February 13, 2025

An important part of financial decision-making is the cost of being excessively risk-averse, especially when handling low-interest loans.

We are getting many questions about accelerating loan repayments, so we thought now is a good time to refresh and re-run our 2023 article, Investing vs. Paying Down Debt.

Many dentists instinctively aim to pay off their loans as quickly as possible, believing that eliminating debt equates to financial security. While reducing liabilities is important, prioritizing aggressive loan repayment, especially for low-interest loans, can actually limit your ability to grow your wealth effectively.

The key is comparing the loan's interest rate with the potential investment return. If a dentist has a loan with a 3% interest rate but access to investments yielding 6% or more, accelerating loan repayment might not be the most financially strategic decision.

For example:

• Suppose you have an extra $1,000 per month.
  
  
• You can either use it to pay off a low-interest loan or invest it.
  
  
• If the loan’s interest rate is 3%, paying it off early saves ~$30 monthly in interest.
  
  
• If you instead invest that $1,000/month in an asset yielding a 6% return, you earn $60 per month.
  
  
• Over 20 years, that $1,000 monthly at a 6% return would grow to approximately $453,439, whereas saving $30/month in interest for 20 years is $7,200.
  
  

These numbers were simplified for this example, but this stark difference highlights the long-term financial advantage of strategic investing over aggressive low-interest debt repayment.

This doesn't mean ignoring debt repayment. Instead, the goal is to balance it with investment opportunities. Over-prioritizing debt reduction can mean missing out on valuable wealth-building opportunities, the most important of which is time. Your financial strategy should integrate both strategic debt management and investing to accumulate wealth over time.

Every financial decision should align with your risk tolerance and long-term financial goals. Some dentists prefer the peace of mind that comes with being debt-free, even at the cost of slower wealth accumulation. Others may take a calculated approach, leveraging investments and business expansion opportunities for greater long-term financial success. Financial decision-making should always be strategic rather than instinctual. While eliminating debt is a guaranteed return equal to the loan’s interest rate, investing wisely can offer a much higher return, accelerating wealth accumulation.

Not sure where to start? Contact us today!