During a recent financial review with a client, one of our optometry bookkeepers was surprised when I praised the practice owner for investing extra cash instead of aggressively paying down debt.
Disclosure: We are not Certified Financial Planners (CFP) at Books & Benchmarks. If you ask whether to pay off optometry practice debt or invest, we’ll refer you to a qualified professional who can help you consider your values, goals, and risk tolerance.
Having said that, we know several CFPs. Here are some points they might ask you to consider if you have extra cash in your optometry practice finances. Of course, this is after you’ve planned for taxes, made regular loan payments, and left enough to operate the business.
1. Interest rates matter for practice debt
Not all debt is created equal. Carrying credit card balances with 18% to 30% interest rates is very different than having an outstanding balance on a practice loan with a 3.5% interest rate. One is a much higher priority to pay off than the other.
2. Expected investment returns for practice owners
This was how the owner I spoke with this week made his choice. His only debt is a practice loan with low interest. His long-term expected returns (based on historical results, not guaranteed) are 7%–10% per year in stocks and bonds. He decided it made more sense to pay the interest and invest his extra cash, earning more than the loan cost.
3. Time impacts practice investment decisions
The owner we spoke with also has decades before he retires. Time is his best ally, because compounding investment year over year will amplify those 7%–10% returns.
A 62-year-old owner might benefit more from eliminating the guaranteed cost of borrowing (interest), even if hypothetical returns over the next few years could be higher. After all, financial markets can decline in some years.
4. Financial priorities for optometry practice owners
Even if paying off practice debt and/or building your wealth through investments are important to you, there may be more urgent steps to take, such as:
Build an appropriate emergency fund.
Even if you have high-interest credit card debt, it’s important to maintain an emergency fund for your optometry practice. Most owners should have at least three months of living expenses in liquid (readily available cash) savings. If you’re the sole income earner in your household, six or even twelve months of living expenses may be more appropriate.
Remember, if you’re hurt and can’t work, you still owe your next month’s regular loan payments. Prepaying some principal doesn’t provide extra credit against future payments, so having cash on hand is crucial for unexpected events.
Fund tax-preferred savings accounts.
Contributing to IRAs or 401(k)s can provide immediate tax savings and allow your investments to grow tax-free over time, making these accounts even more valuable for younger optometry practice owners.
Side note: If you’re an employee with an employer match, taking full advantage of it can be highly beneficial. Employer contributions are essentially free money, offering an immediate 50%–100% return on your savings depending on the plan structure.
5. Personal values and debt decision for practice owners
I don’t think anyone likes carrying debt. But some people really hate debt. If that’s you, go ahead and pay it off early. Paying down debt early is still a form of savings; you could have spent that extra cash on a trip to the beach or a new car. Once you’re debt-free, you can start putting those debt-service dollars to work in savings and investments.
One of the true privileges I have in working with our optometry bookkeeping clients is helping them understand their practice financials. I love showing them how to generate enough cash flow to enjoy a comfortable lifestyle for their families while still having the freedom to pay down debt or invest for the future.
Take control of your practice finances
If you want practice financials that can help you plan and build the practice of your dreams, give us a call at Books & Benchmarks. We pride ourselves on delivering accurate, timely, and meaningful financial statements to our clients that help them understand their practices and make great decisions.
