The Money Blog

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Debt can be good

Oct 21, 2021

In previous discussions, we talked bad debt.

Today, we’re covering good debt.

And no, I won’t be trotting out the old adage that educational debt and mortgages are always a good thing. 

It isn’t true and it isn’t relevant. These debts are only a small part of a doctor’s relationship with borrowing. Let’s dive into something deeper. 

Using a simple example of two physicians, let me show you how debt cuts both ways over the course of a decade.

Case 1:
Frank takes out a $100,000 personal line of credit which he promptly maxes out on consumer purchases and never pays off.

Assuming a $3000 annual cost, the LOC has cost Frank $30,000 over the decade.

Worse still, he had to pay additional personal income tax to cover the annual interest by withdrawing these funds from his corporation.

Case 2:
Yasmine came across great opportunities in real estate limited partnerships (RELPs).

To avoid missing out, she decides to use her LOC to cover household expenses for a portion of the year while she retains additional earnings in her professional corporation to invest in the RELPs.

Using this strategy, she enjoys gross returns of ~15% over the decade.

After servicing the line of credit and paying taxes, she has now permanently increased her household income by thousands of dollars per year.

For Yasmine, leverage has become a tool of wealth creation.

For Frank, it is a life-long trap

Same line of credit. Wildly different outcomes.