Not all Debt is bad!!!

DEBT IS NOT ALWAYS BAD
By Mark Diekmann, D.D.S.
In a perfect world everyone would be debt free. There are a fortunate few who have enough money to go through life completely free of debt. And then there are the rest of us who face debt as a fact of everyday life.

If debt is a fact of life for you, then it’s important you keep certain things in mind when you are considering debt. There are basically two kinds of debt: bad debt and good debt. What kind of debt could be good when we’ve always been told that debt is bad?

Good debt is incurred to acquire an appreciating asset – provides a new source of income; bad debt is debt incurred to acquire a depreciating asset - creates the responsibility of added expense.

Educational debt, for example, should be viewed as an investment in our future. Typically, educational debt will provide us with an opportunity to increase our future income - that makes debt incurred for higher education a good debt.

Debt for an expensive car would be considered bad debt since it is an unnecessary expense that provides no income and depreciates in value – that makes this type of debt a bad debt.

Now, let’s take a look at good and bad debt as it relates to the average doctor who is ready to enter private practice. Many new practitioners get caught up with opening brand new, shiny offices with all the latest and expensive gadgetry. Those who profit from the sale of such gadgetry promote this idea heavily.

Tens of thousands of dollars can be invested by a new practitioner for new equipment, new furniture and expensive leasehold improvements before the first patient ever walks through the door.

Interestingly enough, we have never heard of one single patient who was ever drawn to a practice because of the equipment the doctor was using. We have never had a doctor tell us that a patient was passing by and looked in his window, saw his new equipment, and decided to come in. The fact is patients don’t know if dental equipment is new or 20 years old as long as the old equipment is in good condition and clean.

Now, if you think cars depreciate quickly, wait until you see the resale value of used dental equipment. The resale value of a car may depreciate up to thirty percent the first year, but dental equipment will depreciate up to ninety percent of its original cost the first year! So, since new, expensive replacement equipment does not produce any new patients and creates a non-income producing expense and is a rapidly depreciating investment, debt associated with this new equipment would be what kind of debt? Right, “bad debt.” NOTE: New or used equipment that is required for a new procedure that will increase practice income would be considered "good debt."

So, what can a doctor invest in that is an income-producing asset that appreciates in value?

The answer... an existing dental practice. Yes, you will incur debt to purchase the practice, but the current income stream of the practice far exceeds the expenses and the debt service (the money required to pay off the debt), thereby providing income (income producing debt).

Good income producing practices do not depreciate in value; they appreciate. It is not an expense; it is an investment. You will almost assuredly be able to sell it someday for more than you paid for it and the investment will produce an annual income throughout your entire career.

Buying a dental practice is similar to buying a Certificate of Deposit (C.D.) at the bank. Both are income-producing investments (the C.D. pays interest, the practice provides income). Both appreciate in value (the interest accumulates in the C.D., the practice increases in value over time). In addition, they both are considered a sure and safe investment.

But the practice has a definite advantage over a C.D. The IRS allows you to depreciate the cost of purchasing a practice even though the practice appreciates in value! This means that the dollars used to acquire a practice are pre-tax dollars (which is considered the most desirable by astute investors). Of course, you cannot depreciate the C.D., so this represents an after-tax investment, which is far more costly, and the income from the C.D. pales when compared to the income produced through the practice investment.

If you are not blessed with wealth and have to incur debt to get ahead in life, then make your debt decisions wisely. Income producing debt is good debt... non-income producing debt is bad debt. It’s a simple rule based on logic. Think about it! Call PARAGON today. You will be glad you did!



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