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Dentists Who Invest

Podcast Episode

Full Transcript

James: Welcome back to the Dentists Who Invest podcast. I have sat in front of me returning face, Bilal Ahmed Bilal is here today to talk about student loans and their ramifications going forwards given the flipping crazy inflation rates, which we’re going through right now.

Although interest rates have responded as well but that’s another story for another day. Bilal, how are you? 

Bilal: I’m good my man. I’m good as always. Absolute pleasure to be on. And we’re going to talk about student loans. So I put up post that recently about the different types of student loans and things you need to know what you don’t need to know and how it impacts you.

And you reached out and said this would be a good subject to cover, which talks nicely about what we’re going to do today. So, it’s about the educational side of things for me is we’re going to go through, switch gears about who it applies to, why it applies, and then ultimately what your options are.

Because I always want to walk away with, well ensure you get some actionable. Knowledge on the back of this that you can build into your structure and build into your planning. 

James: Pleasure to have you here, my friend. And you know what else inspired me? Reaching out about this podcast? I saw a BBC News headline and it said something along the lines of, Student loan interest rate goes to 12%, and I don’t know if this was intentionally sensationalized.

In fact it usually is when it comes to the media, of course. But the way I interpreted that was, whoa, they’ve hiked the interest rate. Intentionally to be massive to increase hugely the students loan company have. But actually that was just a reflection of inflation, which is something that you cleared up just before we jumped on camera.

But there’ll no doubt be other people like me out there who have got slightly the wrong end of the stick on that one. But that is the sort of stuff we’re going to delve into. As the podcast goes on, and even after I learned that, I thought to myself, We still need a podcast on student loans because nobody has any idea how the heck they work.

So I know that there is. You’ll be better at describing it to me. There’s different parts, there’s different bands or categories that you can fit into. That’s like band one, band two, things like that. 

Bilal: The inflation side of things that you know is the information you’re getting sensationalized, how does it impact you?

What does it mean to you? And that’s really what these podcasts were about. And ultimately what heath or green, our entire social media construct is about giving you that information that probably someone should have taught you formally as part of the many years of education you’ve been through.

Student loans, ultimately you’ve borrowed to fund your ambitions. And you’ve got to the point where you’re now employed and you’ve got to pay something back. Now the different plans, which is what determines your student loans. So plan one, plan two, plan four, and then we’ve got a postgrad loan as well.

So, how would you know which one you’re on? So if you graduated pre September, 2012, you’re on plan one. Post September, 2012, you’re on plan two. Plan four would be Scottish or EU student pre 1998, and then your post grad is quite simply a master’s loan post the 1st of August, 2016, or a doctoral loan post 1st of October, 2018. So quite bit of information digester. 

James: So long story short, in essence, plan one and Plan two are the ones that are relevant for the vast majority of people. Maybe some Plan Fours out there. And the odd, sorry not Plan four rather the postgraduate one that you mentioned but maybe the odd Plan four as well. Sprinkle into the mix, but very uncommon given the stipulations that you’ve just outlined. 

Bilal: Correct. Plan one, Plan two is what we’re going to focus on today, generally post grad. Certainly the clients that we see, they’ll fund that through their working income. So a lot of people will self fund their masters. So, the most important thing is when do we start paying?

And again, switching through the gears, let’s talk about your foundation dentist. And all of this always runs April to April, which is akin to the self-assessment tax shield or your personal tax year. So 5th of April, 6th of April, one year to the 5th of April. The following year, if you’re a foundation dentist, about to finish your year at the end of August, you’ll about pro a salary of about two and a half grand a month or 30 grand for the year.

Which have just put you over the threshold. So I’m assuming if you were in your foundation the year that you’re going to be in plan two, so when do you start repaying? So the annualized threshold is 27,295 pounds. But for the purpose of today, and whether I can remember that. 2 95, we’ll stick to 27 K as the threshold.

So anything you earn over a pro, a 26 27 K is what you then start paying a 9% deduction on. So that’s three a eight week 1, 6, 8, 2 a month, or sorry, that’s plan one. So plan two is anything 524 pounds a week. 2 27, 4 a month, or 27, 2 95 for the year. Now, again, for most foundation dentists, you’ll come to the end of your foundation year at the end of August, and then you’ll go into self-employed income.

So what does that mean for your student loan? We take the full year for your income that says, what did you earn between the two? Aprils your employed income and your self-employed. Can we put the two together, work out how much you were earned over the threshold, and then deduct the amount you really paid whilst you’re employed.

Then that leaves a balancing figure. You then give that you pay that up as part of. Self assessment tax bill. So April to April, you’ll pay that alongside your taxes by no later than the following January. There are a couple of things you do have to do though. So when you finish your employed year and you come off paying, your employee’s going to issue you something called a P 45 that’ll trigger something with a student loans company to start writing out to you because they’re now panicking thinking this person’s falling off the grid.

