Three years ago, I wrote about cash flow vs equity and I landed on equity as the most important one. The market has changed. Interest rates are through the roof. Signs of a recession are everywhere. Is equity still king?
Consider a physician working in the operating room. This surgeon enjoys doing that work and brings home a certain amount for every procedure done. Now, consider that with every invoice paid, it goes into the surgeon’s bank account. That is generally a big amount. This is a surgeon, after all. Suddenly, expenses, taxes, and ‘benefits’ are taken out and the surgeon is left with take-home pay. Hooray! But this isn’t the end.
Now, it’s time to pay back debts. These usually include a massive house payment, car payment, and any other things the surgeon has purchased, like a boat, pool, RV, cabin, or other expensive luxury item. All of these things are nice, and may even be justified to purchase, but once the bills are paid, there is often very little left. The surgeon is satisfied, because that 401(k) is fully funded.
But, that is such a hoodwink. The maximum 401(k) that can be deposited is $23,000 (add $7,500 if you are over 50 years old) in 2024. That’s way less than the annual income of the surgeon, and will be a huge shocker when the surgeon wants to retire.
401(k)’s Dirty Little Secret
The 401(k) wasn’t designed for you. In fact, there are a lot of people who think you don’t deserve the benefit of this law because you are a high performer. The real trick is that they make you think it is enough when it is so meager. When the surgeon can no longer work, there will be a paltry sum and all those fancy luxuries will go away.
The surgeon has cash flow, but wasn’t building equity, and sees a huge ‘gotcha!’ when retirement comes. The surgeon is now trapped in the job, scrambling to make a bunch of retirement money and not enjoying retirement.
It’s Still Equity
Cash Flow vs Equity in real estate is the same thing. People who focus on cash flow do so for the quick buck. They set up mortgages to maximize their take-home pay. They defer maintenance, which sucks long-term value out of the property. When the time comes to sell, the value is low, and they wonder where all that cash flow went.
High performers maximize equity in any market cycle. They are always prioritizing the long game rather than pulling out money right now. But they do this in a smart way. They realize that they should be enjoying the fruits of their labor prudently. When purchasing an investment, they look for equity over cash flow. That’s exactly what you need to do.
