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.
And…
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”
Nope.
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.
Related post:
The Important Difference Between Good and Bad Debt for Doctors
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.
You can see how this has worked out for us in our one-year review of our first inv vestment property here.
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.
Paying off bad debt is a huge part of how I have increased my net worth by so much in such a short period of time as you can see in this post!
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?
- 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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What is the difference between wealth management and asset management?
I would argue that they are synonyms!
makes sense, thanks!
shoot dude- I keep my student loan debt and choose to invest in the stock market, as my loan interest rates are 1.95-2.6% and investing in the stock market where can get 7-10% historically. I think I have debt-a-betic neuropathy, but knowing market history, already having a plan for my student loans, and not planning on FIRE I am ok with investing vs. paying off debt š
Thanks for sharing Rikki! Using interest arbitrage I think is still different. You arenāt looking at the debt āas another billā but are using it to your investing advantage. I donāt necessarily use that approach as I am a big fan of just getting rid of debt but I think yours is a valid approach!
On Boglehead site I was reading that Blackrock sees US stocks going up 5% per year
https://www.blackrock.com/institutions/en-us/insights/charts/capital-market-assumptions#assumptions
Vanguard 4.7%
https://personal.vanguard.com/pdf/ISGVEMO_122020_Online.pdf
These are nominal returns.
They had forecasts from six total firms. The range was from -6.6% to +6.9%. (The low was in real terms and the high was in nominal terms.) The average was about 3% nominal.
I’m in it for the long haul and am an optimist- I think there is still a premium for investing in stocks š Not planning on retiring for another 25 years, and starting 20 years from now will start adding some bonds to mitigate SORR, and when I retire will be 60/40. There is always a chance for poor and negative returns in equities, but that’s why you have the chance to get rewarded! No guts, no glory!
Rikki,
i like your approach! As a practical matter, there is a clear premium of stocks over bonds. So from an allocation perspective for anyone like us with a 25 year horizon to retirement the heavy weight of stocks over bonds seems sensible. Whether that’s expected return of 4%, 5%, or 10% for stocks is an interesting philosophic discussion and maybe could impact what our saving rate should be. But as a practical matter we know the real rate of return on government bonds is negative. The relevance for holding bonds would seem to be 1. short-term holding period so like an emergency fund, or 2. to, as you eloquently note, provide a ballast so you don’t panic sell if/when stock sell off. 3. To guarantee a minimum return on capital.
I think with some of the more pessimistic return predictions for the next 10 years the forecasters are betting that P/E multiples will compress to more normal levels. If that happens it could just mean returns would be better in years 11 to 20. So if our horizons are 20 years than seems sensible to go with higher equity allocations.
Btw, I am a bit spooked by the Biden headline bomb yesterday about capital gains taxes going as high as 43%. Snice this isn’t the Bogleheads comments thread I can write that. (on that comments thread you get deleted if you speculate on legislative change that hasn’t yet passed!)
ha yeah, I got kicked off Boglehead for a week promoting 1st Republic student loan rates- those guys are serious! I am spooked by Biden increasing income taxes as then less money I can spend on me and the fam. does it change my investing plan- nope. I hope though that a tax increase will cause a stock market crash so I can buy stocks on sale. Hopefully soon I will be greedy while others our fearful. told ya I’m an optimist. even though tax increases suck, I am hopefully going to profit in retirement from the ensuing fear that follows.
However, it is a little more complicated to predict. it seems historically the stock market actually goes up and gets more frothy when taxes increase! doesn’t make sense rationally, but behaviorally when people think taxes will increase they picture the apocalypse, and when the apocalypse doesn’t happen, stocks go up. In reality government tax increases are associated with more spending by the government, stimulating the economy, and boosting corporate profits.
Given this I am hoping people DON’T get spooked by potential huge tax increases b/c they think democrats only have a slim majority in the senate. Then when the tax bomb occurs that it prevents the huge expected corporate profits from corona reopenings, investors will panic that they didn’t meet expected returns, and stocks crash.
my crystal ball though, as always, is cloudy. I can always pray for another bad crash though!!!
Rikki, this is something I’ve been grappling with all year. On the Boglehead site there are debates I’ve been trying to follow and understanding about whether to pay off a mortgage if you are simultaneously invested in bonds with lower yields than you are paying in the mortgage.
My issue is that I have some funds in Vanguard’s New York (my home state) muni fund, which is only yielding 1.37% right now. My mortgage is 2.25%.
I’ve been going back and forth. I could sell some of my muni bonds and pay off some of the mortgage. Or I could think of it as using the mortgage to increase my overall portfolio (both stocks and bonds.) To complicate it, I’m waiting to see if SALT deduction changes as that will lower the effective rate I’m paying.
Haven’t decided what I’m going to do it yet. As of now, I’m thinking about it like you and figuring I can get a higher return than the mortgage.
There’s also some chance the bond yields increase in the future to levels higher than the mortgage yields.
As far as stock returns … I hope you are prescient about 7% to 10% based on past history, but unfortunately, though, I’m only assuming stocks will return 5% in the future since P/Es are so high now. Based on this– https://advisors.vanguard.com/insights/economic-and-market-outlook-2021/impact-on-portfolios#projectReturns But ,either way, that’s good enough to clear the hurdle for us of a 2% nominal borrowing rate.
hey Tom, are you itemizing your deductions? are you paying a lot in mortgage? that 2.25% could be more 1.125% with the tax deduction if you are highest tax bracket, making your muni’s actually higher interest after tax. then add inflation if it ticks up, then you definitely get a real return! However, NY state specific muni’s are not risk free- some cities do default on debt as well as need to luck at the average duration of the fund.
