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Ask Dave

Million-Dollar Question

Craig has a big income, bigger debt and a need for Dave's advice on how to deal with it.

QUESTION: Craig in Colorado says his dental business is $1 million in debt. The amount owed is $600,000 on the building and about $400,000 on the build-out he did to it. They are almost out of debt in their personal finances and make $400,000 a year. He wants to know if they should work on the business debt or contribute to retirement.

Dave's ANSWER: Because of your unbelievably huge, wonderful income, you could fully fund your $17,500 401(k) and it won't move the needle on the $1 million debt. If you do that out of $400,000 and live off $100,000 and also give $100,000 or so to taxes, and you are able to throw $200,000 at this, it's a five-year plan while fully funding a 401(k). But that's certainly not, percentage-wise, a heavy accumulation for you.

You fully funding a 401(k) is a small percentage of your income. You could do that and still really attack these debts. The first one I would go after is the build-out loan and the second would be the real estate loan, in that order.

I would have a five-year plan to get debt-free and not be living like I'm making $400,000. I wouldn't throw $50,000 a year at retirement. If you have a 401(k) at the office, $17,500 is your max unless you're over 50, in which case it's $22,500. Load up on that. If you max that out and don't do anything else, you’ll pound your debt.

When you come out on the other side of that debt, it will be pretty easy to go into accumulation mode. It stabilizes your practice and your life dramatically when you are out of debt because now, not only do you have a practice and a building paid for, but you've got this incredible income on top of that and a piece of real estate. You've got all these different ways to accumulate wealth. You are doing great.

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