Are we going to get our money. So they’ll start writing to you. Some of the wording’s quite strong. There’s quite a lot riding on it for them. So they will be quite strong with their wording. But all you really have to do is register yourself or self-employed. You can do that through HMRC’s website.

You register self-employed from the first September. If that’s when you’re going self-employed. You then get something called a tax reference number or you utr. You then give that up to student Loans Company. They then know to wait for your self-assessment. They’ll stop sending you out the letters and then potentially any penalty notices, Cause it can be stressful.

So stay on top of it, be proactive with your approach and understand what impact it has. And then as part of your self-assessment return, you’ll then pay 9% over the threshold. Again, that’s any of your income minus your expenses, which is then your taxable income. Your taxable income is then what your self-assessment, your student loan calculation is then applied on.

So plan one is pre 2012 and is 20,195 pounds a year. Plan two Thresholders 27,295 pounds a year. And then plan four is anything over 25,375 pounds a year. And you post grad loan is anything over 21 around a year and what do I pay? So for plans one, two, and four is 9% over the threshold. And then for you post grad, 6% over the threshold.

And then, I put it on Facebook and someone says, What if I’m plans one, four and postgrad? Then you’ve been very busy and you’re going to start paying because they do get stacked. And they get stacked with their represe thresholds as well. So it can get quite pricey.

 And a couple of things is not everyone who finishes their foundation year will go on to become a self employed associate. Some will go on to do probably D Dct, d CT two, know whatever they really want to do, or some might then go into employed jobs in hospital jobs, max facts, whatever really is that associate self-employed isn’t the be all and end all for all dentist finishing their foundation year.

 So let’s say in that first year your associate job was 30,000 pounds a year, and for some reason the job you then take on from September onwards pays you 25 grand a year. Your pay, your deduction would only be based on the job that it takes you over that threshold. So let’s say, I don’t know whatever reason, the second job you take from September onwards only pays you 25 grand years an employee.

No deductions made on that, but you then need a second job to supplement your income. I don’t know. you take a job at the Tesco part-time that pays you another 10 grand a year. Your combined income is going to put you at 35 grand. But That doesn’t trigger a student on repayment. Each one has to breach the threshold for the deduction start taking place.

James: There is the potential for some gamesmanship there. I’m sure that someone, some people are aware of two jobs. 26 k. ,I can’t believe that there’s like a little of a loop. 

Bilal: If two jobs each one page you 26 K and you earn combined 50 52 K for the year, you wouldn’t be paying back any student loan payment.

James: That’s nuts. 

Bilal: And that’s quite an interesting point because we now need to talk about sort of the interest implement the implications and how your debt starts stacking up and everything like that. And ultimately, when I trained to become an accountant, I had a choice that says, I worked straight out of college.

 I saved up enough money. I was in a fortunate position to pay for the education out my own pocket because I sit down and did the. That’s how fun of, 20 something year old. I then worked out how much it would cost to pay for the education. Because for most account, well for all accounts read to become chartered, your degree only gets you onto a training contract.

And then you’ve got to do a three year training contract to become chartered and you’ve, So that’s all postgrad. So for me it was, how quick can I get, or how can I get onto a training contract is easy in the most cost efficient way because my employer will then take on the rest of that financial burden.

So I chose to pay it out my own pocket that says I don’t want that 9% hanging over my income for the rest of my life. Because, there’s certain considerations because I don’t, this is a question for Venet really, but when you are going for a mortgage application and they take the top line number, and if I’ve got a student loan in, James doesn’t have a student loan.

We’ve both earn 60 grand a year. Why should we be loan the same amount of money? I don’t have a student loan and I have more liquid. 

James: I suppose my limited note, here’s here, I’m going to guess on that one, and I’m going to say they probably build that into their calculations somehow that this happens.

And what I mean by that is they have the 60 grand, but then they’ll say something along the lines of, typically this person will paying the loan, which makes them this risky, I don’t know but Vene would know the answer on that. 

Bilal: We’ll probably take that one off.

And then you pay it as part of your student loan. It’s part of the calculations we do for you. So we will work out your income tax, your national insurance, and your student loan payments. We would just need to know what band you are on. And then we factor all of that in for you.

So I think the interesting thing today, there’s a couple of things that I want to talk about before we jump into it, but is there anything that you want to add at this point, James? 

James: No. Listening intently. Very interesting. 

Bilal: We’ve done this point to death, but it’s really important that we sort of layer this knowledge as we have these conversations.

