Is your debt good or bad?

In today’s crazy economy, debt management has become an important aspect of managing our businesses. With today’s high student loan debt, the rising costs of practice, increasing interest rates and declining insurance reimbursement, debt has become an important issue to understand.

This article illustrates the difference between good and bad debt, suggests what debt to pay off first and explains how to leverage your debt to manage your finances more effectively. 

Most of us have debt of some type or another. According to Business Insider, in 2024 the average American household currently holds $104,215 in debt, including mortgages, auto and student loans and credit cards. 

When we think about debt, most of us immediately assume it’s all bad. In fact, much of what we’ve been taught is that our goal should be to stay debt-free. While this is noble, there are times when debt is a good use of leveraged capital. Understanding the concepts of both sides of debt is paramount to making informed decisions that can significantly affect your business and personal financial fitness.  

At its core, the basic difference between good and bad debt pivots on the return on investment (ROI) the debt can generate. As such, good debt is an investment that will generate long-term ROI greater than the debt itself. Bad debt, on the other hand, may be used to purchase depreciating assets or items that do not generate value, therefore offering no contribution to your financial growth. 

Good debt includes any borrowing that leads to the growth of your practice, enhances your professional skills or offers an increase in your profit potential over time. Some examples might include: 

Advanced education and training: Borrowing to fund advanced certifications or specializations can enhance your skill set, making you more competitive and allowing you to offer higher-value services to your patients. 

Practice start-up or expansion: This might include a loan to start your practice or to create expansion to increase your practice capacity. 

Investing in your practice: Purchasing essential equipment, such as therapy equipment, goods and supplies to be sold or an adjusting table, can all be important to being able to run your practice effectively.  

Investing in technology: Today’s technology can make you, your staff and your practice more efficient, thus opening the door to seeing more patients and increasing your revenue.  

Acquisition of long-term assets: A mortgage to buy property for your practice or the purchase of other income-producing real estate can be another good use of debt.  

Here’s an example of how good debt can help you leverage success:  

Let’s say you want to buy a new $15,000 laser for the practice. You find a lender offering a great lease rate of 8%. Your payments total $470 per month for 36 months. You charge $49 per visit and see 100 laser patient visits per month for total revenue of $4,900. Your ROI each month is $4,430 per month on a $470 investment.  

That’s a fantastic return with no money out-of-pocket up front and shows how good debt can help you leverage your investment. 

Other examples of good debt with low interest that can help the chiropractic practice leverage revenue would include a bank line of credit, business and property loans and equipment leases. 

Bad debt can be defined as debt that does not increase your wealth or contribute to your financial goals. Most examples of bad debt are fairly obvious and may include: 

High-interest credit cards: According to data from the Federal Reserve Bank of New York, as of the fourth quarter 2023, Americans’ total credit card balance is $1.129 trillion. This type of credit will have interest rates above 10%, classifying it as bad debt. Using credit cards for everyday expenses or non-essential items can quickly lead to unmanageable debt.  

Purchasing luxury items and depreciating assets: While it’s nice to spoil yourself once in a while, taking out loans for things that lose value quickly, such as expensive cars and luxury vacations, do not contribute to the growth of your practice or your overall personal wealth. 

Unplanned or excessive borrowing: Taking on debt without a clear plan for repayment or borrowing more than needed can strain your finances. Excess debt can limit your ability to take advantage of investment opportunities that create wealth accumulation when they become available. Also, maintaining a reserve of funds to cover expenses during low-revenue periods offers a better tactic than floating expenses on credit cards or dipping into your savings. 

Chiropractic strategies for managing debt

Having solid strategies and tactics in place in order to ensure you are making the most of good debt and avoiding bad debt as much as possible is critical to your success. Here are some strategies to consider: 

Develop a clear plan and stick to it: Think and plan before you spend. Prior to taking on new debt, have a clear plan for how you’ll use the funds and whether it will help you generate growth for your practice and how that expenditure will fit into your budget.  

Prioritize paying off high-interest debt: If you have existing debt, prioritize paying off high-interest loans or credit card balances first to reduce the total interest paid over time. 

Create an emergency fund: An emergency fund covering at least three months of personal and practice expenses can act as a buffer against taking on bad debt in the event of unexpected expenses or financial downturns. Strive to save 15% of your collections each month to build your reserves. 

Consolidate and refinance bad debt: When possible, refinance any high-interest debt to lower interest rates or consolidate multiple loans to decrease the interest rate; this can help make your payments more manageable and allow you to pay down the bad debt more quickly.  

Create a profit-based fee schedule: Creating a tactical fee strategy that leads your practice to sustainable profits will help you avoid the need to borrow. 

Negotiate better prices with suppliers: Negotiate prices for clinic supplies with suppliers. Buying in bulk those items you use frequently often unlocks better deals. Create a “buyer’s group” by sharing the cost of bulk orders with other clinics in your area using the same supplies.  

Continually improve your financial comprehension: You don’t need an MBA to have a basic understanding of good financial management practices, but you do need to understand the basics. Hiring a good CPA and investment advisor can go a long way to helping you develop and maintain successful financial strategies. Stay informed about the statistical side of your practice and learn how to analyze those numbers to help you move in a sound financial direction.  

Student loan debt: Good or bad?

I’m often asked to categorize student loans as good or bad debt. The interest rate on student loans, coupled with the fact that they help you become a practicing doctor, would classify them as good debt. However, according to studentloanplanner.com, as of January 2024, the average DC student loan debt was $251,000. This high amount could pose difficulty for some DCs who have yet to reach peak earnings potential. Also, when you consider the Bureau of Labor Statistics estimated in 2022 that the average chiropractic salary was around $75,380, there may be a sharp contrast between student loan debt repayment and earnings. 

In reality, your ability to manage debt of any kind is directly dependent on your income. The rule of thumb is simple — the higher the debt, the more difficult it becomes to pay off.  

While debt is often viewed negatively, when used wisely, it can be a powerful tool to leverage growth. For DCs, understanding the difference between good and bad debt, and how to manage each, is key to building a successful practice and achieving your personal financial freedom.  

Final thoughts

By investing in growth, focusing on high-ROI opportunities and maintaining discipline in financial management, DCs can use good debt to expand their practices, enhance their services and create profitable revenue streams to secure a financial future. Remember, the goal is not to avoid debt completely, but to leverage it as a tool for building a successful and financially stable future.

MICHAEL PERUSICH, DC, a former investment banker, is a solutions-focused advisor with more than 25 years of success across the healthcare and consulting industries. His broad areas of expertise include coaching, training, content development and motivational speaking. Perusich is the CEO for Kats Consultants LLC, where he and his team offer a unique platform of business knowledge and tools for today’s chiropractic entrepreneur. He can be reached at 407-308-5590 or at Katsconsultants.com.