Debt2.PDF

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2001 by Scott Philippson-Lamontagne

This publication is designed to provide competent and reliable information regarding the
subject matter covered. However it is sold with the understanding that the author is not
engaged in rendering legal, financial, or other professional advice. Laws vary from state to
state and if legal or other professional assistance is required, the services of an expert
should be sought. The author specifically disclaims any liability that is incurred from the
use or application of the contents of this book.

Electronic distribution of this book is strictly prohibited.

Requests for reproduction or distribution of this book should be sent to:

Scott Philippson-Lamontagne
E-Mail: philippsonlamo@cs.com

A special thank you to my wife Jodi who has been instrumental in the development and
editorial assistance with this endeavor. Without her, my amateur writing would be even
more apparent.

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Table of Contents

Chapter 1: Three Formalities

Chapter 2: Introduction

Chapter 3: Emotion and Money – Why the Struggle?

Chapter 4: Learn the Logic!

Chapter 5: Will You Buy Me a New Car?

Chapter 6: Closing Comments

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Chapter One

Three Formalities

#1 It is my intention to introduce an alternative way for you to think about debt,
money, and income producing assets. It is not my intention to be an authority on
these matters. I am not an attorney, CPA, Accountant, Certified Financial Planner,
Miracle Worker, or Counselor of any type. Furthermore, I recommend seeking the
assistance of the appropriate professionals and assembling your team of advisors
before implementing any ideas brought forth in this E-Book or anywhere else.

#2 I also would like to implore you not to violate this Copyright by distributing this
book in electronic or printed format. That would be bad business, bad karma, and
just a bad thing to do. Additional copies can be purchased by contacting me directly
at philippsonlamo@cs.com. Volume discounts will apply.

#3 Feedback, testimonials, and suggestions are encouraged and appreciated. The
good, bad, and the ugly will certainly improve future editions of this E-book and
inspire additional topics for the series. I also welcome the opportunity to meet other
like-minded people. Feel free to contact me at philippsonlamo@cs.com.

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Chapter Two

Introduction

Hello and thank you for purchasing this E-book. My name is Scott Philippson-
Lamontagne and I am a serial entrepreneur. I have experienced the joys and the
pains of owning various businesses and investments. From a franchise that used my
money, blood, sweat, and many tears to a multi-million dollar advertising firm that
used my partners money and my time, to my network marketing business which
affords my wife and I ultimate leverage and the ability to help average people we
don’t even know claim their financial freedom. And of course, our investments,
always carried under the appropriate entities!

After selling our ownership in the advertising firm, which still pays us today, my wife
and I began to focus our attention more strategically on developing income producing
assets that fully leverage both our time and our money. We pattern ourselves after
the thought processes and behaviors of other wealthy individuals.

Many of you are familiar with the work of Robert Kiyosaki and the power behind his
CASHFLOW

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101 educational board game. Through experiential learning,

participants learn the true value of acquiring incoming producing assets. As a
certified facilitator of CASHFLOW

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101 events across the nation, I am continually

amazed at the emotional struggle people go through when dealing with debt. Event
after event, the topics of debt and money management always stir the most interest
and confusion.

I believe it is the emotion that this topic creates that is the barrier for many would be
investors. Fear of making the wrong decision creates paralysis. Yet there is a
wonderful transformation that occurs when individuals learn to eliminate the
emotion in their financial decision-making. It is as if a sense of clarity overcomes
them and logic reigns. Two questions arise. First, how do astute investors gain this
clarity? Second, how can the rest of us get it?

Professional investors are no different than many other naturally talented people in
other industries. Whether a sports star, corporate executive, or investor, some people
can explain and teach their talents and others are simply intuitive enough to produce
tremendous results yet have difficulty articulating why. Since not everyone has the
“Midas Touch,” this E-Book is about exploring how anyone can pattern their
behavior and gain clarity around issues of debt and investing. The objective is that
debt be viewed as nothing more or less than a tool that can be utilized to achieve
financial objectives.

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Chapter Three

Emotion and Money – Why the Struggle?

Okay, we are all guilty of it…the proverbial question, “Should I or should I not?”
You know what I mean. “Should I buy that stock? Should I pay off the car first or
the credit cards? Is it better to pay off the mortgage early or start a retirement
account?”