It’s the age old debate of student loans versus assumption. It’s limited company versus sole trader. It’s the number one question and cars are the two most popular questions that I get asked on a regular basis is, should I go limited? Should I get an electric car? The answer to that is, it depends, so we’re not answering that one today.

When we do the calculations for self-employed versus employed, we never factor in student loan repayments because it can be massively mislead. And we’ll talk about why in a second, which is why we don’t put that in. So when we talk about the savings you make, we talk about the real savings as in the total decrease in taxes you will pay.

If we were to factor in student loans into that, A can make it look really attractive. And b, you are not saving money. If you’re deferring debt, you’ll have a much stronger opinion on because dentist who invest is your bad baby as Austin Powells would say. Is which we are going to talk about, but we don’t factor that into our calculations because if the total taxes you’ve saved are X, then if you don’t pay enough student loan back, then you’re not going to cover the interest and your debt’s actually increasing.

So can you do other things with that money you are saving in your limited company to beat. And you have to put that into your calculator. So I’ve got some numbers in front of me, so we’re just going to base this on a hundred k. We’re not going to go through all the permentations, but a hundred K is quite a good number to work from because it highlights the point quite nicely.

So if you are self-employed and you earn a hundred k, you pay about 27 grand in tax. About five and a half grand in, in national insurance contributions and about six and a half thousand pounds in student loan contributions. So that’s your 9% over your 27 grand? So it’s quite a sizeable amount that nine percent’s been based on.

That’s six and a half grand against your student loan repayment. If you operate viral limited company, and as we’ve said, the most tax efficient amount, take out your company’s 50 k mix a salary in dividends. Your student loan is no longer based on the money the company makes.

It’s based on your extraction at the. 

James: So it does apply to dividends as well.

Bilal: Right. So investment, it does apply to dividends. So if in that year you’ve had a nine grand salary and your 41 grand dividend, your self-assessment now shows 50 K. Now you’re paying the 9% above the 27 k up to that 50 K, which is a payment of just over two grand.

Now that’s a four and a half thousand pound difference. Which, if we were to do the numbers in front of you and try to be sort of misleading, we would say if you weren’t limited, you would save about 17 grand a year in total. But it’s not a savings, it’s a debt deferral. So out that 17 grand you got to take 14, four and a half grand out of that because I still want you to do something with that.

I still want you to pay down your debt or do something with the money going to limited company because about a massive advocate that says if you go limited, the biggest reason you should go limited. Is so you can have the liquidity to then reach your financial goals and what it is you’re trying to achieve.

That’s the biggest reason she got limited. So with that being said, if you were to earn 50 K a year and your thresholds 27 K,

You’re then paying back student loan on 22 7 0 5. You pay back two grand. Now on current rates and we’ll go through interest rates in a bit more detail, but what it is currently is about four and a half percent. So if you borrowed nine 20 grand, for instance, your interest payment on that is nine 900 quit.

You’ve repaid two grand, which is. 1400. There’s still 1100 pound that come off the original capital that you borrowed. Now if we go the other way and say you borrowed 50 K, for instance, which isn’t unrealistic to fund what a five year program or a four year program is. If you’ve borrowed now 50 k, your interest payment on that at four and a half percent is 2,250 pounds.

You’ve paid two grand against. Your debt at the end of the year, even after your repayment is 250 quid higher than what it was, where you started out, which is a bit a pill to swallow. So let’s talk about a bit about interest and let’s make that interesting. So how is interest calculated? If you plan one again there’s quite a bit of detail.

All of this is on an Instagram post I put on my Instagram. So at Heath Green, go check it out. And all of this detail is within that. And there’s some good context in the the caption below as well. So, plan one, your interest rate is charged at a flat 1.5% debt easy. Your plan two is 1%, 1.5% if you earn under the threshold.

So your interest, if you earn under 27 K, and this is where you’re talking about gamesmanship, is if you are earning under 27 K, then your interest rate is only 1.5%. If you earn over that, then the interest is 4.5% but that 4.5% is inflation plus three percent. Which is currently 4.5%. I say currently at published rates before everything we’re going to go into in a second. But inflation wasn’t touching double digits when this was written. And this is all on Marcy’s website? Is, it was 1.5% plus 3%. 

James: So really that’s referring to last year. 

Bilal: Correct. 

James: And we would expect that when they updated for this year, it’s going to be a lot higher.

Bilal: Correct. That’s where a lot of the scale moning is at the moment. But it’s a pertinent subject. We need to have these conversations because you can’t bury your hand, your head in the sand because you need to factor in all of this into your investment decision, into your planning, into everything really that all of this does need bear, factoring in and then you postgrad as a foot is a straight 4.5.

And if we then talk about what impact that says, if we’re talking about 4.5% and inflation is just under 10% plus 3%, puts that 12.7% the numbers out in the media at the moment are in the twelves, aren’t they? 