I myself consider my mortgage as a negative bond, so technically I am not really 100% equities. If the market tanks and I lose 99% in equities, I am actually going to jump for joy and try and invest more (as long as the market drop wasn’t caused by Armageddon), and still have equity in my house.
In terms of the stock market returns in the future, I have 100% equities and 10% is small cap value. Valuation might be high but at the same time inflation currently is super low- I think the real return will be at least 5%, and using the FV function in excel it seems I would hit my retirement number easily. though these are just assumptions.
Jordan, do a blog post on this! even though valuations might have been lower in the past, inflation was higher- did the stock market really give you a high REAL rate of return?
Hi Rikki,
Thanks for your reply.
I’m not itemizing my deductions. The issue for me right now is the cap on SALT deduction at $10,000. Unless congressional legislation changes that the mortgage rate for me will stay at the 2.25%. It looks like that might change soon. (I think It won’t change to half that, though. Isn’t it only deductible for federal tax, so I’ll be paying a bit more than half?)
I live in New York so state taxes are brutal. (And getting worse!)
For asset allocation you are 100% stocks? how do you treat your house and your mortgage? do you separate them out? that is another thing I go back and forth on and it seems like on the boglehead site there is lack of agreement.
If I ignore the house in the asset allocation then it would impact whether I would include REITs in my IRA.
Most of the people on the Boglehead site seem to separate real estate and mortgage from their asset allocation and then look at their stock/bond %. Intuitively I’m not sure I like looking at it like that for myself.
What % do you have in international stocks? I settled on 35% in my IPS after lots of debate.
yeah dude I am 100% stocks! my house is kind of like a bond to me, and the mortgage a negative bond. I kind of don’t separate them out- it kind of just a bond to me. There is lack of agreement as money is fungible, but I think the point the Bogleheads make is how does it fit in your overall plan. If I had bonds in my portfolio, it would be to act as ballast and I would not draw from it until retirement. My house equity is also value that I would not draw on until retirement maybe as a reverse mortgage, and my current mortgage is a negative bond as it acts as ballast in everytime I pay it it’s a guaranteed rate of return, which is my interest rate. although it is real estate I don’t look at it like REIT’s as it is not generating as much return. and definitely not like an investment property!
I have 25% total international in my portfolio. you having 35% international is perfectly fine. Again the big question is the stock/bond allocation. after that, how you divide the stocks is not a big deal. The world economy seems so much more connected than in the past and the US/international correlation has become closer to 1, so don’t have to waste too much mental energy on exact percentage of international.
Paid my student loans off less than 4 yrs after graduating residency. Best decision of my life. I’m free to travel, serve, treat refugees, and quit jobs if I don’t like the environment I’m in or the “treatment” I’m getting from higher-ups. Have been funding retirement for years (and did put extra money into retirement first year I was paying back loans after residency, to get the fund started). Without loans have much more freedom to do my own thing.
I love this and totally agreeā¦canāt wait to be debt free!
Rikki,
Great analogy about a ballast!
Agreed on the stock/bond allocation decision being much more salient than US/international stock decision.
Under any plausible assumptions for return difference between US and international returns the gap will be much less than the difference between reasonable assumptions for stock and bond returns in the future.
That being said, Vanguard thinks international stocks will beat US stocks by a few percent a year over the next decade based on where valuations are right now– https://advisors.vanguard.com/insights/economic-and-market-outlook-2021/impact-on-portfolios#projectReturns This is a controversial topic on the BH site. People have been apparently been saying this in recent years as US stocks have continued to outperform. But, based on history, when starting valuations have been like they are now, international stocks have tended to outperform. One other complication is that the tax treatment of foreign stock dividends is less favorable (and expenses are a bit higher … 8 bps for me in VXUS vs. 3 bps in VXI) so I estimate a return drag of about 1/2% in foreign stocks based on something I was reading on BH.
The Vanguard total market fund (etf VT– https://investor.vanguard.com/etf/profile/portfolio/vt) is 43% in US so I figure the max I’d want to be is 43% (market weight) because of the unfavorable tax treatment. (My IPS/financial plan used Jordan’s template and penciled in a band that peaks at 45%, about the current market weight. As a placeholder I have the lower band at 20%, about half the market weight. The lower band is completely arbitrary. I just picked a # halfway betwen 0 and the upper band. Since I’m starting near the upper end of the band it will be a non issue for some time and I can modify in the future.)
Because there seems to be a strong case for international stocks right now I have my weighting at 35%. If Vanguard was right about the international stock outperformance, that several % per year would add up substantially as alpha even while statistically the US stock market had a high correlation with international stocks.
This is a good article. The one point I would like to add is you don’t have to do the aggressive student loan paydown or the 20-25 year plan. You can also do PSLF which takes 10 years. If you work at a non-profit or 501c3 after training it would always be a better paydown plan to do PSLF unless you own next to nothing in student loans when you graduate from med school.
Andrew SLA
Great point Andrew!
PSLF is an excellent option for those with long training periods (like the 7 years I did) or those with high debt:income ratios!
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