We’ve all asked these questions at one time or another. If you purchased this book
with the hope that somehow I will provide you with the answers to these questions
you will probably be disappointed. You see, my goal is not to provide answers, but to
help you learn, as I have, to use reason and logic to allow the numbers to provide the
answers.

It really should be no surprise that we struggle with financial decisions. Society just
doesn’t teach us how to deal with our finances, especially debt. And if it’s not debt,
it’s which investments should I buy? Should I buy a new car? Can I afford a new
house? The problem is not the questions, but how we arrive at the answers. In my
experience, people base their decisions on emotion. So what is the solution?

Let’s replace emotion with logic!

Logic. Sounds simple right? Actually, it is. But before we share the secret, I need
establish a foundation that will guide us through the following chapters.

First, we will not be discussing specific investments, at least not in detail. This is not a
how to invest guide. Specific references to individual investments will be for
illustrative purposes only. This E-Book provides basic knowledge on debt and
investment comparisons for education purposes. I will refer to several strategies that
assist me in eliminating the guesswork in my personal and professional financial
worlds. We will then explore some ways this newfound knowledge could be applied.

Let’s Get Started!

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Chapter Four

Learn the Logic!

One thing that every major investor that I have ever met has in common is an
incredible ability to always drill it down to the numbers. That’s it! The big secret
you were waiting for is in the numbers. As long as you give them their voice, the
numbers tell you when to pay off debt, which investment to make, when and how to
borrow.

The “story” doesn’t matter. Astute investors simply pay little attention to the drama
around the deal. Have you ever seen a banker or investor look at a business plan?
The first thing he/she will do is head straight to the financial section. Then of course
industry, marketing, competition, etc. will be reviewed. Assuming that the numbers
work of course! After all, why waste time if the deal doesn’t fit the financial strategy
of the investor?

Now enough about the story, let’s learn the numbers!

ROI (Return on Investment)

ROI or Return on Investment is a percentage ratio that is used most often as a
measurement of performance or yield of a given investment for a given period of
time, usually on an annual basis. It is derived by taking the Net Annual Cash Flow,
and dividing by the Total Cash Investment.

ROI = Net Annual Cashflow / Total Cash Investment

Net Annual Cashflow is the amount of money remaining after all expenses and debt
services (if applicable) of the investment have been paid.

For Example:

Let’s say that I have a 3 Bedroom rental house:

Cost: $100,000
Mortgage: $90,000
Down Payment: $10,000
Rent: $900 p/mo

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Monthly Expenses & Debt Service: $798.77

To get the Net Cashflow subtract Rent from Monthly Expenses:

$900 – $798.77 = $101.23

Now annualize Net Cashflow:

$101.23 x 12 months = $1214.76

Net Annual Cashflow = $1214.76

To compute ROI, simply divide Net Annual Cashflow by Total Cash Investment:

$1214.76 / $10,000 = 12.15%

ROI = 12.15%

*There are other factors in Real Estate investing, such as appreciation in market value, tax advantages from
depreciation amortization, and equity gained from mortgage pay down, that are not included for the purpose
of simplicity in our illustration.

ROI is somewhat of a generic term used in investing because it can be applied to
virtually any type of investment. ROI is frequently called CCR (Cash on Cash
Return), Annual Return, Annual Yield, and Rate of Return.

CR (Capital Requirements)

CR, or Capital Requirement, is the amount of money required for the investment, at
a given ROI, in order to accomplish a specific goal. It is sometimes helpful for
investors to understand the total amount of capital needed to fund enough assets to
pay for a specific debt or expense.

CR = Annual Expense / ROI

For example, I asked a friend who wanted to generate enough passive income to quit
her job what it would take for her to be able to retire. Her reply? Good luck and a
small miracle! By the way, that’s the “story”. The real answer, if she’s serious, is in
the numbers. Take a look!

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Annual Living Expenses: $33,798
*Expected ROI: 24%

$33,798 / .24 = $139,900

CR = $139,000

*It is important to have an accurate understanding of what ROI can be expected from an overall portfolio in
order to obtain CR. Each asset class will have different norms; again, this is why I work with a team of experts.

In other words if she could invest $139,000 at 24% return, she could quit her job.

The same formula can be utilized to compute CR to cover a specific debt service or
virtually any specific cash flow or group of cash flow requirement. This concept will
be explored in greater detail soon.

