Which Should Take Priority When Building Wealth - Debt Reduction or Cash-Flow?

Updated: Dec 3, 2020


Here is what Padrick Scott, a Florida-based Certified Financial Planner (CFP) and Wealth Management Certified Professional (WMCP), has to say about the debt versus cash flow conversation:

"When making the decision on whether to reduce debt or increase assets and cash flow, one should adequately weigh emotional and economic factors. Emotionally, one might be frustrated with debt and prioritize everything around eliminating any liability. Whereas economically, paying debt down monthly and investing elsewhere might provide a greater monetary value in the long-term. Let’s break the economic factor down in two sectors:

Reframing Debt


It is amazing working with students who have student loan debt in their field of choice. Doctors, dentists, pharmacists, social workers, engineers or whomever it is with student loans might be absolutely ecstatic about taking on a mortgage and going into $380,000 of debt for a $400,000 home, but detest their $200,000 student loan debt. What they do not realize is, those $200,000 in student loans may have created a $300,000 annual salary. Over ten years of working that is $3 million of earnings, and over 30 years total that is about $9 million of cash generated off of a $200,000 down payment. Plus, when we account for inflation, that investment brings us north of $12 million in earnings.


Also, even if a $100,000 student loan only leads to a $50,000 a year salary, that is about $1.5 million in cash flow generated off of a $100,000 down payment. We have to start looking at our financial decisions as investments in ourselves to produce cash flow, the same way we would an investment in a business. Net Present Value and Net Worth

I want to introduce two business concepts here that guide investment decisions - net present value and net worth. These concepts push us to ask this key question about our personal financial decisions:


'Does this decision today, based off of the future earnings we could make in an investment elsewhere, increase or decrease our present day net worth?'


These metrics should drive how we prioritize our money absent emotional desires. The net worth metric, in particular, can have a substantial impact on our financial legacy.


In the simplest of terms, Net Worth = Assets – Liabilities.


Thus, to increase our net worth today, we can either increase our assets at a rate faster than we can decrease our liabilities, or decrease our liabilities at a rate faster than we can increase our assets.


Let's say we prioritize saving, investing and increasing cash flow and use a 7% interest rate as our benchmark. From there, we want to look at the interest rates tied to our debt. If the rate on our liabilities is higher than our benchmark, such as a credit card debt at 24% Annual Percentage Rate (APR), it is best we aggressively eliminate that high interest debt. On the other hand, if we have a car loan with a 3% APR, then we would rather pay that loan down monthly because each additional dollar we commit there is only locking in a 3% gain to our net worth, whereas we could have been locking in a 7% gain to our net worth by buy putting additional dollars into an investment account such as a Roth IRA that has tax-free growth. Identify goals, and then reallocate resources to capture the best net effect for your household. This is how I would recommend issuing a priority score to one's financial goals."


A native of Tallahassee, FL, Padric is a proud graduate of Florida Agricultural & Mechanical University. He is the Son of Rev. Dr. Edward R. Scott, II D.M.D. and Mrs. Pamela Scott. He has two siblings, Dr. Kanesha (James) Cole D.D.S, and Edward R. (Ayanah) Scott, III. He is the loving uncle of Scott and Kaylin Cole, and Aja Scott. Padric is a retired, five-year professional athlete. Prior to a professional sports career, he majored in Molecular Cell Biology with a Concentration in Physiology. Padric fell in love with wealth management during his time in the NFL, and has been in finance ever since 2013. His mission is to educate and elevate, teaching individuals to become generational change agents through sound stewardship of their resources. Padric loves His God, Church (Mt. Sinah A.M.E.), family, working out, and as a member of Kappa Alpha Psi Fraternity, Inc. believes strongly in the motto of “Achievement in Every Field of Human Endeavor.”


This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, investment or accounting advice. This information is not endorsed by a financial institution. You should consult your own tax, legal and accounting advisers before engaging in any transaction.

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The mission of The Little CPA is to share information I have learned as a Certified Public Accountant that will

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