Young Physicians Need to Tell Good Debt from Bad Debt
Most physicians begin their career with high expectations, tight budgets and high debt; and, it’s not unusual for young physicians to continue to incur more debt as they invest in their practice or attempt to finance a more lavish life style. From that point on, the debt they hold falls into one of two categories – it’s either good debt, or it’s bad debt. Needless to say that the more bad debt a person incurs, the less favorable it is for their financial situation or credit standing with lenders. Solo practitioners who rely on financing for capital need to be especially careful when incurring debt. It is helpful, then, to know the five ways to tell good debt from bad debt.
1. Good debt can make money
When used as leverage, debt can provide the capital needed for an investment that can produce a return greater than the cost of the debt. For solo practitioners, their best investment is usually their practice and they are in the best position to know what kind of return can be produced with an investment of capital.
2. Good debt buys appreciating assets
Using debt as leverage to buy an asset that will appreciate, such as a home, is considered a good use of debt. Recent experience reveals that good debt can turn to bad debt should the underlying asset underperform or depreciate in value.
3. Good debt pays for good things
When an essential expenditure can do a lot of good and the capital is not available, a debt can be good if the family or business will be better off as a result. One example is borrowing money to pay for college expenses.
4. Bad debt buys consumable products
When a credit card is used to buy groceries or clothes, the debt is being applied to products that will be consumed and, ultimately, lose all of its value. Most consumer products, such as cars are depreciating assets which mean that the value of the asset could actually be worth less than the amount of the loan.
5. Bad debt buys things you can’t afford
Purchases made with a credit card are often unaffordable which is why a credit card was used in the first place. Many of these purchases are non-essential, for instance an upgraded TV, which makes the bad debt even worse.