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Blogs

Practice Administration

Young Dentists and Money: Part I - Debt

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In this blog post, I’m going to talk about debt, and in Part II be about saving. The following are some financial mistakes that young dentists often make, which should be avoided.

 

Marriage 

At the top of the list for financial mistakes (or life mistakes in general) is marrying the wrong woman or the wrong man. Nothing else, other than losing your dental license, will be more expensive. We’re not going to go into specifics on this topic in either one of these blogs, but this can be extremely financially debilitating to both parties.

 

Purchasing Your Home 

The next mistake to avoid is buying a home before building your practice. It is critical to establish your practice before buying your house. A lot of clinicians will buy a home before purchasing a practice, which makes it extremely difficult to save anything. In your practice, you already have a big loan, new employees to deal with, insurance, billing, treatment plans; in short, you already have a lot of stress in your life. Plus you’re trying to improve your efficiency so the practice will be profitable. If you have a large mortgage hanging over your head also, that increases the stress tremendously and makes it more difficult to establish a good practice. Buy the home AFTER you have your practice established.

 

Mortgage 

The next tip I have is never spend more than double your income on your mortgage. Early retirees, anyone I know that retired before their 60s, never had a home loan that was more than double their income. Sure, you can get higher-priced homes, but they severely erode your ability to save. More expensive homes have often require upgrades and more maintenance, which makes it even harder to save, so always try to keep your home loans no more than double your income.

 

Buying Cars 

Always pay cash for cars. A very wise certified financial planner, when I was first getting into this business, gave me a very important piece of advice. He said, “Never take out a loan for anything that depreciates in value”. Most of our consumer goods do, especially autos. Pay cash.

 

On the other hand, practice loans do NOT depreciate. They actually aid you in earning income and building equity in your practice. Practice loans are good things. But do ensure your practice loan is not so high that you can’t save consistently. When you do take on a practice loan, make sure you have money left over to save at the same time.

 

Repaying Student Loans 

Student loans are outrageous today compared to what they were in my day. What do you do? Do you pay off your student debt slowly, or do you suck it up and pay as quickly as you can?

 

According to Dave Ramsay, financial author and television personality, it is better to pay off student loans as quickly as possible. Those who don’t pay off their loans right away may fall victim to, what he calls, “Docitis”. Some of the symptoms of Docitis include expensive, leased luxury cars and a fully furnished house with a pool on a country club. This is a financially debilitating disease, he writes. You’ve been living on next-to-nothing for a while now; just keep on doing that for a little longer and you can have that student loan paid off in a few years. I would postpone any retirement savings and buying a home until you’ve completely repaid the loan and have an emergency fund of $50,000 in place.

 

I think Ramsay offers very wise words, and there are a couple of reasons for that. Number one, yes, you can get a 30-year mortgage for your loan. You can pay $1,500, $2,000, $2,500 per month forever, but it makes it really tough to save in your 40s and your 50s if you still have student loans. Talking to doctors who still have student loans in their 40s, I always hear that if they could do it again, they would have paid off that debt as quickly as possible.

 

Not only does the student loan hurt your ability to save, but it establishes a mental framework of debt where you begin to think debt is good or okay. You start to say to yourself I need to get a student loan, I need car loans, I’m going to have a mortgage for 30 years, the practice loans will be about 10 years, I’m already going to have a fair amount of debt. You put that all together and you could be $10,000 or more per month in debt. That mentality is TOTALLY financially debilitating, and delays saving until your mid-40s or later. You have to start saving well before then. Knock out that student loan before a practice loan, and before a home loan.

 

This is the end of Part I of this blog post about dentistry and debt. Keep an eye out for Part II coming in the next couple of weeks, or Click Here to View This Video