ten or a fifteen. It doesn’t mean you have to wait that long to pull it off, but those early years, you need that cash flow to have some kind of wiggle room, and to even start a foundation on anything.

Reese Harper: Yeah. Let’s talk about phase two; you are getting into where you are five years in, ten years in. One more thing I would add to phase one is that I think people should have a basic, automatic draft for retirement in those early years to get used to what it feels like to invest money, be scared about watching your accounts go up and down, learn the fundamentals of how stocks and bonds work, how mutual funds work, and ETFs work—

Ryan Isaac: What does it feel like to save money and have it go down while you still have debt and a business that is leveraged in (laughs)–

Reese Harper: Yeah, just go through the emotional experience of like, “I hate investing,” and “my accounts never seem to give me returns!” Those are the emotions, even if you have had a good— the problem is, they way investing works, you are going to have like five great years, and three bad years, and four good ones—

Ryan Isaac: Most of the time, you won’t even recognize the good ones, or remember them.

Reese Harper: So I just think the earlier you can get started in feeling the emotions around investing, probably the better. But I wouldn’t do it at the expense of carrying any credit card balances, and I wouldn’t do it at the expense of having any really high interest rates on my loans. If I pay my loans down 50,000, I can refinance them… there are some limits to that advice. But I think by the time you get to years five through ten, in that kind of range, things change a lot.

Ryan Isaac: Yeah, so kind of the middle part of your career, you are starting to hit the peak earning years, your loans…

Reese Harper: Most people’s peak earning happens about what age, do you think? If you had to guess?

Ryan Isaac: Mid 40s?

Reese Harper: Yeah, that is what I would say. And statistically, the highest earning period for anyone in the country is between the age of 44 and 56; those are your peak earning years. That is what we are talking about right now: you are through that early career phase… some of you get out of school a little bit earlier, and maybe, you will hit your peak earning in your 30s, and that’s common. We see people in their late 30s getting to those peak earning years—

Ryan Isaac: Yeah, in dentistry, that happens. These are times when the business might be— unless you are still growing, like, adding locations, you are starting to get to a point where you can see your capacity, you know, you can kind of start to see the total capacity of the business, and you might be comfortable with here that is at, and maybe making some minor changes… you are starting to see that. And you will start to have loans that are maybe halfway done, and some could be close to being—

Reese Harper: Taxes are definitely at their maximum point at this point. That is what you are going to feel.

Ryan Isaac: Yeah, your depreciation is gone, your amortization is running out, you are not buying big-ticket items as frequently anymore as you did in the beginning… so, taxes are as high as they are going to be, but your savings rates should be too. So this is a time— and people always want to know, “what is the balance between saving and paying off debt?” We won’t go into a lot of detail, because we did that on episode 73… back in the day, in the 70s… so episode 73, if you want to check that out. But, this is a time when you can start to make those decision with extra money. So the advice we would give to people is, always maintain a healthy savings rate. And you would want to talk to someone; you can email me, ryan@dentaladvisors.com, if you want to know what a healthy savings rate is for your income range. There will be a range that will put you either very comfortable in retirement at a normal age, or very comfortable in retirement at an early age; those savings ranges will vary. But this is a time where if you can lock that down— let’s say your savings goal is 20% of your income. If you can know that it is automated, it is happening, it is going to the most efficient accounts, you are doing some pretax, you are building some liquidity… as the business builds on top of that— and let’s say you have 25% left over, and you are saving 20— if you want to take 5% and put it towards your debt, you can do that. You can take that 5% and increase your lifestyle: do the traveling you want to do; get boat you wanted to have. Or, you might say, “you know, that extra 5%… my debt is going to go away anyway… I want to retire earlier. I want to just speed up my retirement,” so you can save it. But this the point it your career where you probably have the cash flow to start making those decisions, between, “I have a base savings rate, and there is money left over. What should I do with that?”

Reese Harper: So what you are saying is, there is never a point in someone’s career where you would say, “don’t save money and build liquidity, just focus only on debt reduction.” I mean, I would never say to anyone that that is the best plan, just to pay off the debt first, and then start saving—

Ryan Isaac: Unless we are talking about really short spurts of consumer debt; let’s get rid of some credit card debt or something.

Reese Harper: Or really short-term spurts of really high interest rate student loans, and you are trying to get a few of them out.

Ryan Isaac: Yeah. There is nothing we can do about it—

Reese Can’t consolidate… but I think what we are saying is a more gradual debt-reduction plan and a more gradual investment plan, it is not just the numbers about comparing what I am going to earn in my investments to the interest rate on my loans and saying, “which one is higher?” It is a whole host of factors from giving you experience as an investor that will really help you in your latter years to be more mature, and it’s about taxes, and how your taxes will be affected by not having the liquidity to— like, I just finished up for a 39-year-old… I mean we have 39-year-olds who are able to put away more than $100,000 towards retirement, which saves them $40,000+ a year in taxes, and in some cases much more than that.

Ryan Isaac: You are talking about that some of money in a big pension, or cash balance or something?