RROI (Reverse Return on Investment)

RROI or Reverse Return on Investment is a term that I coined (at least I have not
seen this term used by anyone else) to describe the benchmark that I use in relation to
decisions about paying off debt.

Using this formula, you can derive a number that can be used to compare two uses
for cash, i.e. buy an asset or pay off debt, or decide which debt to pay off. It is
derived by taking the Total Annual Payments, and divide by the Total Balance Due.

RROI = Total Annual Payments / Total Balance Due

Example #1:

Let’s compute the RROI of a hypothetical car loan:

Car Loan Balance: $10,000
Monthly Payment: $253.63
Total Annual Payment: $3,043.51 ($253.63 x 12 months)

RROI = $3,043.51 / $10,000

RROI = 30.44%

Taking it a step further, let’s say we are trying to decide whether we should pay off
the car loan, or invest in Certificate of Deposit at the bank?

RROI of car loan = 30.44%

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ROI of the CD = 5.25%

What would you rather have, 30.44% or 5.25%? Since the RROI is 30.44%, the CD
would need to have an ROI greater then 30.44% to make it the logical choice. The
ROI of the CD was only 5.25% so I would chose to pay off the car loan. See how easy
the decisions become when we apply logic!

Example #2:

Let’s assume I still had a job, and I did such a good job that I got a big fat bonus!
Should I pay down my mortgage or invest in real estate?

Bonus = $10,000
Mortgage Balance Due = $95,000
Monthly Mortgage Payment = $798
Expected ROI from Real Estate Investment = 19%

RROI = Total Annual Payments / Total Balance Due

RROI = $9,576 ($798 x 12 months) / $95,000

RROI = 10%

RROI of Mortgage = 10% vs. Expected ROI from Real Estate = 19%

Since the Expected ROI from the Real Estate Investment is greater then the RROI of
Mortgage I would choose to invest the money in real estate.

The possibilities for applying this logic are endless! The idea is to let the numbers tell
you what to do instead of your in laws, neighbors, or bar-buddies! Not that we don’t
love them but, they just haven’t learned our little secrets! By plugging the numbers
into the formulas, one can look at just about any financial circumstance in a new
objective way.

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Chapter Five

Will You Buy Me a New Car?

As I became more proficient at using the numbers to guide my decision-making, I
also got more strategic about my financial decisions. By using rules and strategies I
took the final step in removing the effects of emotion and subjectivity. I became an
objectivity slinging, no gray area tolerating, financial guru in my own mind!

You see the “deals” themselves are rarely ever good or bad. It depends on the
situation. For example, if I could buy a single-family home, as a rental that would
require $10,000 down and would provide a 7% ROI and my RROI on my Visa Card
is 24% it may not be a “good” deal for me. Now lets say that I am debt free, just
cashed out of another deal and I have $100,000 sitting in a bank earning only 2 ½ %,
I would be ecstatic to do that deal!

I always assess my current situation prior to determining the “Rules” that will
support my strategy. Using the above situation as an example, I might have a rule
that I will buy any asset that requires no more then $10,000 cash and returns a
minimum of 24%. All I have done is benchmarked my current situation, in this case
the RROI on my Visa card, and created a rule with it. Now decisions are simple,
either the deal meets the requirements or it does not.

My favorite rule is that I will not pay for my own debt. It’s not that I am a credit
scoundrel; on the contrary I have excellent credit. It’s just that if I acquire any
personal debt, I focus on creating an asset that will pay the debt for me. Let’s say I
have a car payment of $425 per month. I might do a real estate deal, or start a
network marketing business that would provide the necessary income stream to cover
the monthly payment. Key: I have to actually use the money to pay the debt!

After converting existing debt, I can use the same rule to help make future
purchasing decisions. Robert Kiyosaki said it best when he wrote that when he
wanted a new Porsche, he went out and created an asset to pay for it.

When creating rules and strategies I always consider CR. Knowing cash
requirements assists in developing rules. For example, if someone needs a CR of
$210,000 to cover all monthly expenses, and they only have a few thousand dollars to
start with, they may not want to limit themselves to the deals that produce positive
cash flow but have little chance of appreciating. In other words, it might make sense
to invest in growth stocks or real estate that has a good chance of appreciation, or any
other asset that would be considered a capital gain investment. After the asset

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appreciates, the strategy is to sell the asset and be closer to the original CR. Then re-
assess and reinvest to get closer to achieving the goal. Time horizon is certainly an
important factor in the decision process.

