What Debt Should I Pay Off First? A Dentist’s Case Study

Hey, guys! This is Justin Goodbread with Financially Simple. So if there is one question I get quite frequently, it is, “What debt should I pay off first?” In fact this last week I had an entrepreneurial doctor in our office and he recently freed up about $1000 a month. Many people will say, “Use the debt snowball.” It’s a good idea. Some will say, “Knock out the highest interest first.” That’s a great idea and may work for you. Which of these two popular options, if any, will work best for him?

The Variables Specific to this Dentist:

He actually has three types of debt left. He only has his mortgage, his student loan, and a business loan. That’s all (kudos to him!) No car loans. No credit cards. He’s in good shape.

If you become disabled or die, your student loan goes away. It’s typically forgiven or cast away. If you become disabled or pass away, then your mortgage is obviously there. That leaves us with the business debt. The business debt when he acquired this particular practice, he took out a huge note, and the bank encumbered the practice, and now he’s trying to knock out the debt.

We examined his situation, taking into account all the interest rates. We looked at the student loan, and the interest rate on the business note was almost the same. The mortgage was significantly lower. We determined he didn’t intend to continue living in the home he had for too many more years since things were about to change with the kids.

The Strategies We Employed:

After careful consideration, we employed the Strategic Debt Reduction method. What we elected to do was to pay off the business debt first. The reason wasn’t just a shot in the dark. We ran through the data and looked at all the significant scenarios and how it would affect his net worth. This client is in a particular profession that has a slightly higher than normal disability rate come into play. So, in the event that he becomes disabled, we don’t really want to attack the student loan because that debt will go away. We know that he’s likely going to sell his house or do something different with it in the next couple of years. But if he were to become disabled, his spouse or future associate would be forced to try to find a buyer to cover his business debt. So we want to chip away at the debt on the practice note.

RELATED READING: Using Debt as a Business Owner

The second thing is, he’s a high-income earner. He’s making some good money and whenever there is business debt involved, the bank, in this case, has a UCC-1 Filing or a lien over the whole business. And whenever you have a lien there, you can’t use the full gamut of tax planning techniques that we need to use. So this client chose to pay off his business note first. We’ll deal with his student loans second, then we’ll attack his mortgage.

It is important to remember that strategies are not always one-size-fits-all. Talk with your financial planner, your accountant, your attorney. You always want to look specifically at what personally affects you, your goals, your outcome. They will help you make your life financially simple.