22: Personal Finance, Investments, and Retirement Options

Chapter 22

Personal Finance, Investments, and Retirement Options

William “Dana” Webb and Brian Lange


Developing a Philosophy about Money

From many years of helping people build and maintain wealth, our firm has learned that most people do not have a philosophy about money. When asked about their philosophy, they usually develop a blank stare. The truth is that most people have never given it a thought. For this reason, it is important to first discuss the philosophy of money.

When you hold a dollar bill in your hand, you have three choices.

1. You can spend it. Most Americans know how to do this. With one of the lowest savings rates in the world, taking time to explain to Americans how to spend money is not time well spent. We will assume the reader has an understanding of this concept.
2. You can lend it. This is what most Americans do when thinking they are building wealth. The truth is no one you know has ever built or maintained wealth lending money. The term “lending” may be new to some readers. Let me give you examples. If you purchase a U.S. government bond or note, you are lending your money to the federal government. If you purchase a corporate bond, you are lending your money to that corporation. If you purchase a municipal bond, you are lending your money to that city. If you put money in a certificate of deposit or money market, you are lending your money to that financial institution. In other words, bonds, notes, CDs, money markets, fixed annuities, and so forth are lending instruments. You are lending your money and in return receive interest. Let us repeat: no one builds or maintains wealth lending money. But if you do the third thing, you will build and maintain your wealth even in retirement.
3. You can own things with it. Wealthy people own things. Think about it. Do you think Bill Gates is wealthy because he knows how to lend money? He owns a company. Do you think Warren Buffett is wealthy because he lends money well? He owns several companies. How about Donald Trump? He owns real estate. Throughout the pages of history, owners build and maintain wealth. While it is true that what is best to own changes from time to time, it has always been owners who build financial security. You can build wealth owning real estate, your own business, stocks, or collectibles, just to name a few. What to own is up to you, but you must be an owner to build or maintain wealth.

One more thought. You should carry this philosophy with you the rest of your life. Most Americans think they should view their money differently during their retirement years. Remember: your money does not know how old you are. With interest rates at historic lows and people living longer, you must continue this philosophy into retirement to prevent outliving your money.

Being Committed to Your Financial Goals

It has been said that most people “want” to be rich, but those who build wealth are “committed” to being rich. In other words, those who build wealth are willing to sacrifice more than most people to attain their goals. Wealth builders understand that if they want a different outcome in their lives, they need to change the way they think, act, and react. Most people want a different outcome in their lives, but they do not want to change the way they think, act, and react. To build wealth most people need to make some fundamental changes in their character.

Be ready to spend more time focused on your wealth-building program. This is why it is very important for your spouse to share your goals. Many wealth-building trains have been derailed by a spouse not willing to allow the needed time away from the family to pursue this dream. It is so much easier with an understanding spouse, or better yet, one who can work alongside you to help you reach your goals.

Be ready to do without. You will not be able to keep up with your neighbor. They will be spending their money on the appearances of wealth, probably with too much debt. Wealth builders live way beneath their means. For example, most people think wealthy people drive expensive automobiles. The average age of a vehicle owned by a millionaire is 11 years old. In other words, those who build wealth rarely have an emotional need to keep up with the Joneses.

Be ready to use “good” debt when appropriate. Too many people do not understand debt. They either think all debt is bad or they have too much “bad” debt and not enough “good” debt. Good debt is debt against something that will probably go up in value over time. This would include mortgage and education debt. Bad debt is debt against things that go down in value almost as soon as you purchase them. This would be car debt and credit card debt. Have as much good debt as you can handle, but eliminate bad debt from your life for good.

Finally, more often than not, building wealth is a byproduct, not a main focus. Most wealthy people will tell you they were so busy doing what they loved, that the wealth was a side benefit. That is why so few wealthy people retire. They could financially retire, but they do not want to stop doing what they love. Find a vocation that you love and be the very best at it. Never stop learning. If you will read one book a year concerning your vocation, you will be light years ahead of most of your competition.

Saving Money vs. Saving Buying Power

One of the biggest myths when it comes to building wealth is that if you save money, you will build wealth. For most people this is impossible. If you want to build or maintain wealth you must save buying power, not money.

When Ford introduced the Mustang in 1964, the price was about $2,000. Today it is over $30,000. Most think the cost of the car has increased. NO!!! The dollar today is weaker than the dollar of 1964, so it takes more of them today to buy the same thing. Read the previous sentence again. Generation after generation teaches their offspring to “put your money in the piggy bank and save it for a rainy day.” They teach their children to save money, an item that goes down in value every year. The child grows up, cannot figure out how to build wealth, and the parents scratch their heads. How can anyone build wealth saving something that goes down in value every year?

The problem is even worse for those who are retired. They have held the wrong definition of the word “safety” their entire lives. They believe safety is holding on to the dollars they have. Change your definition of safety now. Do not wait another day. Safety is not the preservation of principal, safety is the preservation of buying power.

Suppose one retired in 1964 and had $100,000. If he believed safety meant holding on to the principal, he might have invested in a long-term bond paying 5%. He received $5,000 per year, and when the bond matured, he received $5,000 plus the $100,000 back. He thought he was safe because he still had his principal. But he was not. When he received his first $5,000 in 1964, when the Mustang was $2,000, he could have purchased two and a half Mustangs. When he received his $5,000 in 2004, the Mustang was $30,000 and he could have only purchased one-sixth of a Mustang. Conclusion: if his definition of safety was to hold on to the principal, he was successful. However, what good did it do him? The standard of living continued to drop year after year as his purchasing power was eroded.