James: I saw 12%. 

Bilal: So in that same example where you took a 50 grand loan at 4.5%, but let’s put that at 12% and.

So on that 50 K, the interest then charged if you earn 50 k is six grand. 

James: Wow. 

Bilal: In the year, you’ve still only paid two grand towards it. Which means your debt, even after your two grand repayment, is now four grand higher than where it was before the year ended, which is a freaky number now, just to sort of, it, it’s RPI plus 3%, but the inflation rate at the moment is unprecedented.

So the legislation can’t have even factored this in, but within the legislation that says there is a cap, the government can step in and put a cap on it, which is quite useful. So the numbers that we’ve seen are close to 7%, so it’s about 7.3. So if you put in 7.3%, again, same 50 k example where you’ve taken a 50 grand loan, your interest increases by about three and a half grand, but you’ve only paid two grand towards it.

 Which is again, a bit of help to swallow That says, in the same a hundred K scenario limited company sold trader, you’d have paid six and a half grand towards it. So you still would’ve made some dent in the money you’re earning now, I think you raised this point quite nicely and I read this, and I definitely read this online.

We’re always seeking investments somewhere we could put our money where we can get a decent return. What is a decent return? It’s intrinsic. If we said, we’ve got 10 grand in our savings and we put none of this is financial advice. By the way. There two dudes talking is to all the dude and do debts listening.

It’s if you had 10 grand. And you invested that and got 10% return, you’d consider that a pretty solid return and that’s a thousand pound, But if you could cut a thousand pounds worth of cost out of your life, you’ve given yourself a similar return, and we talk about inflation.

What is the point of inflation and what it does and what it is. It’s simply the money you borrow. Isn’t gonna be what, , isn’t going to be worth what it’s worth when you come to repay it, which is why the interest rates have to increase to cover the cost of inflation. Now, conversely, James, you raised a very valid point if it does increase, then your 50 care that you borrowed, you benefited that side as well.

 So when we have these conversations, is for you to understand what the implications are what your options are, what you’ve got to pay when you’ve got to pay. But more importantly, how it impacts you and how it impacts your planning. And do we advocate clearing your student loan as early as possible?

I don’t know. We can’t give you that advice, we’re not here for that. But it has to bake into your wider decisions. Coming from my background we were always told, you’ve got to shun debt for as quick as you can. If you have to borrow and you’re forced to borrow, then you do everything you can to repay that as quick as you.

I’ve taken my mortgage over sort of shortest term possible so I can then start repaying it back as quick as possible. And I don’t really like the use of credit cards that I use my Amex for points, but ultimately debt for me is not something I would do unless I can make money on it.

But buy select mortgage for instance, I’m not going to try and buy to that property for cash because it’s, doesn’t make sense for me to do that. But, we’re sort of veering off topic slightly, but what would you do in this scenario, James?

If you had a 50 grand student loan and you have 50 grand sat in your bank account, would you clear your student loan or would you put that 50 grand somewhere else? What would you do with it? 

James: Here’s the thing. So it comes back to good debt and bad debt. And it’s always going to be, you can look at the figures, but people’s proclivities and opinions will make them react differently in these scenarios

So for me personally, here’s how we look at it. Here’s the critical way to analyze. Let’s look at just normal debt versus. And forget about student loans just for two minutes. So let’s say you have borrowed money on a debit card, or sorry, a credit card rather. Now, let’s paint a really simple picture at the start

let’s say that that debt. Is a 16% apr, 15% apr, and here’s a mistake that I see people make all the time. They think that they need to invest their money to grow their wealth but what are you trying to do? If you invest your money? What’s the flipping first thing that they teach you in any book and invest?

And they talk about compounding so the whole point is that you invest your money as soon as you can and as consistently as you can, so that effect kicks in. Now, if we look at the data, W s and P 500 returns on that 9.1% since 1957, including dividends. So that’s the returns that you can expect to get in the market.

Maybe nine to 10%. 10% are a push typically now that would be if you simply just buy the market over and over again. Some people can do slightly better than. If they have other funds, little satellite funds that surround that, that are rather more punchy. Maybe they’re in the aim market, maybe they’ve got some in the NASDAQ and things like that, but there’s actually a little bit of skill that comes into actually attaining that higher return.

There’s a little bit of skill that comes into it, therefore not everyone can achieve it. So, long story short, realistically we’re talking the nine to 10% mark. And now if your debt is accumulating against you at a rate of 16%, you’re actually lose, You’re actually increasing your level of debt at a greater rate than you can ever expect to get returns in the market

so that’s plain and simple. If it’s above that threshold, it’s black and white, so you need to pay off your debt. Now, even when we get, let’s say if we get done to 8% apr, and we can get nine to 10% in the market, so all of a sudden everyone’s like, Oh, but I can do better in the market by approximately one.

