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Know the Difference between Good and Bad Debt

Posted by Erick Cutler, CPA on Dec 20, 2016 5:11:52 PM

You’ve probably heard the saying, “You’ve got to spend money to make money.” That’s definitely true for dentists. To thrive financially in your profession, you must spend money...

lots of money. In fact, to achieve your goals, you will probably need to take on debt.

The prospect of going into debt often elicits panic in fiscally responsible individuals. After all, debt is bad. Debtors don’t know how to manage money. They are doomed to living their life at the mercy of others. In some cases that’s true, but in other cases the opposite is true. There is good debt and there is bad debt. Good debt is necessary and temporary, and it actually brings you closer to your ultimate goal: financial solvency.

Bad Debt: Impulse Purchases, Unproven Technologies and Depreciating Assets

A common example of bad debt is financing a brand-new luxury car. You pay a premium for “brand-new” and “luxury.” The moment you drive it off the lot, it depreciates in value. Yes, you need a car. But you don’t need that car. Bad debt is usually associated with wants rather than needs and offers minimal or no return on investment.

Another example of bad debt many dentists fall victim to is buying the latest equipment as soon as it hits the market. The pitfall here is not necessarily the equipment, it’s the timing. Manufacturers must constantly bring new technologies to the market to stay in business. Some prove themselves beneficial, while others turn out to be lemons. If you’re among the first to invest in the newest toys of the trade, you’re essentially a guinea pig. You may discover over the long term that you’ve made a sound investment. Or, you may end up shelving your expensive new gadget because it’s too difficult to use or because patients don’t like it. Looking for a better option? Invest in equipment with a track record of reliability and usefulness. That’s good debt.

Good Debt: Investments That Will Pay Dividends Into the Future

Your first professional experience with good debt was probably your investment in your education. Student loans are debts, but they set you up for lifelong financial success. The same holds true for continuing education. Going back to school to become licensed in prosthodontics or endodontics, for example, will lead to additional patients. That’s good debt.

Dentists often struggle to decide whether to purchase their own building or lease space for their practice. Buying real estate represents good debt, because land isn’t subject to the law of diminishing returns. Land is a valuable finite resource and will always be in demand. The line does begin to blur when considering architectural and design choices that must be made when constructing a new building or upgrading a dated office you purchase. Choices that are too extravagant or overly trendy may become examples of bad debt because they represent unnecessary expenses or expenses that won’t stand the test of time. Err toward the conservative to remain on debt’s good side.

Whether you’re paying off student loans from dental school or purchasing a new practice, debt is inevitable. Don’t fear it, but do be mindful of what type of debt it is. Is it necessary? Will it help you grow your business or improve patient satisfaction? Is there a less expensive but equally effective alternative?

Dentists aren’t immune to downturns. Avoiding bad debt (and saving that money instead) will help you survive those downturns. Experts agree it’s wise for dental practices to retain enough financial reserves to cover expenses if income suddenly drops 25 percent in a month. Hopefully, that won’t happen in your practice. If it does, you’ll be glad you took a conservative approach to taking on debt.

Contact the dental team at Goldin Peiser & Peiser for additional information on making your practice financially secure.

 Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article. 

 

Topics: Dental