It would be wonderful if we could all go through life completely free of debt. A fortunate few are born into wealth and have enough money to provide for themselves and go through life free of debt. Then, there are the rest of us who face debt as a fact of daily living (something you learn to contend with, live with, and yes, for many of us, die with it). Unfortunately, it's even something we can pass on to our children someday. If you are already wealthy, you may want to read this article to see how the rest of us live. If you are not one of the wealthy, then you should read this article carefully.

Having no debt indeed is the best, but if it is a fact of life for you, it's vital to keep certain things in mind when considering debt. There are two kinds of debt: bad debt and good debt. What kind of debt could be right when we've always been told that debt is bad? Good debt is debt for an appreciating asset; bad debt is a depreciating asset. Good debt provides income; bad debt provides expenses.

For example, education debt is a fact of life for many of us, but we should view it as an investment in our future. We want to think it will allow us to increase our future income, which makes it good debt. Debt for an unaffordable expensive car would be considered bad debt since it is an unnecessary expense that provides no income and depreciates. Debt for something that depreciates and provides no income would indeed be regarded as a bad debt. Education is an investment that appreciates by increasing future income potential. The car is a depreciating expense that will provide no revenues and will rapidly depreciate (uses up income instead of providing income). The expensive car may be more fun to have, but the education will be the best investment.

Now, let's look at good and bad debt for the average dentist preparing to enter private practice. Many new, young dentists get caught up with the opening of brand new, shiny offices with all the latest and expensive gadgetry. This idea is promoted heavily by businesses that profit from the sale of such gadgetry. A new dentist can invest tens of thousands of dollars for equipment, furniture, and leasehold improvements before the first patient ever walks through the door. Interestingly enough, no one has ever heard of a patient who was ever drawn to a dental practice because of the doctor's equipment. No one has ever had a dentist say that a patient was passing by, looked in his window, saw his new equipment, and decided to pay a visit. It just doesn't happen.

If you think cars depreciate quickly, wait until you see the dental equipment's resale value. The resale value of a car may depreciate up to 30% the first year, but dental equipment will depreciate up to 90% of its original cost the first year! Since purchasing new, expensive dental equipment does not produce patients and is a rapidly depreciating asset to boot; it represents "bad debt." However, buying new equipment that allows the dentist to provide new or additional procedures can increase income and is considered "good debt."

Now, what is good debt for a dentist? Where can a dentist find investment or income-producing debt? Where can a dentist invest in an income-producing asset that appreciates, not depreciates?

The an existing dental practice. The doctor incurs debt, but the current income stream of the practice exceeds expenses and debt service (the money required to pay off the debt), thereby providing income (income-producing debt). Acceptable income-producing dental practices do not depreciate; they appreciate. It is not an expense; it is an investment. You will almost assuredly be able to sell it someday for more than you paid for it (if you don't pay more for it than you should).

Buying a practice is similar in many ways to the purchase of a bond or a bank CD. Both are income-producing investments (the CD pays interest; the dental practice provides income). Both appreciate (the interest accumulates in the CD; the dental practice increases in value over time). Also, they both are considered a positive and safe investment. The most significant advantage a practice has over the CD (in addition to the dental practice making you more money) is that the IRS allows you to depreciate the cost of purchasing the dental practice even though the practice appreciates! This means a dental practice represents a pre-tax investment, which is considered the most desirable investment made by astute investors. Of course, you cannot depreciate the CD, so this represents an after-tax investment, which is far more costly, and the income from the CD pales compared to the revenue produced by the investment in a dental practice.

Income-producing debt is good debt. Non-income producing debt is bad debt. It's a simple rule-based on logic. Think about it! Call AFTCO at 1.800.232.3826 or visit our website at

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