The Truth About Debt – The Borrower Is Slave To The Lender
There are many people currently hurting financially during the COVID-19 crisis and most of it can be attributed to debt. The information that my friend, Dr. Brent Lacey shares below is invaluable at times like these during a financial crisis.
I recently had the privilege and honor to sit down and speak with Dr. Brent Lacey who is a gastroenterologist, financial coach, and personal finance blogger over at The Scope of Practice.
Dr. Brent has coached hundreds of families to succeed in eliminating debt, and has spoken to doctor groups all around the country (including the White Coat Investor Conference) on topics related to business and personal finance.
He like me, is debt averse and subscribes to the Dave Ramsey philosophy (from Proverbs 22:7) that The Borrower Is Slave To The Lender.
Here’s the highlights of our conversation:
Dr Brent: So, I got started probably five or six years ago teaching Dave Ramsey Financial Peace University at my church. I initially got asked to just help teach the class and then started teaching it on my own. I eventually expanded and started doing some financial coaching.
That’s what got me to go get certified as a finance coach through the Ramsey team. After coaching several couples and figured that I ought to have someplace where I can write all the stuff down that I can refer people back to and say, “You know what? I wrote an article about this. Why don’t you go read this article? This has got all the information you need.” And that’s kind of how my website, The Scope of Practice was born.
As you’re aware, dentists and physicians come out of school really excellent at our craft but with utterly no idea how to run a successful business.
And part of the mission of The Scope of Practice is to give people the tools and the knowledge that they need in order to do so.
Dr Jeff: What are some of the things that you teach people moving forward after a crisis now that we know that a financial crisis can hit at any time like the COVID-19 crisis?
Particularly those docs and other high-income earners that have gotten used to a certain level of income and living comfortably.
3 Things To Plan For After a Financial Crisis
Dr Brent: Most of us that have lived through the other financial crisis in the past knew that something like this would happen again.
We need to plan for the future, for sure. And I would say three things are really important for physician/dentists.
#1 Living BELOW our means
(editor’s note: This was the #2 our of the 7 lessons we learned from The Richest Man in Babylon)
One of the things I find when I’m coaching folks is that it’s very natural when you get out of training to let your new income cause a jump in your lifestyle that you’re not really ready for.
Because as a doctor, you’ve been in college and medical school/dental school for 10-15 years while holding your breath living as a resident.
Then it happens, we graduate and go from broke to a nice six-figure income overnight.
Now that money is rolling in, we start to enroll kids in private school, buy a Tesla, doctor house, boat and jet skis even though we have a half of million in student loan debt to deal with.
Remember that the borrower is slave to the lender. Except, we don’t think about that too much as we didn’t worry much about it when we were broke so why should we worry about it now?
Buying all of those things above is fine if you’ve got a financial plan that you’re working through. And I think that’s one of the traps that doctors fall into.
This idea that we have student loans or other consumer debt, “Oh, we’ll pay them later. It’s part of life. Everyone’s got it. But we just have to deal with it.”
And it only takes one giant financial crisis, like the COVID-19 crisis, to really unveil the fact that they know they’re living on the edge. And as soon as someone pulls the rug from under you, that’s it.Join the Passive Investors Circle
#2 Emergency reserves
The second thing I would say is not having enough of a cash reserve or an emergency fund. The only thing you can guarantee about emergencies is that they’re going to happen. You just don’t know when.
- Need a new set of tires
- HVAC system goes out
- Water leak that causes flooding
Or you have a big financial crisis that takes out the entire global economy. Who saw that coming, right?
And so having cash reserves of three to six months of expenses allows you to weather these foreseeable storms.
#3 Alternate income streams
The last thing I would say is make sure that you have other income streams instead of only one, the active/earned income.
Dave Ramsey Baby Steps
Dr Jeff: I know, you’re a Dave Ramsey certified coach and subscribe to the phrase that the borrower is slave to the lender. And you also teach the Dave Ramsey 7 Baby Steps.
Could you briefly go over those steps to refresh our memory?
Dr Brent: Sure. So the seven baby steps that they teach with the Dave Ramsey system is this:
1. Save $1000 in an emergency fund
The Total Money Makeover book by Ramsey suggests that before you start paying down debt, save up $1,000 in an emergency fund is a must.
I realize that $1000 isn’t much to cover emergencies long-term, but it gets the ball rolling towards financial freedom.
2. Pay off all consumer debt with the Debt Snowball method
Here’s an overview of the Debt Snowball:
- List your debts from smallest to largest
- Make the minimum payment on all debts except the smallest one
- Throw all extra money toward the smallest debt until it’s paid off
- Once that one is done, start with the next on the list
- Use the money you were already paying on this debt plus the amount you were throwing at the first one and add the two together
3. Save 3-6 months of expenses in an emergency fund
After you’ve become consumer debt-free, it’s now time to finish funding your account you started in Step 1 earmarked for emergencies.
Dave suggests that you need at least 3 – 6 months of expenses saved but it all depends on your risk tolerance. (Editor’s note: I plan on saving up two years’ worth of expenses now that I feel that a large financial crisis can affect us at any stage of our life.)
4. Invest 15% into retirement accounts
Dave suggests investing 15% of your household income into Roth IRAs and pre-tax retirement plans. Some think 15% is not enough but you have to realize who his target audience is, blue collar workers.
