There are very few doctors who are complete strangers to debt. In today’s era of austerity, pay freezes, increasing cost of living and training, expanding university tuition fees, debt is much more familiar companion. If understood and properly leveraged debt can be a very useful tool. Hence the age old concept of good debt vs bad debt.
What is good debt?
Good debt is debt that will not negatively affect your overall financial position. In the many cases it will actually improve your long term finances. There must be a clear and specific reason for taken on this debt and a realistic plan for repayment. The aim should be to clear this debt as quickly as possible, or over time with pre-set affordable payments such as with a mortgage.
Before taking on good debt, one must identify the cheapest possible way to borrow this money. This can often be done with a broker, financial advisor or careful comparison of options. Things to consider include the borrowing method, the interest rate, the loan or credit amount and the terms and charges that are applicable. In many cases it may mean taking the loan with the lowest interst rate, but this is not always necessarily the best option, for example the lowest interest rate may come with high charges or penalties for late or missed paymemnts.
Examples of good debt include
Student loans – loans to pay for university are considered good debt because university degrees should improve your overall earning capacity, and therefore improve your long-term financial situation.
Mortgage – this can be good debt, but that very much depends on the details of the mortgage. A mortgage with reasonable interest rate, that is likely to be paid in full and that will allow you to eventually own the house is good debt. This is because mortgage payments are likely cheaper than rent, and the property will likely increase in value and thereby become a financial asset.
Business investments – borrowing to build a business can be good debt, if you can build your business to be bigger than the loans taken.
Buying a car – this can be an essential mode of transportation, enabling you to get too and from your place of employment. However the repayments and running must be realistic and affordable.
Bad debts are debts that are either extreme and unaffordable or debt that does not improve your overall financial position, and most likely will negatively affect it.
Bad debts are more likely to have no realistic repayment plans and often come from impulse purchases or items that are not really necessary. This also includes borrowing money to pay for everyday bills.
If you are stretched and taking on debt, with no real plan for repayment, then it most certainly is bad debt. Sadly doctors and other healthcare workers frequently rack up hefty amounts of bad debt. Naturally as one’s income increases, their life expenses also expand, and often beyond their financial means. There is a certain pressure amongst doctors and other professionals to maintain a particular level of living even if the financial capability is lacking. The key to achieving financial freedom and avoiding bad debt is to manage this expense expansion as carefully as possible.
Examples of bad debt
Credit card debt – if acquired to pay for uncesccary items such as luxuary holidays, expensive social habits (frequent drinks and dining), clothes, etc. Large interest rates and penalty charges can see your debt quickly spiral out of control.
Brand new car – Car retailers enjoy hooking unsuspecting young professionals especially doctors. Think twice, as new cars immediately loose value, and over time you could find yourself with a loan that is higher than the resale value of the car.
Borrowing money to pay bills – This is a very slippery slope. Your debts will increase if not extremely careful. If you find yourself in this situation I advise seeking advice from a financial advisor and setting out a debt management plan.
Pay day loans – Just no!
Get out of debt
Here are Rob Moore’s (the disruptive Entrepeneurs) 10 ways to get out of debt fast
- 1. Spend Less
- 2. Identify Fixed Costs and Variable Costs
- 3. Get rid of a lot of your variable costs
- 4. Cancel all the direct debits you don’t need
- 5. Set a specific monthly budget
- 6. Target the day where you get to zero
- 7. Only buy stuff you need
- 8. Sell stuff you don’t use
- 9. Do overtime
- 10. Learn to sell
Please read the full blog posts for more on getting out of debt.