Debt is a significant problem that many graduates face, particularly residents. According to StudentDebtRelief.us, in 2016, the average medical school debt was roughly $190,000, with approximately 25 percent of grads shouldering debts greater than $200,000. Of course, these figures do not include credit card debt, a mortgage, and/or other loans that residents and new doctors may carry.
To help young medical professionals better manage their financial obligations, we spoke with Michael Kalscheur, CFP, partner and senior financial consultant with Castle Wealth Advisors, LLC. Most of his experience regarding loan debt pertains to new physicians—specifically residents and providers who have been out of medical school for less than 10 years. Here, we highlight measures Kalscheur recommends for paying off loans, developing “fiscally fit” habits, and avoiding overwhelming debt from the onset.
Create a budget
No matter what you earn as a young clinician, it can be easy to spend above your means. Therefore, the first thing you should do is take a realistic look at how much money you take home versus your expenses—such as student, car, and home loans; household expenses; savings; and other debt—and establish a practical budget.
While you do not necessarily have to follow this best practice every month, it is imperative to review your existing budget anytime you consider borrowing money. A good rule of thumb: If you cannot look at your budget and honestly say, “Yes, I can take on this new debt without touching my savings,” you should not assume another loan.
Keep flexibility in your budget
If you spend every dollar you earn, getting ahead will be difficult. Therefore, you should ensure you have a money cushion and consider living just below your means. Read on for just a few ways you could pay down your loan debt more quickly and prepare for unforeseen extras:
- Buy a home you can afford with a 30-year mortgage but treat it as if it were a 15-year mortgage or pay a little extra toward the principal every month.
- “Skinny down.” If you can afford $3,000 a month for a mortgage, purchase a house or apartment that will cost you between $2,000 and $3,000 monthly, and make additional payments to satisfy the loan early.
- Use extra money to pay off your student loans first. After roughly five to seven years, your medical school debt should be paid off, and you can use the extra money to pay down a mortgage even faster.
- If you get a large pay raise, put that additional income into your cushion of cash. Equally important: Do not spend it before you have earned it.
Understand paying off debt is (and should be) a lofty goal
Over the years, Kalscheur has seen the devastating effects that debt can have on residents and new physicians. It is one of the reasons he is so passionate about helping young clinicians understand the great importance of making a commitment to become debt-free.
“I often reference Dave Ramsey,” he says. “A multimillionaire who seemed to have it all, he went bankrupt because he didn’t control his debt and got overleveraged. Being prudent and without debt are far more enviable than overextending yourself and trying to pay off what you cannot afford. I look at someone who is out of debt and think, ‘That’s a smart person. He knows what he’s doing.’”
Don’t try to keep up with the Joneses
While it can be difficult to say no when banks and other lending institutions are willing to loan you money for extravagant purchases, get comfortable living within your earnings right out of residency. What’s more, never borrow just because you can or make financial decisions based on staying in step with some of your colleagues, older clinicians, and/or seasoned healthcare executives.
For instance, although some hospital presidents or physicians who have practiced for decades may climb behind the wheel of a Porsche or Lexus, it is more sensible for you to purchase or lease a reasonably priced economy car. Taking out a loan for a luxury vehicle fresh out of training and not yet earning the income needed to appropriately cover that expense would be a poor choice. One day, you will be able to enjoy many of life’s finer things, like an expensive vehicle, without hardship, so be patient. It will take time and that’s okay.
Moonlight/pick up extra shifts
Seek opportunities to make extra money. Accepting locum tenens jobs while you have a permanent position and/or picking up extra shifts at your healthcare organization, when possible, are two excellent ways to supplement your income. If you were to moonlight as an independent contractor when your schedule permits or pick up a single shift every couple of weeks, before you know it, you could be depositing tens of thousands of dollars into your savings account, even after taxes.
You will be amazed at how quickly you can pay off your loan debt by following the above recommendations. While it won’t happen overnight, it won’t be a two-decade process and in a relatively short amount of time, you can be debt-free.