Those of you just beginning your careers are probably most worried about student loan debt. And it’s true – student loans are a heavy load for most physicians who don’t come from wealthy families and who don’t get a lot of government help along the way.
Though, you don’t have to look at it that way. Your education debt is different than other forms of consumer debt: This investment in your education bought you something more durable than pizzas and hot wings and a new Xbox. It bought you your greatest asset: a career that will likely be worth millions of dollars over the course of even a moderately successful career in medicine.
Think of it: Your investment of, say, $200,000 went to purchase an asset easily worth ten or twenty times that over the course of a career. As long as you take some steps to protect that future income – to lock it in, so to speak, for you and your family, in the event of your death or disability – you have come out way, way ahead in the grand scheme of things.
As long as you can keep working, or you have insurance in place to cover you in the event that you can’t, your medical school debt is not the biggest threat to your financial wellbeing. It is the enabler – the catalyst that made it all possible. Plus, the interest is generally tax-deductible, and well below the market rate. Almost any hedge fund manager would jump at the chance at the kind of returns on capital you are likely to experience over time as a doctor, just on the basis of cash in vs. cash out.
The biggest threat to your financial well being, instead, is consumer debt. This is the debt that you may incur in the effort to fund a ‘doctor’s’ lifestyle. Or what you think a doctor’s lifestyle is – because you haven’t been around long enough to realize what many other doctors who have come before you have found out for themselves: They have spent themselves into a corner.
The 5 Rules of Debt
I would argue that there are 5 Rules of Debt:
1. To buy an asset
Such as a medical school education leading to an MD degree and a license to practice.
2. To protect an asset
For example, if you have to borrow some money in the short term to keep from getting evicted out of your home, or to keep your medical practice running during a temporary cash flow crisis, that’s understandable. At some point some of you may borrow against life insurance in order to pay insurance premiums. The goal is to protect an asset to make sure you don’t lose it.
3. To fulfill contractual obligations
Fulfilling contractual obligations goes beyond just honoring commitments; it’s about preserving one’s reputation. Failing to do so can tarnish a company’s or an individual’s image, leading to distrust among business partners, clients, and customers. Businesses, in particular, rely on a strong reputation to attract new clients and maintain existing ones. In the long term, honoring contractual obligations becomes a cornerstone of building strong, lasting relationships in the business world.
4. To retire older debt at a better interest rate or more favorable terms
Retiring older debt with better terms is a smart financial strategy that individuals and businesses can use to their advantage. Over time, interest rates and financial conditions can change. What was once a reasonable rate might now seem exorbitant. When the opportunity arises to secure a new debt at a lower interest rate or with more favorable terms, it’s a wise move to consider retiring old debt.
5. To replace secured debt with unsecured debt
Replacing secured debt with unsecured debt can be a strategic financial decision, but it’s not without its risks. Secured debt is backed by collateral, such as a house or a car, which means that if you default, the lender can claim the asset. In contrast, unsecured debt, like credit card debt or personal loans, isn’t tied to specific assets.
If you keep these five rules of debt in mind, pay yourself first, and you can keep working as a doctor, you will likely have few debt problems. The medical school debt isn’t fun, but you’ll manage comfortably, as your career progresses.
6 Financial Mistakes New Doctors Make
You want to know the real threats to your financial well-being? If you’re properly insured, medical school debt isn’t on the list. Here are some much bigger problems:
1. Buying too much house
You’re in the first stages of your career. You don’t need to move in to your boss’s neighborhood.
2. Buying a home too soon
Your first job out of medical school is just that – a first job. Chances are quite good you will want to move to take a new job within a couple of years. It’s ok to rent for a time while you get situated.
3. Home furnishings
This is a biggie. Many couples have stretched themselves to get into a home – and then broke their budgets furnishing it. Don’t go into debt on high-dollar home furnishing. Pay for quality on appliances, but it is better to live on lawn furniture you own than on plush sofas that you don’t. Buy a modest home, and you’ll be able to buy whatever furnishings you want for your home soon. With cash.
4. Buying too much car
Yes, interest rates are pretty low, by historical standards. The current averages, as of early November 2014, are about 4.04 percent for a 60-month new car loan, and about 4.9 percent for a 36-month loan on a used car, according to data from Bankrate.com. Which makes it deceptively easy to spend too much money on something that actually depreciates in value. Unless you’re a cab or pizza delivery company, your cars are not assets, except to the extent they help you get to work. Buy a used car that you can rely on – and save the rest. If you are looking at a $36,000 car, buy a used car for $6,000. Take the rest and invest it. If you can get 4 percent,plus the 4-6 percent you’re not spending on a car loan, that’s a spread of 8 to 10 percent. In today’s low interest environment, that’s a lot. Add to that all the depreciation you didn’t take by selling that $36,000 vehicle for $6,000, down the road!
5. Overspending on eating out, vacations, etc.
The problem is, you think you can afford it. You should be able to afford a very enjoyable lifestyle – but not an extravagant one. Get your feet on the ground first – and watch your savings account grow. Then you’ll have a better idea about what you can and can’t afford.
6. Failure to Protect Your Biggest Asset
You can be doing all the right things, and making all the right decisions. But without insurance in place the whole house of cards can come crashing down in an instant. Your greatest financial asset now is your future as a doctor. If you protect one thing, protect that – with sufficient disability income insurance, and sufficient life insurance to ensure you will have income coming in to maintain your lifestyle. As long as you avoid making misguided consumer debt mistakes, this will be much, much easier.
Invest in Your Tomorrow
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