When Should I Pay Off My Debt?

For someone without a lot of financial expertise, it may seem obvious that if you’re in debt, you should pay it off as soon as possible. And that assumption can get your dental practice in a lot of trouble.

People hate being in debt, and dentists tend to hate it even more than the general population because they have so much of it. So when they have money available, they’ll tend to put it towards paying it down as quickly as they can. There’s a battle between emotion and logic a lot of the time – the emotional decision is to accelerate debt, while the logical decision is to hold off and invest the money.

Read the Guide: Financial Planning for Dentists

It’s a hard decision to make. Debt can be frightening, and the emotional side of it is powerful. Add in the fact that retirement savings is more abstract – retirement is a lot farther away, while debt is here now – and without guidance, the decision can be pretty hard to make.

One of the first things to think about is what kind of debt you have. There’s actually good and bad debt. Good debt is something like taking out a loan to buy a new piece of equipment for your practice, or your mortgage. An example of bad debt is a high-interest credit card. If you have a lot of bad debt, that should be eliminated – but good debt can be managed more gradually. In terms of taking on new debt this comes into play again: why are you putting yourself in debt? If it’s for something that will help your practice be more productive, that’s fine. But if you’re just living outside your means, well, stop doing that.

When deciding whether to invest or pay down debt, think about the opportunity cost. If you use money on something, you obviously can’t use it on something else – so think carefully about what you’re losing when you’re gaining something else. The simple answer is that you should strike a balance between debt and savings, but the current situation leans a little bit more in one direction than the other.

Interest rates today are the lowest they’ve ever been, and probably the lowest that they will ever be. Now is actually the best time in the history of money to be in debt. So why would you be in such a hurry to get out of it? Low rates mean that your practice debt compounds less than it would with higher rates, and the interest is tax deductible anyway.

On the other hand, if you fail to invest now in your retirement, you will miss out on returns for every day your money’s not in the market. An intelligent capital preservation strategy is critical as well – to focus on saving more and taking less risk with that money in the market. If you don’t invest in your future now, you’ll have a lot of catching up to do in the future.

You can’t make up for age. The idea of compounding of interest over time makes this very clear. There’s too much to be lost by failing to invest now, too much money to lose by failing to get returns for years while you concentrate on paying off debts that aren’t hurting you that much.

So what should you be doing? Pay off bad debt first. Then concentrate more on saving money and investing it in your retirement now, putting yourself on the prudent path. Once you’re on your way towards a healthy retirement, then you can start building a strategy to pay down your good debt as long as you are also making what you want from the practice. Make your decisions based on numbers and logic, not on emotion. Debt might not be fun, but it’s a lot more fun than realizing you can’t retire until you’re 80.