Upon finishing training, many new anesthesiologists will have debt (usually in the six-figure range) from medical school and college. They will likely also have debt from credit cards, relocation loans, car payments and possibly housing debt. Monthly payments can be extremely high, and the interest alone can cost thousands of dollars per year. That’s why it’s important to have a strategy for paying off your debt. By Lindsey Rutland, MD
In Part 1 we discussed the basics of budgeting, and now in Part 2 we’re going to talk about tackling debt. Eliminating debt is a sure way to get yourself on the right track financially.
People inherently have different levels of comfort with certain amounts of debt - financial specialists term this how “debt-averse” or “debt-tolerant” a person is. For people with high debt but very few assets, there are multiple reasonable ways to start building wealth. While you must decide for yourself exactly how much debt you will tolerate, it is generally agreed that high-interest debt should be eliminated as quickly as possible. There is no exact definition for high-interest debt, but these are generally high interest rates seen for personal loans or credit cards. Some say that high-interest debt is anything in the double digits, others say that it’s a debt rate that is higher than what can be earned in the market on average, while even others say it’s any debt that is not a student loan or a mortgage. No matter how you define high-interest debt, it is something that should be your first priority to knock out because paying off high-interest debt will give you much higher returns than any savings or investment that exists. Once your high-interest debt is conquered, it should be avoided in the future. That means paying off the complete credit card balance(s) every single month with no exceptions (get rid of credit cards if you cannot do this), and save up to pay cash for big future purchases (ex. TV, refrigerator, vacation, etc.).
If you’re currently in a position where it will take a more extended amount of time to pay off high-interest debt, you should consider refinancing in some way. The first step is to stop acquiring high-interest debt (ex. cut up the credit cards). Most traditional loans (ex. relocation student loans) can be refinanced with your lender or with another lender for a lower rate. If you are refinancing student debt, you may be able to consolidate both a relocation or personal loan with your student loan for an overall lower rate. Refinancing higher rate loans into a lower rate loan usually comes with significant fees, so make sure to calculate the costs carefully to ensure you will save money in the long run (but chances are that you will come out ahead). Credit card companies can sometimes be surprisingly helpful if you call and simply ask for a reduction in interest rate. Another option is to transfer the balance to a card with an introductory 0% APR (annual percent rate) period. This will allow you to make payments toward the principal balance without money getting sucked into interest payments. Remember there may be a fee for this and after the introductory period is over, the rate will usually increase to the original high value. Once you graduate and start your first attending physician job, you should redirect that larger paycheck to getting rid of this high-interest debt before making other purchases.
There are several schools of thought on how to pay down low-interest debt. Some recommend paying off low-interest debt slowly and putting any additional money into your investment accounts. The thought process here is that in the long run you will earn more money on those extra dollars because the market generally produces returns that are higher than the interest rate on a low-interest loan, so your overall net is positive. The problem with this way of thinking is it assumes that you will invest that extra money. If you spend those dollars elsewhere, you are just paying interest for a longer period of time with no market gain. If you choose this method, it requires you to be very disciplined. Others believe that you should pay down ALL of your debts as soon as possible. This will give you peace of mind and lower the overall interest owed; once the loan is paid off, that money can be put into investment accounts (or wherever else will help you achieve your goals). Student debt is covered in the January blog post by Dr. Malgieri, and there are some very specific considerations for this type of debt depending on your circumstances.
Getting rid of debt should be one of the main objectives in your financial plan. Make an aggressive plan to pay off high-interest debt as quickly as possible (and to not acquire any new high-interest debt). Save up to pay for big future purchases. Make a plan for low-interest debt taking into account your specific debt tolerance and situation. Once you have a plan for debt elimination, you will gain peace of mind and not get trapped in a cycle that results in future debt.