The overwhelming majority of doctors will have loans in their life.
Student loans. Mortgages. Private loans. Practice loans. Car loans. The list goes on and on.
And while loans for doctors may seem somewhat inevitable, their permanency is absolutely not. In fact, the number of things that should be financed with loans is actually pretty small.
But, as you may know from experience (I know that I sure do!), the amount and frequency of debt that we take on as doctors leaves us feeling numb to its negative effects.
Dr. Cory Fawcett calls it “debt-abetic neuropathy” which I think is pretty accurate and clever.
We take out loans early and often in our lives so they begin to feel normal. We therefore think that taking out more loans is no big deal.
Doctors begin to think that paying our loans becomes “just like any other bill”
This is the wrong way to think about loans as a doctor, or as an anyone really.
Yet, this is advice or wisdom that I received from many of my mentors in medical school and residency. Truth be told, it’s also the strategy that a number of attendings I know are still employing.
Before my financial education began, this was the strategy that I was going to use to pay back my massive loan burden. Simply because I did not know any better.
Loans are not “just another monthly payment”
Loans have interest on them. A monthly payment in my mind is like Netflix or something. I pay a standard cost for a good or service that brings me an equal or greater joy than the price tag (that’s called intentional spending).
Meanwhile, a loan on the other hand is not a standard price. It constantly changes based on how you are paying it back.
Go to any loan calculator and play around. Even at the same interest rate, paying back a loan in 5 years versus 28th years will save you hundreds of thousands of dollars over the course of the loan. That is equal to hundreds of thousands of dollars that you could use to:
- Pay for your kids’ college
- Take some extra vacations
- Invest in cash flowing rental properties (Check out my step-by-step guide here!)
- Retire earlier
- Basically anything that you want!
One friend of mine told me that he wants to die still owing loans because this way he wins. I tried to kindly explain that the loan company wins BIG in that case as he’s paying them so much more interest over the years that they don’t even care about the principal anymore. Unfortunately, I’m not sure that it sunk in for him.
How should doctors think about loans?
I recommend thinking of them as malignant pre-tumors that need to be cut out as soon as possible before they grow and destroy your financial well-being.
Let me elaborate.
If you end training with >$450K of debt like I did, you can either pay off your debt aggressively in 5 years by paying ~$12,000/month. This is what I do.
Or, you can pay it off over 25-30 years with payments of about $2,000/month.
Please note that these are just round, approximate numbers to illustrate the example.
You may be enticed to choose the 25-30 year route to increase your cash flow immediately. Then, you can use that extra monthly money to buy a bigger house, take out a car loan, join a country club, and otherwise live it up! That loan payment is just another monthly expense anyway!
By doing this, you keep adding more and more monthly expenses to your plate. Soon, you are just making enough income to cover your monthly expenses. You’re in the rat race now. And guess what, those loans aren’t going away. If you start making less money, the one thing you can’t get rid of is the loans.
Not a good situation to be in.
On the flip side
Let’s say you decide to pay off the loans aggressively in 5 years.
Well, for the first 5 years, you are going to have some limitations in what you do. A lot of this depends on your specialty and income. But I’ll tell you what, any doctor will be thrilled with the lifestyle that they can afford as an attending, even while paying back loans aggressively, compared to your lifestyle as a trainee.
And then, guess what?
After 5 years, your loans are paid off! You effectively get a $12,000/month raise as this money now goes into your pocket and not the loan company’s. And this continues, for the rest of your working career!
Just imagine what you can do with all that dough!
In my mind, this is a total no-brainer. Make yourself wealthy, not the loan company!
And I put my money where my mouth is in my published strategy for paying back my loans.
The exception that proves the rule
I will note that this is the exact opposite advice I give and strategy I use for what I term as good debt.
As a reminder, good debt is debt that pays you to take it on. (More on that here.)
The main example of good debt is a mortgage for a cash-flowing rental property. You technically have the debt in your name. But it is paid off by your renters in addition to extra cash that goes into your pocket every month. That is by definition debt that you get paid to take on.
In this instance, I do not pay off my rental property mortgages as quickly as possible. I use that debt as leverage to increase my cash flow from the properties in the present. Then I use that money to buy more properties and grow my wealth exponentially.
I definitely 100% do not think that paying off your rental property mortgage early is wrong. Many people strongly advocate for it. Doing so will again increase your cash flow in the future, once the property is paid off, immensely.
It’s just not the strategy that I use.
But most debt is bad debt!
Car loans. A mortgage on your home property. A construction loan. Your student loans once you stop being a student.
These and more examples are all bad debt.
There is only one acceptable strategy for paying off bad debt. And that is to pay it off as quickly as you can!
Remember, your loans are not just another monthly payment!
Ready to learn more about managing your debt? Check out these posts!
- Revealing My Secret Strategy to Pay My Huge Student Debt
- What Do You Need to Include in Your Savings Rate?
- Doctors and Dollars Episode #9: Frugal Champion
- To Be Rich & To Feel Rich: Two Very, Very Different Things!
- Debunking the Myth of the Doctor Car!
What do you think? How do you manage your debt? How do you think all doctors should handle their various loans? Let me know in the comments below!
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