Destroy Your Debt, Doctor

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Destroy Your Debt, ASAP!

Is debt crushing you down? Are you struggling because of credit card debt or car loans? Have you managed to dig a financial hole and fall into it?

I have been there. I spent more than I earned for too long. Next thing I knew I was borrowing from one credit card to pay another one. As my grandmother used to say I had to “beg from Peter to pay Paul.”

My excuses were that I made little money and I was at work a lot. Like that even makes sense. I was single and had the income of the average household. The problem was simple. I spent too much.

During my residency training, I got behind in my payments. I even missed a few payments. That compounded with interest and penalties. I maxed out Discover, AmEx, Master Card, and Visa.

My Path Out of Debt

They ballooned beyond what I could manage to pay. I considered Bankruptcy seemed to be my only option. But I wanted to pay my debts. With the help of a Consumer Credit Counseling Service, I was able to pay back everything I owed.

I got back on my feet and learned a lot about myself in the process. I learned how to budget. And I learned the dangers of overspending and easy money. Fortunately, that was early and on a small scale.

I trashed my credit score in that process. Those “charge off” comments stayed on my credit report for years. It didn’t seem right that the black mark remained so long. After all, I paid every cent I owed. But that’s how the world works.

Check out your credit report for free. Your report may surprise you.

That fiasco left me unable to get a credit card or a reasonable loan for many years. That turned out to be a good thing. It forced me to spend within my means.

That was an embarrassing and scary time of life for me. I came out of it and survived. You can too.

How & Why to Destroy Doctor Debt

Getting out of debt is a matter of decision. I often ask patients who stopped smoking how they did it. More often than not they say “cold turkey.”

Something happened that scared them. A heart attack. Or a child who asked them to stop so they could watch them grow up.

Something gave them a WHY. They could then find the HOW.

It is the same with losing weight or getting out of debt. Once you decide to actually do it then you only need a few simple techniques.

“Dave Says …”

I recommend Dave Ramsey as a great resource for getting out of debt. He has helped thousands of people do that over the last 15 years or more.

His radio show and podcasts are free. His books are a bargain considering how much financial value they add.

I don’t agree with his investment strategies but his debt demolition advice is the best out there. If you are not sure where to start, try reading his book, The Total Money Makeover.

Dr. Cory S. Fawcett has become like a “Dave Ramsey for Doctors.” You may find his book or blog helpful. Especially if you want advice more specific to doctors.

Student Loan Debt

Average student loan debt for medical trainees has passed the $200,000 mark. That is staggering. The interest alone at 6% runs $12,000 a year or $1,000 per month. That is without paying down the principal at all.

But even that amount can be attacked with persistence and a good strategy. A very high savings rate for the first 2-3 years out of residency can all but wipe it out. Or you could go the PSLF route and have the taxpayers take care of it for you.

Don’t ignore it or take it lightly. It is a serious obligation and cannot even be discharged by bankruptcy.

Dr. Ben White has stood out as an expert in the area of medical student debt repayment. Check out his book and blog for more. Physician on Fire offers a list of good resources.

Car Loan Debt

40% of doctors have a car loan. They shouldn’t. If you have one, pay it off. And don’t do that again. Reliable and safe cars are available for cash and every doctor makes enough to afford one.

I had a car loan once. I paid it off fast. Looking back, it was a mistake. In modern medical practice, a car is a need. But buying a depreciating consumer item on credit isn’t wise. No matter how we rationalize it.

So buy a boring older car if that is all you can afford. Save up and buy something fancier later. Don’t make those tall bank buildings downtown taller in the process.

Some doctors prefer a lease to a car loan. I recommend neither. One survey showed 17% of doctors lease cars. That deal ensures you pay high fees for a depreciating asset.

It bundles a car loan with a car that declines in value. Not ideal on either count. It is almost impossible to figure out the interest rate you are paying.

Debt feels like a ball and chain. Destroy your debt, doctor.
This is what it feels like to be in debt.

Minimal Mortgage Debt

You might not be able to afford to buy a house for cash, as I would now when buying. You may need to borrow to own your own home. It isn’t required. Renting is always an option.

Mortgages are still debt. Keep them small and affordable. Don’t ask about the most house you can buy. It is about the smallest expense that meets your basic needs.

I recommend putting down at least 20%. Then pay off the balance ASAP. Most doctors could pay off their mortgage in 5-7 years. I did and I know a lot of other doctors who did that.

I have no regrets about paying it off. It reduced my stress. And I have more free cash flow that would otherwise go to a bank in interest payments.

Some will argue that you need the mortgage to enjoy interest deductions. Those people are likely biased or confused. In truth, those interest deductions are phased out and are overstated.