Reese Harper: Yeah, a large retirement plan for work. If you are using a large amount of money to pay down your debt, you have to pay taxes on the money before you can pay down debt with it. It’s post-tax money, and you miss out on the opportunity to lower your taxes, which, man, I mean, if there is any tax reduction that you leave on the table at all, you have to keep in mind that that is a 40% loss any year that you let it happen. If it is an HSA contribution that you didn’t max fund, you lost 40% of your money up in smoke. If you didn’t buy a piece of equipment that you needed, and that you just let go and just forgot to buy it before the end of the year, you lost 40%. I mean, there are a lot of things that if you need them— like maximizing your retirement plan, your 401k, your 401k match, a profit-sharing plan, a SEP IRA, a cash-balance plan— as you get older in this new career phase, you can improve the type of retirement plan you have to put more money away. If you even leave any money on the table, and it comes at the expense of, “well I had to pay my debt off…” I am glad you saved that 6%, but it cost you 40% by not taking advantage of either the depreciation, the deferral, the deduction, something that you needed— I’d say needed, or something that goes into retirement, because the retirement money is yours… it will stay with you. Now in fairness, you don’t save 40% forever. Eventually, you will have to pay taxes on some of this money when you pull it out. So it’s not, like, 40% that is gone forever; you are going to have to reclaim some of it when you yank it out down the road, but your income is at the highest point it is ever going to be, and the likelihood of that being at the same place is just not very high.

Ryan Isaac: Yeah, the likelihood of you still pulling out your same income in retirement for living expenses is just not very likely.

Reese Harper: It is just really important to not let debt reduction come at the expense of not taking advantage of these other things.

Ryan Isaac: Yeah, I would say that this is the time of career too when some debts are starting to get paid off just according to their natural amortization schedules, and this is a good time to start considering your debt reduction, your fast debt reduction plan as just kind of using a snowball approach to some of these debts, you know? When you start getting into your late 30s and 40s, some debts will be going away, and if your savings rate is healthy, grab those payments and throw them to another one, and there is your debt reduction plan, and it will shave years off your total debt, and tens of thousands if not hundreds of thousands in interest. So, it is a good time to start thinking about that stuff.

Reese Harper: Yep. And to this latter phase of your career, at this point, it has more to do with— debts are most likely gone. You are going to have to take some consideration around renovation your practice, and improving the quality of your practice, thinking about the sale of your practice, and how you and how your want your practice to be positioned in the market, how many new patients you want to be generating before you start having someone appraise it… you know, do you want to invest some money in that? You are also at the point where your retirement plan contributions can be at their peak, and you will have to give the least amount of money away to staff and team at this point, and so the ratios are really in your favor to have maximum liquidity, and so having some debt at this point in your career can also be healthy for you if it is allowing you to defer more income towards retirement to lower your taxes even more. Let’s say every year in your practice, you have a goal of investing… call it 2% of your collections back into practice enhancements, or 3%. You might not do it every year, but every third year, you might do it. Let’s say you are doing $1,000,000 in collections, you have 3%, 30,000 a year, that is your annual amount, which means every three years, you have 100 grand, or every year, you are going to do 30.

Ryan Isaac: Which you could easily put back into a practice every few years.

Reese Harper: Yeah! You could say, “okay, I can build a calendar of things I know I’m gonna want to do throughout my career, and I’m gonna make sure I stick with that.” The question is, is it best to do that with cash, or is it best to do that with debt? And every three years, instead of writing that $100,000 check, you can kind of say, “maybe I’ll refinance my practice loan from 250 to 350, because, you know, my payment will be the same. I started my loan at 350. I paid it down, and now I’m going to refinance it, and add some debt, but I’m going to take that 100,000 and just keep my payment the same. That way, I can keep my retirement plan contributions going, I can pay off my house, I can take some vacations—”

Ryan Isaac: And the business get something it needs, because what you bought three years ago is now old, and it is not the newest thing anymore.

Reese Harper: Yeah, and sometimes, maybe your interest rates can be lower, too, at that point. Maybe, there are just better financing options. So, thinking about your practice in those terms, more around, how much every year am I going to put back into this to keep my practice competitive and fresh, and keep that ROI that we talked about earlier at that 18%-20+% profit instead of ten, or eight, or five, or zero… that is really essential.

Ryan Isaac: Yeah, and I think a good takeaway from this, just a healthy way to view the end of practice is, you don’t have to retire with no debt on your practice; it is okay to sell a healthy, functioning practice where you protected the value, and protected the profitability the whole way, and sell to it to the next person with some debt on it.

Reese Harper: Yeah, they don’t care!

Ryan Isaac: It doesn’t matter to them, but it shouldn’t matter to you either. If you protected your investment, then you have made the right decisions on that investment throughout your career.

Reese Harper: Yeah, what if, by doing it this way, it helped you maintain your practice value at peak value instead of having to sell it at 50% less than what it was five years ago? Very common. So I think that is just the trade-off you’re making by— you know, you can’t get out of debt easily; it is really hard. I wish it were possible, but you are a business owner, and what is going to happen is if you are patient with it, over time you will be able to get rid of all of your debt, have your house completely paid off… along the way, you will have had more liquidity, so you will be able to make better decisions as an entrepreneur, as a business owner, and you will be able to protect the value of your practice, and the profitability that it has, and you will be able to take better vacations, live a better life, and enjoy yourself. And rather than having it be a little more volatile, and so focused on getting out of debt that it kind of throws off the more important decisions, right?

Ryan Isaac: Yep. Well, cool. I think that is a good wrap-up there. We are on YouTube, so, the Dentist Money™ Show is on Youtube. If you want to check that out, just go ahead and google it and find us there. If you go to our website, dentistadvisors.com, at the top, there is a link to schedule on our calendar. You can find a time that is convenient for you; we will have a free consultation; we will chat about your situation, answer any questions we can, and we would love to hear from you, so, thanks for joining us.

Reese Harper: Carry On!

Debt & Financing