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The Important Difference Between Good and Bad Debt for Doctors

Can debt be good? Or it all bad? These are important questions to ask.

A straw poll of most people would likely reveal an overwhelming majority who believe that all money owed is bad.

I wouldn’t be surprised to find that an even greater majority of physicians believe that all debt is bad. We spend so much of our lives under the burden of student loans. Physicians also notoriously use borrowed money to finance the lifestyle and gratification that they have delayed for so long.

But the real question is, “Are these two types of debts (student and consumer) the same?”

Debt can be good

Or it can be horrible. There is of course some in between, some grey area. But I like to think of being a debtor in a more or less binary way. It’s good or it’s bad.

So, what is good debt?

I’ll borrow my definition from Robert Kiyosaki in his book, Cashflow Quadrant.

Debt is good if you are compensated or paid for taking it on.

good debt

You may be screaming at the computer or phone screen right now saying that this is not possible. When we borrow money, we have to pay interest on top of the principle. So, how the heck would we get compensated for the debts that we take on?

I’ll answer this all important question a bit further on. Stay with me.

What is bad debt?

Well, it’s the inverse of good debt.

Therefore, it’s debt that you are not compensated or paid to take on. I would venture to guess that most of the debt that most physicians think of fall into this category.

Recipe for success

The formula for financial success in general, and especially as a physician, is quite simple. I’ve shared it before here.

It’s worth repeating here in the context of this post.

Interest can be working for you or working against you.

The sooner and more effectively that you reduce the interest working against you (bad debt) and maximize the interest working for you (investing in assets like stocks, bonds, and real estate), the quicker you will reach financial success.

Reducing bad debts by paying them off and increasing your income producing assets to reach financial success makes sense.

However, you can also use good debt to improve your ability to accrue income producing assets.

A quick aside

This is an important distinction that I am about to make.

When I say that you can use good debt to accrue assets, I am NOT talking about so-called “interest arbitrage.” This is the idea that if you have, say, a car loan for 5%, you minimally pay the car note and instead invest in index funds with a yield of 7%. Some people are in favor of this as rationally it makes sense to take the extra 2% return that you will get.

I am not saying interest arbitrage is right or wrong. That’s a discussion for another post and in the end, it is always a personal decision.

I am just saying that interest arbitrage is not an example of using good debt to buy income-producing assets. Remember, good debt pays you to take it on. In the example above, you car note is, by definition, bad debt. You are not paid to take it on. Even if you are employing interest arbitrage. Imagine, if you didn’t have the car loan, you would have gains of 7% instead of 2%.

Don’t kid yourself into thinking that you are somehow making more money because of the car loan. You aren’t. It’s bad debt.

Making debt work for you, not against you

So, how can we use good debts to increase our financial well-being.

In my mind, the two most common examples are loans for investment real estate and, yes, student loans.

Let’s start with student loans first

Student loans are the bane of a doctor’s existence.

I still have over $400,000 of student debt to pay off. I hate paying over $10,000 each month. But that is what I do to get rid of them in 5 years or less.

So why am I saying that student loans are good debt?

Up until even recently, I didn’t feel this way myself. But then I started to look at them from a different perspective. My student loans are what paid for my education that ultimate led to my job as a plastic surgeon. That job pays well. Over my lifetime, it will pay me many, many multiples more than what my student loans are. Especially by paying it off ASAP (in 5 years or less).

So, in this case, my student loans are loans that I will be paid to take on.

However, this is not always the case

Student loans are not always good though. What if I had become a grade school teacher instead of a plastic surgeon. My income would be much less and the amount of loans that I took out (even excluding the ones for medical school) would be terrible debt. This may even be true if I had become a primary care doctor instead of a plastic surgeon. I am not saying that this is right, just that it is the current reality.

The lesson here is that we need to be cognizant of how much debt we are taking on based on our likely future income. I absolutely did not do this. I got lucky that I fell in love with plastic surgery.

The second case in which student debt is very bad is if it is not paid off quickly. Drag on your student loans and you will pay hundreds of thousands of dollars more in interest. Then, the debt stops paying you to take it on and you instead start paying it more.

Don’t do that.

Using good debt in real estate

This is my favorite use of debt.

Let’s start with an example from my life. My wife and I bought a duplex for $174,500 using 25% down. Thus, we owed about $130,000 on the mortgage when we closed. We increased our debt by six figures!

But…that’s not where the story ends. Every month, our tenants pay rent. This rent covers our mortgage. It also covers all other expenses like taxes, insurance, and maintenance. There is also extra that we put (usually tax-free) into our pockets.

