Doctors Need to Finally Confront Debt

Physician's Money Digest, November 2005, Volume 12, Issue 15

Physician's Money Digest

Debt. The very word reeks ofreally bad karma. No wonderpeople don't want to talkabout it, advise about it, or even writemuch about it. And we certainly needto because American debt, both publicand private, is at an all-time high.So we at have risen to the challenge and arewilling to confront this uncomfortabletopic to review how it affects ourfinancial health.

Good Debt

For our purposes, there are two kindsof debt: good debt and bad debt. Gooddebt is rationally entered into to producea profit or a long-term benefit. Educationalloans, for example, are proven toraise our lifetime earnings, if not thequality of our lives, so we usually amassthis debt willingly. I recently met a physiciancoming out of training with a voluntary$250,000 in school debt, and Ialso met another person accepted tomedical school who turned it down afterdoing the math. Sometimes the tail canwag the dog, especially if the motivationis only financial.

The same is true with our homes.We sometimes forget, especially in thistime of unprecedented real estate gains,that our home primarily is where welive our lives and only secondarily is aninvestment. Real estate has always beencyclical, and I expect we will witnessthis as mortgage rates finally rise, drivingdown real estate values.

Bad Debt

So-called bad debt is typically enteredinto for emotional rather thanrational reasons, and is often the resultof impulsive purchasing of consumablesthat rapidly lose value. The rate isusually high, the homework scanty, andthere is no clear plan for repayment inthis kind of "bad" loan. Most of thistype of debt seems to be consumercredit card debt. Impulse-driven andeasy to do, we often forget that it addsup quickly and has a notoriously highinterest rate, and we don't think aheadabout the burden of repayment.

A new development in bad debt isrefinancing of our homes to free upsome of our inflated equity for consumerspending. It's low interest, deductible,and you can get the car/boat/whatever of your dreams, so what's theproblem? The problem, my friends, isthat we are mortgaging our futures.

Everyone is uncomfortable with thesubject of debt. Even Donald Trumpavoids the subject in public. But youcan be sure that he has mastered the useof "other people's money" in private,to a profitable purpose. So in privatemake sure that you at least include thesubject of how to manage your debtalong with other aspects of your financiallife proactively with your financialadvisor on a regular basis. Remember,in personal finance, sometimes IOUcan be a four-letter word.