And that’s all well and good in theory, but the market actually doesn’t really work like that because some years it’ll go down 10%. And then some years it’ll go up 20%. And overall, these are the returns that you might expect. But who says no? The whole point is you can’t predict when those years are.

So 8% consistently against. Versus on average 10% over a long period of time, average, like over a long period of time. I wouldn’t like to roll a dice on that one. If you see what it means. So there’s a really nice rule of thumb. that I’ve come across before, and that says that as soon as the interest on any debt is over 5%, you really want to focus on paying that back versus investing it.

Rule of thumb. We purely look at the numbers. Let’s forget about your inclinations and your ideals. Whatever culture or whatever background that you’re from that isn’t in giving you ideas or preconceptions about debt. That’s purely on the numbers

Three to 5%. It’s 50 50. You can do either, You can argue a case either way under 3%. It’s pretty consistent that you can beat that level of debt in the market. Therefore, it is believed that you should orientate your wealth towards repaying your debt. Sorry, let me backtrack. You should orientate your wealth towards investing before you should repay your debt at that level.

Rules of thumb. Never, ever black and white. So that’s straight up normal debt. And that’s when we’re talking about what we might call bad debt, as in debt that is consistently appreciating at a rate greater than we can ever appreciate our money. 

Bilal: We’re in that territory now for student loans though, aren’t we?

James: We are, yes. And this is where I’m building up to. So the conventional wisdom is student loans. Particularly that plan one that you’re talking about. Given that framework, the whole reason that I went into all of that was to give everybody a framework or some sort of bearing on what we’re about to say next.

So let’s say your plan one. Given what I’ve just said, appreciate at a rate of one point half percent. The conventional wisdom would be to focus on investing and growing your money, and then eventually paying it back one day. But you said that’s not linked to RPI whatsoever. So that’s never gonna fluctuate.

And I get that there’s a whole over 20,000 points thing that before you pay it back, That’s actually an extra little. Nudge to not pay it back, in my opinion for the plan one people. Because you get this first 20,000, which is sanctum always 

and it can never be en roached upon so plan one people for me. Personally, I would orientate myself towards investing. Now, of course, what we have to factor in there is that you have to have a knowledge on investment in the first place. Because if you’re not actually even getting 10% in the market and your money’s just sitting there, Then effectively there’s not any appreciable gain on it.

Then wouldn’t it be better to negate the one and a half percent that’s working against you? 

Bilal: Correct. 

James: Versus nothing happening. But even the most rudimentary knowledge of investing will allow you to beat that. 

Bilal: Unless you follow my crypto strategy and then you always lose.

James: Unless you like triple down on alt coins or do something bananas, not suggestible. So plan two people. It’s definitely way more of a conversation. And here’s the things that I would consider, so first of all, the whole RPI thing, it actually works at both ends, just as you’ve said, 

because it’s appreciating at a rate of 10%. But the actual real value of that cash is also depreciating at a rate of 10%. There’s about 50 things to consider here for me. Is your wealth going to appreciate at a greater rate than that? Should you invest in yourself?

Should you get better at sales, should you get better at education? One of the beautiful things about dentistry is in terms of the money that you make, you can literally go into work on Monday and make more flipping money with the right mindset and with some more skills under your belt. That’s a beautiful thing

So few jobs can do that let’s just straight up look at it from the point of view by someone without a limited company right now. So for me, you’ve got that on the one. But then on the other hand, you’ve got this wealth or this debt that you have hanging over your head, which is appreciating against you, which is growing at this unprecedented rate, as you said for the moment.

Do we live in an era now of constant high inflation? These are the things that people are chucking around. Has government debt got so high now that they have to print so much flipping cash in order to reduce their own? Debt in real terms that your cash is constantly diminishing in value, perpetually and interest rates never quite go back to where they are before.

We’re certainly at that threshold where the government is so leveraged in that no one actually really knows what’s going to happen next on that front. Put it like on that one. Here’s what I would say. I would say that that is exactly the sort of narrative and things that people say right before things get better.

Because it’s peak fear and then it improves. So you have to consider that too these are all the things that are going through my head when I hear this. And then as well as that, let’s talk about the limited company example. It’s all well and good. You’re saving all this money at one end and tax, but the actual debt is continuing to work against you.

For me, if you’re only ever going to pay yourself 50,000 pounds for the rest of your life, out of your limited company and by the way, no one has any idea where tax bans are going to go up or down, or whether they’re going to stay the same. Are you going to continue to pay yourself for the rest of your life because out of that and keep all your money in the limited company

because you want to just keep dodging this interest bullet that’s accumulated against you over time. you kind of ring fencing yourself in there a little bit. It’s, honestly, it’s such a huge catch 22. I really feel like it would be something that a lot of people could probably benefit on, some advice on.

