Here is a question for you: Would you rather be debt-free and asset-free, or debt-rich and asset-poor? I am sure that most will chose to be debt-free and asset-free. Debt-free is the dream for many these days.
In the race to become debt-free, you forget about building assets. This is like filling a hole in the ground by using the dirt from a new hole you are digging. When you finish filling in the first hole, you have a new one right next to it. Many clinicians find themselves digging a lot of deep holes these days. To build assets, you must start early so that time can work in your favor. Compound interest is a wonderful thing if you have enough time to let your assets grow. Waiting to start building assets after all debt is gone is false economy. Let time work for you, not against you.
I am not advocating that you just let your debt run forever. You need to understand what your debt is actually costing you. With that in mind, here is a good financial rule to know and understand: "Money is worth what you can borrow it for." What does that mean? Take a sheet of paper and draw a line across the page. That line represents what it cost you to borrow money. If it cost you 10 percent to borrow money, then write that percentage down on the line. With that established, now you need to see what you are paying for the use of other people's money. If your credit card charges you 18 percent to use their money, that is above the line. If you have a mortgage at 6 percent, it goes below the line. Since you get a tax break on the mortgage interest at a 30 percent tax bracket, your "net" cost for that mortgage is only 4.2 percent.
Everything that falls below the line is "cheap money." You don't need to be in such a hurry to get rid of that debt. Everything above the line is expensive. Make sure you look at the net cost of the debt if it is tax deductible. Since interest rates constantly change, your "cost" of money will change too. You need to repeat this little exercise whenever there is a change in the interest rates. Just remember that money is worth what you can borrow it for.
One asset you should consider building first is cash. A good goal would be to build a "cash/emergency/opportunity fund" of $10,000. This fund should not be kept in your checking account. It should be in a separate account that is totally liquid. I would suggest using a money market for these funds. I would also suggest you not use a money market at your local bank. They will charge you half a percent or more for the FDIC insurance. Every mutual-fund family offers a money-market account. Some money-market accounts allow you to write checks but they may limit the amount of checks that you write per month. It pays to check out all of the features and limitations on the accounts. Based on your tax bracket, you should see if a "tax-free" money-market account works best for you. The nice feature of money-market accounts is that you can put the money in today and pull it out tomorrow. It is not tied up.
Cash is still king and as opportunities present themselves, you will have the cash to take advantage of those opportunities.
Click here for previous articles by Stanley Greenfield, RHU.
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