Another favorite rule of many wealthy investors is to pay for personal debt and
expenses with tax-free income. That’s right TAX FREE! This can be accomplished
with real estate, which can be depreciated over a period of time. This depreciation
can in many cases create a “loss” on paper. This loss under some circumstances can
be carried over as a tax shelter lowering overall personal income taxes, not to
mention that the cash flow the property generates would be tax-free. This tax-free
income is often used to pay other personal debt or expenses.

I love this game! Don’t you? As you may realize there are a lot of factors that are
out of scope for this E-Book. There are many books on these types of investments
available on the market. Check E-Bay

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or your local bookstore.

With a clear understanding of these principles, I have become much more
comfortable in making financial decisions. Going against popular “wisdom” I have
actually borrowed money from a credit card to fund an asset. Now come down off
the ceiling and hear me out. I came across a good opportunity for my situation at the
time but did not have the cash to do it. I had the chance to purchase two older mobile
homes at below wholesale costs.

My wife and I often buy these older homes, mark them up and resell them with a
small down payment and carry the mortgage for the rest. (We actually bought a
three-bedroom two-bathroom mobile home with a working fireplace for $100 from
two fighting transvestites. It was worth it for the entertainment value alone, not to
mention the $12,220 mortgage that we owned after we sold it.) Anyway, the total
price for both homes was about $8,650. Here is how it worked out:

Home #1

Cost: $6,100 (including holding costs)
Sale Price: $12,950
Down Payment: $500
Mortgage: $12,450
Term: 60 Months
Interest: 13.75%
Monthly Payment: $288.08
ROI: 62%

Home #2

Cost: $2,550 (including holding costs)
Sales Price: $13,950
Down Payment: $750
Mortgage: $13,200
Term: 60 Months
Interest: 13.75%
Monthly Payment: $305.43
ROI: 204%

*ROI is calculated using your cost basis. On Home #2 our basis was $2,550 minus the
$750 down payment making it $1,800.

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ROI = Annual Cashflow ($305.43 x 12 Mo.) / Total Cash Investment ($1800)

In this particular case my credit card had 14.95% interest, and based on a $200 per
month payment, a 30% RROI. Compared to either number the ROI on the mobile
homes is significantly higher, not to mention the fact that my monthly cash flow
increased by $393.51 per month after my $200 credit card payment. Which way
would you have gone?

Bear in mind that it is against the rules to borrow money to purchase securities. It is
not against the rules to use a credit card to pay other expenses and use that money to
invest freely. I am not suggesting that you implement this strategy. I am suggesting
you expand your thinking!

It is very important to understand all of the ins and outs of any investment to
properly cover risk. So please only make-educated decisions and understand the tax
ramifications of any investment prior to purchase. Investing is best as a team sport;
use your advisors, i.e. CPA, Tax Attorney, Financial Planner, etc. Just make sure
that they are able to keep up with your newfound techniques!

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Chapter Six

Closing Comments

I hope I gave you what you needed in this E-Book. Thanks again for putting up with
my cheap graphics, and mediocre writing skills. Like I said, not my areas of
expertise! Before we say goodbye, a few last thoughts.

It doesn’t necessarily take your money to invest. There are many people out there
that will be glad to get a few more points on their ROIs. If you do not have the cash
to invest, find a friend that does and bring them a deal. Then work out a fair way to
split the deal. Also, if you find a deal that does not fit your strategy, find someone else
that would like the deal at hand, then play matchmaker, for a fee of course.

I have found that if I poke around enough, I can always find something interesting. I
recently heard Robert Kiyosaki speak and one of the things that he said was
appropriate for this point in our discussion: “There is more than a trillion dollars that
exchanges hands each day, you can’t catch a few bucks?”

Question: If you pay off your debt, once paid, what do you have left over? If you’re
lucky, a tangible item such as a car or house, but in many cases little or nothing is left
to show for your efforts. If instead, you create an asset to that will pay for the debt,
when the debt is retired, you still have an income-producing asset…and by the way,
you still have all the gizmos and gadgets that you got into debt in the first place.

Thanks again and happy number crunching!