So, what mistake did this retired person make? He placed his money in a lending instrument and lost his buying power. Had he owned something with this money, his $100,000 would have had a better chance to have a rate of return high enough so that he would still have been enough to purchase the Mustang in 2004. In other words, to build or maintain wealth, we must be owners, not lenders, throughout our lifetime. But to do that we first need to create a budget and live within it.

Building Wealth

Making Decisions from the Revenue Side, not the Expense Side

There are basically two parts to every financial business model. Some people in the company are in charge of bringing in revenue. Others have the job of controlling expenses. Both are important. However, when a major decision is made, it must be made from the revenue side. Too many businesses today make it from the expense side.

For years legendary CEOs (chief executive officers) would add new streams of revenue to their corporations to increase the value. This was done by creating new products or services to sell or by buying smaller companies and continuing to sell their products or services. Both increased corporate revenues.

Today, CEOs seem to be more CFO (chief financial officer) minded. They try to increase the value of a company by cutting expenses, not by increasing revenue. In the short term, this can work; in the long term it is usually a bad decision. Take the case of a widget company that moved jobs overseas to cut labor costs. The company even built a factory overseas to produce widgets between 8 a.m. and 5 p.m. But what really happened? The factory overseas produced the agreed-upon widgets between 8 a.m. and 5 p.m., closed down for 1 minute, then reopened again at 5:01 p.m. to continue to manufacture widgets for the bootleg market until 7:59 a.m. the next morning. How much can that company really save now that they have to cut prices on their own widgets to compete with the bootleg market widgets, which are produced 16 hours out of every 24-hour period? In other words, every day, twice as many illegal widgets are produced with the same quality as the legitimate ones.

We tell that story because we find most families and new business owners also make decisions from the expense side. When hurricanes swept through the Gulf Coast area, forcing gasoline prices higher, we could tell wealth builders from those who would never build wealth just by listening to their conversations. Most people were talking about how they were cutting expenses in other areas of their budget to pay for the increase in gasoline prices. In other words, they were making decisions from the expense side of the ledger. Wealth builders were talking about how they would need to increase their income to pay for the rise in gas prices. Hourly people asked to work overtime. Sales people focused on making a couple of extra sales per month. Retired people would talk about getting more aggressive with a portion of their investments. In other words, these people were focusing on increasing income, not cutting expenses.

People who build or maintain wealth make decisions from the revenue side. Successful businesses are built from the revenue side. Therefore, you must also think this way when building your dental practice while still managing overhead.

Investment Choices

Now that you understand you must be an owner to build or maintain wealth, what should you own? There are many things you can own; however, our advice would be to narrow the list to the following:

1. Own your dental practice. That may be tough to do at first, but make that one of your goals. This would be the business that you own.
2. Own the building in which your dental practice is located. This will be a longer-term goal for most dentists and would be the commercial real estate in your portfolio. If you purchase or build a building with more square footage than you need, you can rent out the remaining square footage and have another stream of income.
3. Own what you invest in your retirement plan. This will give you a chance to own mutual funds. Make sure the mutual funds you own have all stocks in them with no bonds. Remember, bonds are a lending instrument. Your stocks, which represent ownership, will help you build more wealth over the long term.
4. Only after you have accomplished the first three items should you begin to own other things. At this point you may want to own single-family homes or apartment buildings to rent. You may wish to own individual stocks or another business that your spouse would operate. You will have many choices, but choose the investments that best fit your personality and character traits. For example, do not try to be a landlord if you lack the time or temperament to do it.

It should pointed out that the comments above are directed toward your business life. Do not forget your personal life. You should be an owner there too, and your first purchase should be a house. Most people should structure the purchase of this house with an 80% first mortgage, a 10% second mortgage, and 10% down. This should be your only personal debt. Always pay cash for your other purchases, including automobiles. Too many young people start their adult lives with car debt and credit card debt because they saw their parents do the same thing. Wealth builders have neither. This does not mean they avoid using a credit card. This means they pay the entire bill when it arrives and never let interest accumulate.

One final word of caution on this topic. We cannot tell you how many times newly retired people have told us they were so busy making money during their career that they failed to build wealth. We know you have studied hard to be a dentist, but never confuse making money with building wealth. If making money takes all of your focus, then hire a competent financial advisor to help you stay focused on your wealth-building plan. Doing this will be a good investment.

Retirement Plan Choices

There are basically three types of retirement plans: individual retirement plans, company-sponsored retirement plans, and self-employed retirement plans. This discussion will cover only the ones you will most likely consider in each category. Not every plan will be mentioned.

1. Individual traditional IRA: A tax-favored account that allows anyone under the age of 70 1/2 years, with earned income, to contribute annually. A nonworking spouse may do the same thing. Earnings are tax-deferred and contributions may be tax-deductible. Be aware of the income limits.
2. Individual Roth IRA: Contributions are not tax-deductible, earnings grow tax-free, and/>

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Jan 4, 2015 | Posted by in General Dentistry | Comments Off on 22: Personal Finance, Investments, and Retirement Options
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