Before we delve into the lessons of saving and growing your money, I would like to examine a pair of quotes which will help switch your brain from clinical mode to business mode.
“A penny saved is a penny earned.”
– Benjamin Franklin
The adage states that saving money is the most important factor in financial stability and building wealth. In his legendary book, The Wealthy Barber, author David Chilton speaks of the importance of consistently saving 10 per cent of everything you earn from every pay period. This is the simplest form of saving and it’s a concept that made Chilton’s barber a millionaire.
“Take care of your cents, then your dollars will take care of themselves.”
– Thomas Jefferson
This quote focuses on the importance of increasing one’s income sources. In the book, Rich Dad, Poor Dad, by Robert Kiyosaki, the author explains that each dollar of your savings should be thought of as your employee. If you have $25,000 then you have 25,000 employees who have the capacity to grow your business if you learn how to recognize opportunities for passive income through investing, purchasing and accounting.
We have heard the term “passive income” many times, but do we really know what it means? Passive income is generating money from a concept or organization that does not require our direct presence. Once we save money, we are essentially looking for ways to maximize our income. I will be able to explain some of these concepts in this article, but make it a goal of yours to work towards maximizing your passive income. Here is a short list of examples of passive income:
- businesses or practices that do not require your presence
- mutual funds
- income-generating real estate
- anything which appreciates in value over time
This is the simplest form of saving money. Regardless of your debt and monthly bills, it is very important to pay yourself first. This is because in order to gauge spending you must be aware of your set income so that you can do your best to be economically efficient. In The Wealthy Barber, Chilton recommends investing 10 per cent of each pay cheque into some sort of long-term investment vehicle like mutual funds or a high-earning savings fund. I do this myself, and as I have learned, in order to be successful, you must invest each month – ignoring whether the market is high or low. This is called “dollar cost averaging.” It ensures that you do not get hurt by market fluctuations as long as you are committed to the long term.
My best advice would be to use an investment professional who has very good references. Make sure to ask around and choose someone who has a short- and long-term plan outlining an investment strategy.
For a chiropractor, investing in real estate offers a tremendous opportunity to create wealth. As with all investments, some due diligence needs to be performed to help put the probabilities for success on your side. Here are some of the advantages of buying real estate out of which to run your practice.
If you recall, The Wealthy Barber said “pay yourself first.” When you own real estate you are paying your mortgage instead of paying someone else’s rent. People need a place to operate a business. There are plenty of health professionals looking to operate their businesses who need to rent space. These needs offer chiropractors an opportunity to rent out their property and receive rental income.
Naturally, there are operating expenses in owning a piece of property such as mortgages, maintenance and utilities. However, the more health professionals you have paying rent the less your mortgage costs. This is where multidisciplinary practices become very enticing since patients enjoy the luxury of one-stop shopping, and property owners (you, the chiropractor) enjoy the financial windfall of passive income.
Aside from receiving rental income, another way to create wealth from real estate investing is to have the property you own appreciate in value. Let’s say you own real estate and run your practice as a single practitioner. In this case, you are not receiving any rental income, but this ownership still offers the possibility for your property to appreciate in value. A simple way to calculate the amount of appreciation is using the rule of 72. The rule of 72 is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself.
For example, in the GTA, from 2001 to 2011 – over a 10-year period – the price of real estate doubled from $250,000 to $500,000. Using the rule of 72 we can determine the percentage of increase each year by dividing 72 over 10 years. The result is a 7.2 per cent average increase per year.
Leverage is simply using someone else’s money to buy something. A mortgage is an example of leverage. Leverage can increase your returns. Consider this example: you purchase a property for $400,000 and use $40,000 of your own money and borrow the rest. If after five years that home is worth $500,000, then it has appreciated 20 per cent by going up $100,000 in value. If you sold the property and paid back the mortgage you would have $100,000. This would represent a 150 per cent return on your money.
Whether you are already practicing chiropractic – or are getting ready to – I highly recommend you professionally incorporate your practice. In 2002, the Ontario government made it possible for chiropractors to incorporate their respective practices, and many chiropractors, such as myself, have taken full advantage of it. Incorporating allows chiropractors to pay less tax and keep more money in their business to help grow their practices. The government allows this in an effort to stimulate small business growth and it can help chiropractors reach their financial goals. This is how it works:
An un-incorporated practice is generally called a sole proprietor. If a sole proprietor makes $100,000 in a year after expenses, the government will take about $29,000 in taxes, leaving $71,000 for the chiropractor to take home. An incorporated chiropractor who made $100,000 after expenses would be able to pay himself or herself a salary of $50,000 from which he or she would take home about $37,000. The remaining $50,000 would stay in the corporation where it would be taxed at 15 per cent, meaning the corporation would pay $7,500 in taxes, leaving $42,500 in the corporation. When you add $37,000 and $42,500 it totals $79,500 – over $8,000 more than the sole proprietor.
For some reason, many chiropractors receive advice from accountants who discourage them from incorporating their practice by saying that they “do not make enough yet.” Take it from me – this is totally untrue. Being incorporated is worth it, even if you are just starting out. In my first year in practice I was incorporated and I made $50,000. I chose to keep the majority of the money in the corporation, and at the end of the year I paid $6,000 less in taxes. It is worth your while to incorporate if you plan to be successful.
Preparing today for tomorrow is always a solid game plan when looking to grow your savings. The key is building a team around you that you trust – like a financial planner, real estate agent and a lawyer. Throughout your business dealings you will need to consult this team on your journey to maximizing your savings.
Anthony Lombardi, DC, is consultant to athletes in the NFL, CFL and NHL, and founder of the Hamilton Back Clinic in Hamilton, Ont. He teaches his fundamental EXSTORE Assessment System and conducts practice-building workshops to health professionals. Visit www.exstore.ca for information.