Becoming a physician is expensive, not just in terms of time and effort but also financially. Upon graduating many doctors find themselves managing debt from student loans, alongside the costs of starting their practice. This financial strain presents a dilemma for many early in their careers: should doctors focus on paying off debt or investing?
Fortunately, by understanding the fundamentals of debt management and financial planning, in addition to smart savings, physicians can set themselves up for long-term success.
Managing Medical School Debt
According to a 2019 Weatherby Healthcare report, most physicians graduate with student loan debt of $300,000 or more and finish residency with more than $200,000 in remaining loans. What’s more, only one-quarter of physicians surveyed expected to pay their loans off in under 10 years.
While every situation is different, strategies for paying off medical school loans will depend on a doctor’s specialty, career path, salary, and financial priorities. In general, physicians can approach debt in three basic ways:
Focus on Debt Reduction: A debt reduction plan focuses on making higher payments to accelerate the time period for eliminating the debt entirely. Eliminating debt early can alleviate financial stress, allowing for peace of mind and a focus on future growth. By doing so, doctors become debt-free sooner rather than later.
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Focus on Investments: Making minimum debt repayments frees up capital for investing in opportunities with returns higher than the interest on your debt. While this carries more risk, especially in volatile markets, there is the potential for higher long-term gains.
A Balanced Approach: By combining these strategies, doctors can pay more than the minimum on their debts while investing moderately. This approach provides a balanced path, reducing risks associated with market fluctuations.
Both paying off debt and investing can build your personal net worth. After ten years, however, these financial strategies can lead to quite different outcomes. For instance, a doctor who focuses solely on debt repayment might miss early investment gains but will enjoy financial freedom sooner. Conversely, a doctor who invests heavily could either build a substantial financial portfolio or face setbacks if the market performs poorly.
So, when should physicians prioritize debt repayment over investing, and vice versa? When choosing between the two, physicians should consider several key factors:
- Interest Rates vs. Investment Returns: If the interest rates on a doctor’s loans are higher than their investment returns, it generally makes more sense to pay off the debt first. Otherwise, if the market conditions suggest higher returns from investments, investing more funds could be advantageous.
- Financial Stability and Cash Flow: Physicians with stable and substantial income might focus on investing, as they can manage debt payments without compromising their financial security. Those with less predictable income might prioritize debt reduction to decrease financial risk and monthly obligations.
- Career Stage: Early in their careers, physicians can focus on debt reduction to build a solid financial foundation. As they begin to earn more, they can shift focus towards maximizing their investments.
- Personal Financial Goals and Risk Tolerance: Some doctors might prefer the peace of mind that comes with being debt-free and choose to clear loans aggressively. Others might accept some level of debt in order to invest in assets that grow in value.
- Tax Considerations: The tax implications of both paying off debt and investing can influence decisions. For example, the tax deductibility of interest on certain types of loans versus the tax advantages of specific investments might tip the scales.
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Your repayment strategy will determine how long it takes to pay off your debt. According to the same 2019 Weatherby Healthcare report, 25% of doctors surveyed aggressively paid off their debt within five years of graduating. On the other hand, federal loans typically have a 10-year repayment period, while some can take much longer.
In order to optimize both debt reduction and investment growth, consider these additional strategies:
- Pay off lower debts for a quick “win.”
- Pay off high interest rate debt to minimize the total paid in interest.
- Pay off credit card debt to improve your financial standing and credit score significantly.
- Invest in assets with low to moderate expected returns.
- Consider Public Service Loan Forgiveness.
- Consider income-driven repayment plans.
- Consider refinancing your student loans.
Building a Robust Savings Plan
To effectively balance debt and investments, physicians should keep their financial strategies current and flexible. This means staying abreast of current financial trends, connecting with peers who are navigating similar financial decisions, and consulting with financial advisors who understand the needs of medical professionals. As a result of doing so, physicians can make informed choices well-suited to their changing personal and professional situations, ensuring financial security throughout their careers.
Need help building an emergency fund or your retirement savings? The financial advisors at Blankinship & Foster can expertly guide you through the complexities of managing your financial goals. Reach out to us today to get started.
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