There’s so many unknowns, there’s so many variables when you’re in that plan two threshold and when you have a limited company. 

Bilal: So let’s run with that slightly. So let’s say in, there’s been a number of years you’ve been making, whatever you’ve been making, you’ve been limiting your extraction to that 50 K and then you’ve not done anything with it.

So, you said to James, you’re going to start investing in xyz. You’ve not got round to doing it. Not everyone does. It’s active, it takes time. You’ve got to be sort of driven towards it. So, don’t beat yourself up if you haven’t done it. But ultimately, let’s say there’s a pool of 75,000 pounds of limited company now.

And you borrowed 50 grand. Originally you’ve been paying back your two k repayment because you kept yourself at the 50 K threshold. Let’s assume your debt hasn’t even increased. So let’s just say you’ve been covering the interest payments on. And then, three years down the line, we had 75 grand available to take out the company.

We took out 50, there’s 25 grand left that left there after corporation tax, 75 grand over three years. If we were to take that 75 grand out, we pay 33.75% income tax. Which is about 25 grand. I’m then left with my 50 K, which I use to pay off my student loan. My return of investment at this point then is of that 50 grand I was taken out, I was paying two grand towards my student loan .

So the question then becomes, how long does it take me to recover that two grand that 25 grand tax I took hit up front, which is what, 12 years for instance? 12 years of that two grand of additional liquidity, could I have invested that into my isa? Would that have factored into something else?

Would that have compounded to something that offset? So if I suffer the 25 grand up front, I’ve now got two grand more liquidity than I did every year, and I’m still at 50 k. It repays itself after 12 years. So those kinds of conversations have to come into the four as well because A, as you know, I’m a massive purveyor of planning.

So the. Conversation then becomes, let’s use a mortgage example. So when you go get a mortgage and they say to you, James, for the first two years, you’re gonna pay 3%. The rates are ridiculous, but 3% on your mortgage for for two years. And if you go back and you revert to the standard variable rate for the next 23 years thereafter, you’ve borrowed a hundred grand and you are going to repay 180,000 pounds now.

And then they put a table at the back that shows what that debt looks like. And I don’t know a single person that hasn’t looked at that table and had a squeaky bond. That’s gone. I’m borrowing a hundred k, I’m borrowing 300 k. I’m going to be paying back nearly double. Nobody looks at the student loan though.

I don’t know anyone that treats their student loan as a debt per se. That says I’ve got 50 grand on my head that it doesn’t cause me any issues. Doesn’t set my credit card, it doesn’t really impact my liquidity for anything. It’s almost like a tax that you pay every year.

It’s just becomes part of your tax repayment that says, I make x either my employer deducts it, or the government’s going to take it, and it just gets factored into the same conversation every year. Whereas if you take the bull by the horns that says in your formative years and you’re making 50, 60, 70 grand a year, you do not need that money to live off. Do you take the proactive step just to pay it all off upfront and then it’s done? It’s forgotten. 

James: Even me just saying all of those things earlier and you saying what you’ve just said now. There’s so many things you could honestly argue about it all day long.

Here’s what I will say Most fas that I know, still consider it good. That’s what I will say Most but there will be some white there who don’t share that opinion. And you are right, it’s a hugely personal decision.

Bilal: Exactly. And then the other way to look at it is, again, look at RY as a business that says if I was a foot to two 50 company and I was about to revalue my debt, and the rates I’ve been enjoying 2.5% on my billion pound loan facility, which is now 4%. What do I do? I put my prices up. 

James: I’ve got a nice framework which has just popped into my head, and here’s another thing you have to consider, all the money that you save up in a limited company, do you invest it in a business, and get that off the ground as well. because that’s one of the real ways you can throw petrol on the bonfire and create financial freedom.

It all comes down to whether you’re back yourself. Here’s a really nice framework, if you’re a risk on person. I would lean away from doing. Risk averse where the money’s just going to be sitting there not doing anything. I would lean towards repaying your debt because you know that you can get a better return from doing that than taking any speculative risks.

That is the nicest framework I think. That has just popped into my head, and it’s a really nice way to partition that decision. And by the way, I was very careful and I said the word lean. I said the word lean, which obviously is massively open for interpretation, but I feel like if you’re going to make the decision, decide where you fit in on those two bands, and then use that as the first decision tree split on your decision tree when you’re deciding, 

Bilal: There’s other hedges as well that says, and again, we we’re talking about options, we’re talking about things you could potentially do that says if you are sat with a pot of 50 K and you don’t know which way to go, the bit we’re saying here, and we’ve really said here, is if you do nothing with the capital that you originally or the whole liability of you shoot loan again, assuming 50.