There is no better example of getting paid to take out debt than investing in cash-flowing real estate.

I don’t think anyone can argue that this is bad debt.

These are really the only main 2 forms of good debts that I can come up with

I’m sure there are some who will argue that other debts can be “good.”

But based strictly on the definition from the beginning of the post, I’m not convinced that there are any more.

And I say this knowing that it means I also had and still have a LOT of bad debt:

  • Consumer credit card debt of over $30,000 that we paid off (!)
  • Mortgage on my primary residence
  • Car lease on my wife’s car

Like anyone though, I am focused on reducing the bad debt and utilizing good debt to build my assets

Thankfully, my wife and I made it a primary goal upon graduating training to get rid of our consumer debt. We did this in just a few months after starting our jobs.

Now, we plan to pay extra on our primary mortgage every month. We will pay it off even more aggressively after paying off our student debt. And we plan to buy a car outright after my wife’s lease is up.

That is how we are reducing bad debt.

And we are increasing good debt by continuing to invest in cash-flowing rental properties using leverage. In doing this, we minimize risk by using our specific strategy and underwriting process for the properties that we buy. We are currently closing on our second such property.

All of this and more are included in our written personal financial plan.

Actually, one last example

As I am writing this post, another example of a good debt just popped into my head.

Self education and investing in yourself may be the best debt that there is. I will make more money in my life based on the information that I have learned by investing in books, courses, and coaching, just in the past year, than I will from likely anything else.

So, in may mind, that counts as well!

good debt

Use real estate to your advantage!

In closing, use good debt to your advantage.

If you are a physician, changes are that your student debt is actually working to help you when viewed in the long run. No matter how much it still sucks to throw huge amount of money at it each month. Maybe looking at it from this new perspective will help ease the annoyance.

However, I really encourage you to learn about real estate investing if interested. In my opinion, it is a huge wealth accelerant. And physicians are uniquely positioned to have success in real estate, no matter how active or passive you make it.

Here are some resources if you think real estate investing could be for you:

What do you think? Is there such a thing as good debt? Did I miss any examples? Are you taking advantage of your debt? Let me know in the comments below!

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    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected].

    3 thoughts on “The Important Difference Between Good and Bad Debt for Doctors”

    1. awesome discussion of good debt and bad debt. unfortunately I am using interest arbitrage just because it requires minimal time on my part- just call me lazy. I am in an opposite mindset than you in I think interest arbitrage is good debt, at least for a doctor who has steady income. I am not paying my mortgage or student loans aggressively as per my financial plan, but optimized the lowest interest rate I can and invest in the stock market. My AA is 100% equities, but technically if you include my student loan debt I’m 130% equities. I think of my mortgage as a negative bond.

      I am definitely tempted if I were offered to get a 0% loan like a car loan at no cost, I would take it and place the money to pay it off in a savings account, and then payoff the loan when it is due. I think have to consider the overall risk of losing money, which in this case would be zero.

      God bless you man you have the energy for this blog business and doing real estate. I myself don’t want to do real estate as again, I’m lazy! actually, I work hard enough as a doc I rather spend my extra time with family then put in the time for real estate, and it seems don’t need to do real estate to reach my goals.

    2. PPS,

      I agree that physicians often look at student debt as a burden instead of an investment. The cost can be high but it is an investment in yourself and your future. I would counter that paying off student debt may not be the best return on your investment. 1. Interest rates are very low so if you can refinance to 3% or below then you may be better off investing rather then paying off debt. For example we invested 50k in our first STR for a 500k purchase. The equity in that property is over 350k now. If you decreased your student loan payments you could purchase more real estate. 2. Not to be morbid, but your student debt is your’s alone if you do not have a co-signer. Therefore, there is less of an incentive to pay it off early. I paid off my high interest loans but Lauren and I are letting the rest of our student loans ride….

    3. I am on the side of minimizing debt. From an overall peace-of-mind standpoint, the less debt the better if the SHTF and you and/or your spouse cannot work (like during the recent COVID lockdowns). Yes, it’s true that if your mortgage is only 3%, you can possibly do better investing extra funds elsewhere, but there are no guarantees. If the funds are under the control of a professional advisor, that person takes a cut and any gains will be taxed. Also, the more debt you have, the less borrowing “power” you have if a good opportunity comes along. From an emotional angle, I love not having a mortgage payment every month. Great post and very thought provoking.


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