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Buy in loan

  • Avatar cozmopak 
    Participant
    Status: Physician
    Posts: 77
    Joined: 01/08/2017

    I have 128k left in my buy in loan at a 5.5% interest rate.  I could pay all of it off today, but that would completely deplete my emergency fund.  Would you do it anyway?  This would increase my monthly cash flow by about 5100 dollars/month.

    #238964 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 6177
    Joined: 01/12/2016

    Its not a great rate all things considered. I probably wouldnt completely deplete my emergency fund for it though.

    You have 128000/5100=25 months of that level of cash flow already in the bank.

    Any refinancing or loan switches you could use to get a better rate? Rates are super low right now.

    #238965 Reply
    Liked by RocDoc
    CordMcNally CordMcNally 
    Participant
    Status: Physician
    Posts: 2806
    Joined: 01/03/2017

    How much of an emergency fund do you really need? I would consider paying the difference towards the practice loan.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #238967 Reply
    childay childay 
    Participant
    Status: Physician
    Posts: 1009
    Joined: 01/09/2016
    Earnest refinancing bonus
    Any refinancing or loan switches you could use to get a better rate?

    Click to expand…

    Agreed

    #238973 Reply
    Avatar cozmopak 
    Participant
    Status: Physician
    Posts: 77
    Joined: 01/08/2017

    I could, but I’m lazy considering that I plan to have it paid off very quickly.

    #238974 Reply
    Molar Mechanic Molar Mechanic 
    Participant
    Status: Dentist, Small Business Owner
    Posts: 394
    Joined: 10/29/2017

    5+% interest sucks.

     

    Kill off $113,000, keep $15k in the bank.  Pay loan anytime it goes over $15k.

    Have a nice dinner when the loan is gone.

    Rebuild e-fund.  Invest.

    #238976 Reply
    Liked by ENT Doc
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8113
    Joined: 01/09/2016

    You do need to consider the tax component. A buy-in for a practice you are actively working in is fully deductible, so it may not costing as much as you think. Freeing up $5,100/mo cash flow is actually a straw man reason. [NOTE – see clarification on “fully deductible” in response to @humbleinvestor below]

    • That said, I never recommend a client make a decision based solely upon tax savings.
    • That said, early debt payoff for a HIP who is on a path to early FI has a negligible impact on lifetime wealth. Seriously negligible. At that point, it is an emotional decision. As much as I rail against emotions in investing, this is an appropriate consideration for this scenario:
      • Is the debt a huge weight on your shoulders? Do you think about it every day/constantly? Does it make you feel bad to have to deal with it? Pay it off asap. [This is especially relevant for student loans, which feel especially onerous since clients are sending out $ into what feels like a black hole.]
      • otoh, is it just a math equation to you? If so, in this situation, I might suggest waiting a few months rather than depleting your e-fund. Doing so is, again, negligible to the point of irrelevancy in the overall lifetime results.

    It helps to keep in mind that, from your perspective, where you are today is the reality of your life. But it’s only a feeling – rationally, you need to accept that it’s not your reality, just your current reality.

    The real reality is your long-term projections – will your choice affect your ability to meet your most important goals? Over the long term, the difference between the two thins out to nil.

    I have this conversation with clients regularly and hope this perspective (awkward as it comes across, sorry) will help non-clients who have these debt payoff issues.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #238981 Reply
    Liked by Zaphod
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4405
    Joined: 01/08/2016

    You have a130K efund……

    #238983 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8113
    Joined: 01/09/2016

    You have a130K efund……

    Click to expand…

    You have a gift.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #238985 Reply
    Avatar HumbleInvestor 
    Participant
    Status: Physician, Small Business Owner
    Posts: 207
    Joined: 12/28/2016

    @jfoxcpacfp is the whole monthly payment for the buyin deductible? I thought only the interest is deductible

    #239026 Reply
    Molar Mechanic Molar Mechanic 
    Participant
    Status: Dentist, Small Business Owner
    Posts: 394
    Joined: 10/29/2017

    J-Fox can give a better answer, but it will come down to “It depends on how the deal was structured.”

     

    Did he buy hard assets? Yes, over time on a depreciation schedule.

    Did he buy stock? No.  Not deductible.

    Pay a management fee? Yes, in the year it was paid.

    It all comes down to the contract, and if it’s like mine, the answer is all of the above.

     

    #239077 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8113
    Joined: 01/09/2016

    @jfoxcpacfp is the whole monthly payment for the buyin deductible? I thought only the interest is deductible

    Click to expand…

    I apologize for the lack of clarity – I should have said the interest on the buy-in is fully deductible. The point I was trying to make is that investment interest is typically deductible only against investment income. In your situation, the interest is fully deductible.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #239086 Reply

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