When you graduate with a high student loan balance, you probably have a negative net worth. An exception would be if you have a trust fund or an enormous savings account to tap into. But the reality is that most of us don’t have the luxury of someone else footing the bill for our college education.
Despite a high student loan balance, your net worth might be more in your control than you think.
In fact, your negative net worth isn’t because you have debt. Net worth problems happen for two reasons: You either aren’t saving the right way or you’re making investment mistakes.
Let’s talk about how to achieve a higher net worth even with student loan debt.
Negative net worth as a student loan borrower
Negative net worth isn’t as bad as you think.
At its worst, negative net worth as a student loan borrower is a type of tax. If you’re a federal loan borrower, you’re likely paying about 10% of your income to your loans and another 2% to 10% toward your tax bomb amount every month.
Negative net worth is more like a 20% tax
If you look at it this way, your negative net worth is more like a 20% tax. The amount seems a steep price to pay. Hopefully, you’re earning a lot more money with your education than you would have earned otherwise, even if you account for the 20% reduction.
Let’s look at an example of a doctor, lawyer or other professional earning $150,000 a year in income. We’ll call him Ted.
Ted has a student loan balance of $400,000. He pays 10% of his income every month toward his student loan debt and is taking advantage of student loan forgiveness after 20 years of payments. Based on that scanario, Ted’s tax bomb should be $250,000.
In this situation, he pays about $1,000 each month for his student loan payment and saves $650 a month toward his future tax bomb.
Ted’s only losing about $20,000 per year to paying his student loans and saving for his future tax bill. If he would max out his retirement savings and lower his taxable income, Ted could pay even less and keep more money in his pocket.
How to grow your assets and your net worth
The most common problem with student loan borrowers is that they’re not growing their assets. If you buy your own practice, for instance, your earning capacity can grow exponentially. Plus, you’ll have a high number of tax write-offs available to shield your income from taxes, which lowers the income the loan servicer sees when calculating your loan payment.
You can grow your assets in other ways, too. Here are a few ideas to help you get started.
Invest in mutual funds or exchange-traded funds
Getting a great return with individual stocks is difficult. Investing in funds, rather than in individual stocks, is a common way to grow your net worth. Funds tend to perform better, especially for non-professional investors.
Mutual funds and exchange-traded funds (ETFs) offer a diversified approach to putting your money to work. The trouble is that you might not understand what your money is doing after you invest in a fund.
In terms of investing, you want to have two types of accounts that you consistently contribute to:
- A retirement account: Make a minimum contribution of 5% each month up to a max of $19,000 a year.
- A non-retirement account: Contribute at least $100 per month or up to $1,000 or more each month.
Even if you’re not doing very well financially and can barely afford to survive, I always suggest you have both of these accounts. The key to making it work is to set up automatic contributions.
It’s called behavioral finance. Your long-term net worth will drop significantly if you don’t get into the habit of consistently contributing to these two accounts.
Invest in rental properties
The rental debt snowball looks like this:
- Buy a bunch of rental properties based on the income you think you need to stop working.
- Find properties that will rent for more than what the mortgage costs.
- Take the free cash flow every month and put it toward one of the mortgages until it’s paid off.
- When that first mortgage is paid off, roll that payment into the second mortgage to pay it down fast.
- Each successive house you pay down becomes a faster and faster progression toward eliminating the debt, turning your efforts into an exponential payoff.
- The paid-off rental properties can produce significant income rather quickly using this method.
Another strategy we talk about in our Six-Figure Debt to Six-Figure Net Worth course is becoming a professional real estate investor. Either you or your spouse can spend the majority of their time doing real estate work, with a minimum of 750 hours required.
Being a professional real estate investor allows you to write off losses against your other income. If you’re making $300,000 as a physician and you buy several properties a year, you can write off depreciation, remodeling expenses and appliance costs.
Start your own business
One of the best ways to grow your assets besides rentals is to start your own business. Many of the borrowers that we talk to during our student loan consults are afraid of owning their own business. But a professional services business has exceptionally low risk.
A doctor’s office, chiropractic office, and law office are stable professions with a low failure rate, especially when compared to the restaurant business. In St. Louis, for example, there are at least five barbeque restaurants within a mile of where I live. I don’t know how most of them stay in business. Although, several tend to close every now and then.
But if you think about the dynamics of a professional services business, it’s very low risk. Plus, you have the option of selling your practice if you decide to move on to other things.
Learn new skills
Learning a new skill is a great way to grow your assets. It’s often overlooked, even though that’s exactly what you did when you took out your student loans: You were investing in learning new skills.
You can get a positive return on your investment when you learn new things. If you’re a dentist, you might take an implant course. Knowing how to do implants and offering them as a service could help you earn more revenue in your practice. In this instance, spending $10,000 makes sense because you could earn tens of thousands of dollars extra every year.
Other courses can also give you a positive return if they allow you to retain more assets, grow your wealth faster, save more money or save on taxes.
Learning a new skill is a valuable thing to do, though reaping the benefits can take time after paying off the educational expense. Don’t let yourself get stressed out when your investment in new skills doesn’t earn an immediate return.
Why net worth isn’t your biggest problem
If you only put 5% into your wealth, you might justify the low contribution because you’re paying your student loans and aren’t able to save very well.
I’ve already talked about how your negative net worth is really a tax. So your problem isn’t your net worth or that you have debt. The real issue is that you’re only saving 5% and staying in your job as an employee way longer than you should because you’re afraid to take that next step.
There’s a greater risk if you don’t take chances when you have student loans. If you’ve already invested in your education, trusting a corporation to pay you fairly for 30 years is riskier than becoming your own boss where the default rate is three in 1,000.
Another risk is your happiness. Is it riskier to work full time when you’re unhappy and not feeling fulfilled? Or to negotiate different working conditions, such as a flexible schedule or more location independence?
Building your wealth as a student loan borrower
Giving up 20% of your income to pay your student loans and save toward your tax bomb sound like big obstacles to growing your net worth.
To grow your assets, you can’t coast through life. You need to put money into investment accounts, decide to own rentals, open your own practice or learn new skills.
You also need to learn how to make smart investment decisions for tax reasons, such as taking advantage of tax loopholes, using the right funds and accounts, and listening to the right people for investment advice.
Instead of working twice as hard, you can get strategic about growing your finances and become a millionaire by taking calculated risks to grow your net worth.