As doctors, try aiming for investing at least 20% or more of your income.
5. Save for children’s college
Dave suggests two ways to save for kid’s college:
- Education Savings Account (ESA)
- 529 Plan
6. Pay off your mortgage early
Baby Step 6 is all about making extra payments towards your home mortgage to pay it off as quickly as possible.
Dave feels that the only type of debt that he is “for,” is a home mortgage, but if you can save up and pay cash, that would be better.
As an interesting side note, I found a doctor that had posted a question in the White Coat Investor Forum about paying cash for a house he was getting ready to purchase.
What caught my eye was the title of the Forum topic: The borrower is slave to the lender
Here’s his post:
Dave Ramsey is correct. I am buying a home (3rd time ) and my spouse and i are good savers. I have enough to pay cash for the house, but this money is in vanguard stock index funds and we would pay 20% long-term capital gains tax (LTCG) on any gains and tack a huge tax hit if we pay cash, so we applied for a mortgage.
Both with near perfect credit, zero debt and a large net worth. Mortgage brokers and their team seem to have zero functioning neurons. 🙂
- Tons of crap to sign.
- Tons of data requested.
- Tons of asinine questions
Some are: “where did this deposit into vanguard for 80k come from?”
When i answer: that deposit was from my savings account. they say: “we need a paper trail, can you send documents.“
I said: listen, here is my vanguard statement, we have zero debt and enough to pay cash for this house, the only reason we are getting a mortgage is because we want to save in long term capital gain taxes; you guys have zero risk. We have no debts, no smoke and mirrors here. You have a house as collateral, we are putting 50% down payment and we have enough to buy the house.
I fill out the stuff, answer the questions then some time passes and more BS questions.
Then as closing day approaches (we have been waiting for a few months to allow sellers kids to finish school) the mortgage people are in a panic. They had months to request info and now they are running around like chickens freaking out about stuff……….”We need this now if you want to close on time!” “send this newly requested info by this afternoon”
Tempted to tell them to $&@$&” off and just pay cash. I know that is financially dumb, ( I posted my situation here a few months ago and i discussed with a cpa and a cfa and everyone unanimously agrees mortgage is better financially) but goodness gracious I HATE BEING A SLAVE!
Now you can see why The Borrower Is Slave To The Lender.
7. Build massive amounts of wealth and give back
Baby Step 7 is to accumulate wealth and give back.
Proverbs 3:27 – “Do not withhold good from those to whom it is due, when it is in your power to do it.”
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Do You Think Dave Ramsey Is Wrong?
Dr Jeff: My wife and I completed the steps in order, but we did something a little bit differently because we felt we had a decent enough income.
For us, while aggressively paying down debt, we didn’t want to miss out on all of those years of not investing and taking advantage of compound interest.
So we did both, paid down debts but continue to invest in our practice retirement account.
Now I know that goes against his thinking, but I think if you’re disciplined enough and you have a high enough income, you should do both.
Is Dave Ramsey wrong?
Dr Brent: I think you hit a really key point with that analysis. It’s if you’re disciplined enough, and that’s really the kicker because the mistake I see a lot of people make is thinking about the problem is a math problem and not a behavior problem.
It all boils down to you knowing yourself better than anyone else. I think it’s very reasonable if you stay disciplined enough and you know yourself well enough, you can make that happen.
Dr Jeff: I’d like for you to comment on a couple of posts from dentists made on DentalTown.com that were in the middle of going through the COVID crisis.
“Our state shut us down for emergencies only. So pretty much saying, we quit making any money. After we get through this, we need to learn to live simply. Cash for cars, live in a simple house, pay off debt quickly, etc. All we can do at this point is to learn from this.”
Another dentist commented on the above dentist with, “I’m with you 100%. I told my wife this is a wake up call for me. Once this is done ‘No more payments other than mortgage.’ That’s it. No more financing cars, credit cards, etc. If I can’t pay cash, I’m not doing it.”
I guess they get that The Borrower Is Slave To The Lender.
It seems like people are realizing, after going through a huge financial crisis, what’s REALLY important. My family and I are doing things together much more and getting off of our devices in order to connect with each other.
Dr Brent: Well, it’s true that as we have become more global and more connected that we’re actually less connected to people around us.
Especially, I think in the generation below us. So the millennials are more connected than ever.
What we have seen that I think is distressing is a rapid rise in:
And I think all those things are linked as we become gradually more connected online while becoming more disconnected from reality. Unfortunately this becomes our new norm.
One of the things that I counsel my clients about is that consumerism has gotten dramatically difficult.
The Jones’s have gone digital.
It’s become easier more than ever to try to keep up with them!
Think about all the stuff that we can see on others’ highlight reels on Facebook. The sad part is, like the news, we can’t tell if it’s real or not.
Look at Pinterest. No one’s going to pin what they really look like when they wake up with “bed hair”.
Instead, what are they posting? “Oh, check out my vacation I just went on”, “Look at our trip”, or “Look at this new car.” And then all of a sudden you think, “Man, why not me? Why isn’t it my turn?”
I hear that all the time while coaching. And I think getting them back to a place where they’re connected to the people they really hang out with is incredibly healthy for them.