Making large purchases or investments can be a terrifying experience for some people… especially if they let their feelings about the item they are purchasing cloud the facts they are taking in about the purchase. But when it comes to Debt from a large purchase, it is not all the same. In fact, sometimes taking on Debt can be the smartest thing you can do for your Practice. Sound crazy? Let’s review the two basic types of investments to enable you to make wise investment decisions and maximize your ROI. Let’s get started!
First, let’s discuss Depreciating Assets. These are the things you buy that drop in value. For example… Let’s say you are wearing a nice sweater that you bought for around $220. Well, when the box showed up at your house, and you opened it up and put the sweater on, it instantly lost a big chunk of its value. After wearing the sweater for a split-second, its value dropped to less than 30% of what it had been when you bought it. While it is still technically an “asset,” it is depreciating because it rapidly dropped in value.
The same thing goes for a new car. If you were to buy a luxury vehicle — say, a Ferrari — you’d easily spend $300,000 at the dealership. However, the SECOND you drive it off the lot, it’s value literally plummets. It’s an incredibly depressing, true concept that we need to wrap our brains around.
Our lives are filled with depreciating assets: wardrobe, TV monitor, laptop, vehicles, the equipment you buy for your practice, etc. These items are essentially amusing or useful money pits that can’t produce a truly significant ROI, and you frequently buy these on your credit card… Which means you pay interest on this depreciating asset! Big mistake. There is actually a simple rule for investing in these items…
Always pay CASH, not credit for a depreciating asset. Remember, you won’t be able to sell these items for even close to what you borrowed to purchase them. Not only will it take you awhile, but you will have the double-whammy of paying interest making the item even more expensive to you. You might find yourself resenting the item more than enjoying it!
Based on that information, ask yourself this question: are you a depreciating asset connoisseur? Is this a trap that you fall into? Be aware that these assets do not look good on your net worth spreadsheet! Of course we will all still buy new gadgets or silly items sometimes — we’re human. Just remember, especially when it comes to buying new equipment, it’s easy to get sucked in when you see the next, new, cool thing on the market. Be mindful and purchase these items only in moderation, while funneling the majority of your funds to the other category of investments…
Appreciating Assets have the capacity to gain value over time. They generally produce a high ROI. To go a step further, the best POSSIBLE investment you can make is an appreciating, income-producing asset. Commercial real estate usually falls into this category.
If you invest in high-value commercial real estate with a great location — not only does it have the ability to gain value over time and increase your general profitability, it also produces income in the form of rent.
Did you know that you can acquire a building and then rent it from yourself? You simply make a personal investment in the building, and then your corporation rents it from you. Think about it… You know you’re going to pay the rent every month! It’s a huge win-win. What’s more, this investment is safe and tax advantageous. That’s money you don’t have to do any extra work for, and that you can someday pass on to your family.
Just to give you a different example… Maybe you purchased a really expensive, eye-grabbing sign to put out front. Well, if ten more new patients walked through your front door last month because of that sign, then it is an INCOME-PRODUCING asset. A sign won’t necessarily appreciate in value, but it will definitely contribute to the growth of your Practice, and will easily earn back the money you invested and then some!
You can finance these assets with total piece of mind because they create a return without significantly dropping in value over time. See what I mean about sometimes going into debt temporarily can be a huge benefit to your Practice?
Time for a quick challenge
What percentage of your money is going towards appreciating, income-producing assets?
Are you “asleep at the wheel” when it comes to making wise investments?
The next time you’re reaching for your wallet to buy the next new thing on the market — remember to stop and ask yourself this question…
Is it a wise investment, and will it earn me a worthwhile return?
Do the math. Think about where you’re putting your money.