Myths of Mortgages

At best you pay out $10K and get $3K back. I offer to be the bank on that deal. You pay me the $10K and I will return $3K to you and see how much richer you get.

Some are restating what they heard. Others have sophisticated arguments and spreadsheets. I don’t always understand those arguments.

All I know is I used to pay $10K in mortgage interest every year and now I don’t. It seems better this way to me.

I was able to buy houses equal to about one year of my salary. I live in the Midwest in a low-cost area. You may need to go up to 2 or even 3 times your annual salary. Realize that you will crowd out other expenses and delay your other financial goals.

Business or Practice Debt

It takes money to make money. Businesses need capital investment. It is okay to use leverage to get started or for growth. But keep a close eye on your interest expense and debt-to-asset ratios.

I took out loans to buy into my private practice and surgery center. They were great investments. I had a low-interest rate with tax deductions. The payments were manageable out of cash flow.

I didn’t sign a recourse loan. I directed business profits and dividends to pay off the loans. After that, all the cash flow comes to me.

Investment Real Estate Debt

There is no such thing as “good debt.” But debt used for investment real estate is one of the better ones. The interest is deductible and your tenants pay down your debt for you.

I also have used mortgage debt to buy commercial real estate. When buying a medical office building the asset serves as collateral. Your tenants provide rental income and pay down debt.

Debt can work as leverage to build fast wealth. But like any powerful tool, it can crush you if misused. Beware.

Need More Help With Debt?

If you need more one-on-one help, consider a credit counseling service. They will help put you on a budget for paying off your debts. They may be able to get you a lower interest rate.

It feels great to be debt-free! Trust me on that one! If I’m wrong and you miss making all those interest payments you could always go out and get more debt!

For more info: www.nfcc.org www.credit.org/cccs/ or Consumerfinance.gov

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6 Comments

  1. I can’t quite tell if you like real estate debt or not from your post.

    Would you rather be on the debt side (have a mortgage on a cash flowing property) or the equity side (loan money to a real estate syndication)?

    January 15, 2020
    Reply
    • FiPhysician,

      I’m sorry I wasn’t too clear on that issue.

      I have invested some in the debt side of real estate, but I would rather have equity when taking a risk. I use mostly short-term high-grade bonds for my low-volatility investing.

      Like most of these decisions, it should be part of a comprehensive financial plan. We all need an IPS developed on our own or with a competent planner (like you!).

      Personal finance is also personal. I had a lot of debt early on for buying commercial real estate, surgery centers, and rental houses. I paid that debt off. My goals were to have a simple and low-risk steady cash flow.
      If my goal were to build up to $20M in real estate I wouldn’t pay off that investment debt as long as the properties are cash flow positive.

      We should all pay off our consumer debts. I think most are better off without primary residence mortgages. A few should continue debt on an appreciating asset with cash flow, like a business or investment real estate.

      January 15, 2020
      Reply
      • Thanks for the comments and clarification!

        We both have seen physicians do so well from related medical businesses and real estate in the last decade. There are a lot of Rich Doctors out there now from these semi-related enterprises.

        I worry about how much we see physicians dipping their toes into crowd funding and other ventures right now, however. There is a lot of cash out there chasing returns. The music will stop at some point!

        I like that you recommend taking some risk but have the goal of paying it off! Better to have no debt when the music stops…

        January 16, 2020
        Reply
        • FiPhysician,

          I currently have ZERO debt. I own all of my income-producing assets outright. I couldn’t do that at first, but it is great now. I can enjoy appreciation on the upside. But I won’t have reason to panic with a drawdown, real estate crash, investor fraud, or tax changes.

          I agree. There seems to be way too many investment dollars floating around. I have heard stories of VC firms recently forcing startup firms to take more money from them. Crazy times.

          I’m also skeptical of crowdsourced investing. The opportunities offered are not exactly the best. Those deals were skimmed off by the big boys and insiders.

          Doctors were always an easy mark for brokers and whole-life insurance salesman. Now many doctors get term life and buy index mutual funds.

          But the real estate syndications and deals and courses from physician bloggers seem to be facilitating a new kind of unbridled enthusiasm. Doctors are taking on risks they don’t understand out of hope and trust of those promoting the deals. It won’t end well for many.

          January 16, 2020
          Reply
  2. Love your post. Thanks for the mention. I’m putting this on next Monday’s Fawcett’s Favorites. Happy New Year.
    Dr. Cory S Fawcett
    Prescription for financial success

    January 16, 2020
    Reply
    • Dr. Fawcett,
      Glad you liked it. I’m glad it will make your list. I always look forward to your Fawcett’s Favorites.

      January 16, 2020
      Reply

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