AFTCO
w w w. a f t c o . n e t
1.800.232.3826
Good Debt vs. Bad Debt
t would be wonderful if we could all go through life doctor tell me that a patient was passing by and looked
I completely free of debt. There are a fortunate few
who are born into wealth, who have enough money
to provide for themselves and go through life free of
in his window, saw his new equipment, and decided to
pay a visit. Indeed, I’ve heard as much praise by patients
for 20 year old reconditioned equipment as I’ve ever
debt. Then there are the rest of us who face debt as a heard for the new, incredibly expensive equipment that
fact of everyday life (something you learn to contend was recently purchased for a new office.
with, live with, and yes, for many of us, die with it). Now, if you think cars depreciate quickly, wait until
Unfortunately, it’s even something we can pass on to our you see the resale value of healthcare equipment. The
children someday. resale value of a car may depreciate up to thirty percent
If you are already wealthy, then you may want to the first year, but healthcare equipment will depreciate
read this article just to see how the rest of us live. If you up to ninety percent of its original cost the first year! So,
are not one of the wealthy, then you should read this since new, expensive replacement equipment does not
article closely. produce patients, it is a non-income producing expense.
It's true that having no debt is the best, but if it is a It is a rapidly depreciating expense to boot, all of which
fact of life for you, then it’s important that you keep cer- adds up to “bad debt”. New equipment required for new
tain things in mind when you are considering debt. procedures, however, can increase income and therefore
There are basically two kinds of debt: bad debt and good is considered "good debt”.
debt. What kind of debt could be good when we’ve Now, what is good debt for a doctor? Where can
always been told that debt is bad? one find investment or income producing debt? Where
Good debt is debt for an appreciating asset; bad can one invest in an income producing asset that appre-
debt is for a depreciating asset. Good debt provides ciates in value, not depreciates?
income; bad debt provides expenses. The answer... buy an existing practice. You incur
Educational debt, for example, is a fact of life for debt, but the current income stream of the practice
many of us, but we should view it as an investment in exceeds expenses and debt service (the money required
our future. We’d like to think it will provide us with an to pay off the debt), thereby providing income (income
opportunity to increase our future income, so that makes producing debt).
it good debt. Good income producing practices do not depreciate
Debt for an unaffordable expensive car would be in value; they appreciate. It is not an expense; it is an
considered bad debt since it is an unnecessary expense investment. You will almost assuredly be able to sell it
that provides no income and depreciates in value. Debt someday for more than you paid for it (if you don’t pay
for something that depreciates and provides no income more for it than you should).
would certainly be considered bad debt. Buying a practice is similar to buying a bond or a
An education is an investment that appreciates in bank C.D. Both are income producing investments (the
value by increasing future income potential... the car is a C.D. pays interest, the practice provides income). Both
depreciating expense that will provide no income and will appreciate in value (the interest accumulates in the C.D.,
rapidly depreciate in value (uses up income instead of the practice increases in value over time). In addition,
providing income). The expensive car may be more fun they both are considered a sure and safe investment.
to have, but the education will be the best investment. The biggest advantage a practice has over the
Now, let’s take a look at good and bad debt for the C.D., however, is that the IRS allows you to depreciate
average doctor who is ready to enter private practice. the cost of purchasing the practice even though the
Many new practitioners get caught up with opening practice appreciates in value! This represents a pre-tax
brand new, shiny offices with all the latest and expensive investment, which is considered the most desirable by
gadgetry. This idea is promoted heavily by those who astute investors. Of course, you cannot depreciate the
profit from the sale of such gadgetry. C.D., so this represents an after-tax investment, which
Tens of thousands of dollars can be invested by a is far more costly, and the income from the C.D. pales
new practitioner for equipment, furniture and leasehold when compared to the income produced through the
improvements before the first patient ever walks practice investment.
through the door. Interestingly enough, I’ve never heard Income producing debt is good debt... non-income
of one patient who was ever drawn to a practice because producing debt is bad debt. It’s a simple rule based on
of the equipment the doctor was using. I’ve never had a logic. Think about it!
4108