And you pay student, you pay your two grand repayment on the 50 k, and that current rates are 7.3%, your 1600 pound worth a year. So your debt’s going to keep compounding by the additional six and 1600 pound a year. So you’re going to end up own more money because you’re not going to cover with the interest payments.

But if you have 50 K and you had an investment opportunity and you could repay your debt, split down the middle and said, 25 grand into the investment, 25 grand repay my student loan. Then you’re now in a position where your two grand a year is covering the capital and the interest payment.

So it’s now chipping away at the balance every year. So it’s not the answers or the options are never binary. It’s never one or the other. But it’s for you to then do the math. Now, keep saying this, but when our website’s live, we call it an amortization table, which is how does your and amortization something non real?

So it’s not depreciation is over the years with different interest rates. What does that debt look like now from your perspective? And again, I’m a massive purveyor of planning and you have to plan, you have to know where your exposure is that says, if you know that by chucking in 10 grand lump sum into your student loan now covers the capital and interest repayments it, then what?

As James ports, it turns into good debt because it’s no longer increasing. But you need to be able to work that number out and you need to be understand how that number works. But because at 50 k you’re not going to cover your capital and interest payments, but 35 K might be covering both and chipping away at the balance and now you’re happy as.

It works and now you’ve got your 25 grand over there making your money. You’ve got your 25 grand over here, not costing you any money, so it’s a win-win overall. 

James: That’s a nice framework actually, because I’ve been either good or don’t do it. But you’re actually saying actually there’s maybe a bit of a middle ground here and that’s interesting.

That’s interesting. So many decisions. It’s not black and white, 

Bilal: It really isn’t. And the rarely accounting is unfortunately. That’s why I like having these conversations and really appreciate for this platform. It’s a fantastic community that you’ve built because once this goes live and, we maybe put a question out into the group that says, What would you do?

Everyone’s going to have different opinion, everyone’s going to have a different option, which you’ll find so many different permentations of what people have done or haven’t done, or will do or may do, it’s really interesting that says there’s never going to be a binary approach to this.

And the goal certainly for me as part of these conversations is to say you have options. But giving you enough information is part of these conversations to come to the table, armed with something that says, go back to your accountant, have do the math with them that says, If I was to make a 10 grand voluntary payment towards my student loan, what would that do to my capital of the next 15, 20 years?

Build an Excel spreadsheet. Work out yourself and get own your numbers because I look at cash flow more than anything else because I’m the thing that’s drummed into our heads is cash is king that says, especially if we end up in a recession that says those are more cash during recession, we’ll make the most money coming out.

The other end of it that says access to cash and having cash that says if you do want to sit on your cash for now and do stuff, Then as long as you are beating where your exposure, then you’re in a good position. But half the battle is knowing your exposure. How do you calculate your exposure?

 Where you need to be to understand the number you need to achieve? If you know, for instance, your debt’s going to keep increasing. Then you’ve got The new option really, as we said before, is increase your prices That says, do you discount now?

So every time you now go to someone asks you for discount. that’s now coming out your back pocket, and that’s not going against any debt that you’ve got. So be steadfast in your approach because you always work from a number back. And then you build your plan on the back of that. But it’s knowing where you’re trying to end up is the majority of the battle, is knowing what you’re trying to achieve, where that money would go, and how much money you need to put there in order to cover yourself.

Because as we say, and it’s just assuming that debt never does anything, and over the life of your investments, you make x amount of money. You sell up into the sunset, and you just know in the back of your mind that over the next 30 years, your 50 grand debt has been growing by a grand a year.

You’ve now got potentially a hundred grand. You now need to repay. So when you sell your business for a million pounds and you don’t budge on that sale price because anything you budge is going to decrease the amount is directly coming out of your back pocket. So folks are making your business more valuable.

If you thought it was going to be worth a million pound, make it worth 1.1 million pound, then that a hundred grand you get as part of the proceeds goes back to paying your debt. I’m ignoring taxes and sort of entrepreneurs relief whenever at this point, but it’s where the argument is that says, Don’t sit around licking your wound.

Get on top of it, understand what impact it has on your decision making, and understand what impact it has on your cash flow and your profitability and your decision making. Because once you get to grips with all of these numbers, then you are now in control and you’ll sleep easier and you’ll understand the decisions you make and how they factor in the rest of the plan.

James: Good for thought. I actually really like that framework of looking at it from the perspective of. And then each individual and whether they’re risk on or risk off as a really nice first decision point. Because I actually feel like if you’re someone who really backs, then again, of course everybody thinks that they can be a gun slinger with their money and grow it and all of these things.

