$2M Debt: My Financial Planning Session with a Struggling Dentist

Dentists face unique financial challenges that make managing their personal finances and planning for the future complex.

From balancing student loan repayments to investing in a practice, the financial decisions they make today can impact long-term financial health.

Having a strategic plan in place allows dentists to focus on what they do best: caring for their patients while ensuring their financial goals are met.

A comprehensive financial plan covers aspects like paying off student loans, college planning for children, and implementing insurance solutions, such as disability and malpractice insurance.

As dentists, we often find ourselves in complex financial situations, balancing the demands of our practice with personal financial goals.

Recently, I had a conversation with a fellow dentist that highlighted the importance of prioritizing debt freedom over expanding investments too quickly.

The $2m Debt Situation

A 33-year-old dentist contacted me through a private Facebook group dedicated to dentists interested in real estate investing.

He had been practicing for just a year, and while his income was strong—$400,000 to $500,000 annually—he was also carrying significant debt.

Specifically, he had a $1.1 million loan on his practice and a $1 million mortgage on his home.

Between these two obligations, he paid $30,000 monthly in debt payments.

Despite this heavy debt, he considered purchasing a single-family home as an investment and even eyeing an $8 million commercial property in his area.

His questions were typical:

    
• Should he put 20% down or 30% down on the home?
    
• What area of the country should he invest in?
    
• Should he leverage more debt for the commercial property or bring in partners?

The Advice

I asked him to take a step back and look at his situation as a whole.

Much like how we, as dentists, conduct a thorough patient history before diagnosing, he needed to assess his financial history and current obligations before making further investments.

Here’s what I recommended:

#1. Prioritize Debt Freedom

With $2 million already in debt, the first goal should be getting out of debt as quickly as possible.

While it might seem appealing to invest in real estate, clearing just $300 a month on a single-family home after all expenses isn’t going to move the needle on financial freedom.

#2. Consider Selling the House

Although it might be a difficult decision, selling his million-dollar home and renting something more affordable could significantly reduce his monthly financial burden.

By freeing up cash flow, he could focus on paying down his practice loan faster.

#3. Work Toward Replacing Himself in the Practice

One of our most valuable assets is time, especially when our children are young.

I advised him to aim to pay off his practice debt as quickly as possible and then consider bringing in an associate or partner.

This could allow him to work fewer days—two to three instead of five—while maintaining his income.

The goal is to free up time to spend with his family, which is irreplaceable.

#4. Invest Wisely, Later

Once debt is no longer a concern and his time is freed up, he could consider investing in scalable real estate opportunities like RV parks or mobile home parks, which I prefer.

These types of investments offer better returns and scalability compared to single-family homes.

The conversation served as a reminder that sometimes, the best financial decision is to pause and reassess our priorities.

For many dentists, the key to long-term wealth isn’t in quick investments but in methodically eliminating debt, reclaiming our time, and making strategic investments that align with our lifestyle goals.

Understanding Personal Financial Planning Basics

Understanding the basics of personal financial planning helps you manage your money effectively.

Establishing Financial Goals

Setting clear financial goals is essential. These could include paying off student loan debt, saving for a house, or planning for retirement.

Writing down specific and measurable goals will guide your financial decisions.

Use SMART goals (Specific, Measurable, Achievable, Relevant, Time-bound) to help you stay focused.

Example: “I will save $200 a month for the next 5 years to build a down payment for a house.”

Don’t have goals? Check out this video:

The Importance of an Emergency Fund

An emergency fund is crucial for covering unexpected costs like medical bills or car repairs.

Aim to save 3-6 months‘ worth of living expenses. This will provide a cushion and help you avoid going into debt.

Tip: Keep your emergency fund in a separate, easily accessible account to avoid spending it on non-emergencies.

Managing Debt and Credit Cards

Managing debt, especially student loan debt, can be challenging.

Prioritize paying off high-interest debt first to minimize interest costs over time. Make regular payments to improve your credit score.

Steps:

    
1. List all your debts, including interest rates.
    
2. Develop a payment plan starting with the highest interest debt.
    
3. Use balance transfers or debt consolidation if beneficial.

Investing in Insurance Coverage

Insurance is a key part of your financial security.

Types of insurance you might need include health, disability, and life insurance.

Proper coverage can protect you from financial loss due to unexpected events.

Recommendations:

    
• Health Insurance: Covers medical expenses.
    
• Disability Insurance: Provides income if you can’t work due to illness or injury.
    
• Life Insurance: Supports your family financially if you pass away.

Investing in the right insurance protects your assets and ensures financial stability for you and your loved ones.

Strategizing for Dental Practice Owners

Building a Business Plan

A strong business plan is crucial for any dental practice owner.

Begin by defining your mission and vision. Identify your target market and analyze competition. Outline marketing strategies to attract patients.

You should also set clear financial goals. Include projected income, expenses, and profitability.

It’s essential to update your business plan regularly as your practice grows.

Key components:

    
• Mission and vision
    
• Target market analysis
    
• Marketing strategies
    
• Financial projections
    
• Regular updates

Practice Ownership and Valuation

Understanding the value of your practice is important for financial stability.

Regularly evaluate your practice’s worth using benchmarks. Focus on optimizing production and collections while controlling expenses.

Knowing the value helps in situations like selling your practice or planning for retirement.

Keep accurate records and seek advice from valuation experts for the best results.

Key actions:

    
• Regular valuations
    
• Optimize production/collections
    
• Control expenses
    
• Keep accurate records
    
• Seek expert advice

Real Estate and Dental Practice Loans

Managing real estate is a significant part of owning a dental practice.

Decide whether to lease or buy your office space based on long-term goals. Researching location and size is also crucial.

Dental practice loans can provide the necessary funding.

Compare loan options carefully, considering interest rates and repayment terms. Maintaining good credit can help you secure better rates.

Important steps:

    
• Lease vs. buy decision
    
• Location and size research
    
• Loan options comparison
    
• Interest rates and repayment terms
    
• Maintain good credit

Each of these aspects plays a vital role in the financial and operational success of your dental practice.

Navigating Student Loans and Investments

Planning your finances as a dentist involves handling significant student loan debt and developing a smart investment strategy.

You need a plan to manage your loans while also growing your wealth through sensible investments.

Handling Student Loans After Dental School

Managing student loans is a crucial step after dental school.

Many dentists graduate with large debts, often reaching $450,000 or more.

Loan repayment options vary, including standard repayment plans and income-driven repayment plans.

In a standard plan, your monthly payments are fixed, and you pay off the loan over a set period, typically 10 years.

For a $450,000 loan at 5% interest, this could mean a monthly payment of around $4,772.

Income-driven repayment plans might lower monthly payments to 5-10% of your discretionary income, but the repayment period can extend to 20-25 years.

These plans also offer loan forgiveness after the repayment period, though they may accrue more interest over time.

Crafting an Investment Strategy

While handling loan repayments, it’s also vital to start investing.

Diversifying your investment portfolio can help you earn returns over time.

Work with an investment advisor to create a risk-balanced strategy.

Types of Investments:

    
• Stocks: High potential returns but also higher risk.
    
• Bonds: Lower risk with steady returns.
    
• Mutual Funds: A mix of stocks and bonds.
    
• Real Estate: Purchase properties or invest in real estate funds.

Start by setting aside a portion of your income for investments.

Even small, regular investments can grow significantly over time.

Aim to balance between repaying loans and investing to secure your financial future.