And then what happens when it backfires as well. So we have to consider that too. But if you have that inclination in you, then like I say, maybe you ring fence a little bit more. Your money to do that so that you can, because it’s about doing what you want with your money as well. You’ve only got one shot on this earth

to actually humor these inclinations that you have, which are in part of your character. Whereas if you know that you’re, somebody’s just going to sit on your money and just sit and watch and accumulate, I definitely would siphon more of that off at that point, because that’s the safest investment.

That’s the best investment you can ever make as someone with those inclinations, which is to reduce this debt that you owe on which the interest is just perpetually costing you money. I like that a lot. 

Bilal: And I think, let’s go right to the other into the spectrum for the listeners of this podcast that will have kids coming up to university age.

Do you want them to have the debt? Do you think it’ll make them better with their money or how many people have both of us come across that have got huge hoards of cash in their limited companies that are just doing nothing? And I’m risk averse. As an accountant and we are trained, to follow the cash, follow them.

I generally am risk averse if I can’t influence it with my own two hands. I’m not very good at it. And that’s where sometimes a bit of my bias comes out. But I think you need to have a balanced approach from everyone you speak to. But I am generally risk averse. Now, let’s say you’ve got your limited company.

You’ve started sending off your assets. You’ve got two kids who are about to go to university and they’re a shareholder in the company. They’re getting dividends, they’re getting everything. Do you up their dividends in that year that says they get 50 grand or across 

whatever their uni life is that says you now extract 12 and a half grand a year and pay them to pay their student fees and they end up there with their degrees, with zero debt and that puts them in their better stead. That says, realistically, it’s only really cost you 12 and a half grand if you still actively trading.

You’re not going to miss that really, are you? That says, you can start factoring in things that way, but it’s worth having those conversations that understands. It says, Do you think your child would be better having the debt or make it more responsible? Because it does, if you start putting things over people’s head and they’re now responsible for that.

But in the same token, if you give someone a free ride, are they not going to appreciate the ride that they’ve had? And all of this stuff is massively it. End up having sort of existential crisis when you start thinking about the wider implications, but it’s rarely binary and how you plan for these kinds of things is really important.

So those of you who’ve got kids who are nearing those sorts of ages, do you start building in them into your wider tax strategy? And ultimately how the money finds its way to them in order to get there. Ultimately, if they then pay you back is it alone? Is it repayment? Where that money go?

No. You can only ask the man who Ka and I, Joe at this point is there’s so much to consider, but we find ourselves in this scenario and we deal with a lot of people in the demographic of that sort of plan two, where we do go through the numbers that says, How much are you paying?

How much you repay back? Should you be paying this as part of it? And we don’t turn a blind eye to it when we start looking at limited company calculations. That says, yes, you are going to be repaying some back, but what do you want to do with the money? We had a conversation recently with one of our clients first year associate.

And, he’s making it between sort of 10, 15 grand a month. And with his first couple of paychecks, he just whacked off fishing alone. He lives very modestly and when he did that, he then treat himself to a nice car, which said, I would rather get the car on finance and clear that debt because what I don’t want to do is I have two lots of.

I thought, you’ve cleared your student loan. Again, risk averse, so I’m saying it’s fantastic. And then he’s gone out and got the car in finance, but in a net cash position. He’s completely new to what he doesn’t, what he hasn’t done. He’s got debt on top of debt, on top of debt now. So now we’re having conversations about how soon can we get him into buying his own practice.

What does that planning look like? Because now he knows what his liquidity is. Now he knows when he buys a house, can he make that 50 grand stretch as far as he needs to. And then, we’ve just opened up a limited company for him that says in 12 months time, he can then move, that he can sell the car he’s got and get electric car through the company.

Again. He’s on top of it all and we go through this planning in detail with him. It’s down to the individual that says, Get on top of it. Plan for it. Understand what it means to you. Understand how much debt you have, how much student loan you payments you have, what the rises and movements in inflation have, what bearing they will have.

How much are you actually repaying each year? What is that doing to your capital? 

James: No, I’m just reflecting on this podcast, Bilal and I really hope that we answered more questions than we created because we’ve actually bounced back and forth, but I think that just highlight. How much of a decision it is in an individual decision.

And within some of the things we said there, there is a framework to give people clarity. 100%. But we’re going to wrap up now because we’re coming up to our Mark. Anything you’d like to say in conclusion today? 

Bilal: Nope. I was going to say as there’s the post on Instagram we’ve got, as always, if there’s anything that you want us to cover in a bit more detail.

Feel free to reach out on Instagram, on Facebook, Tag us in, drop us a message. And I think James, if we put a post out on the Dentists Who Invest group and we’ll be interested to see how people react to that as well. 

James: Let’s make that poll happen. Bilal, thank you so much for your time today. I’ll catch you later my friend 

Bilal: Thanks, buddy.