The Golden Answer to “Pay Off Debt or Invest”
Physicians Want to Know How to Pay Off Debt Or Invest
The number one question most physicians have is whether they should pay off debt or invest, or more accurately, which pursuit would be more beneficial to their circumstance. Money obviously being a factor either way.
The golden answer really lies in how you make decisions around the money you have, don’t have, or will have.
Do you know how to launch yourself onto the road of financial success?
Have you given any thought to your financial future—and what it will take to build a secure life free from the devastating effects of debt and consequential worry?
In this episode, Jim Dahle, founder of White Coat Investor (as if you didn’t know him already!), talks about his popular financial philosophy of “Live Like a Resident” and how a basic shift in mindset and their spending behaviors can truly set physicians up for life!
Because money talks, right?
Yeah, we all know it does. *Sigh.*
In detail, White Coat Investor explains why it is important in the long run to live like a resident just a little while longer (relatively speaking) after becoming an attending physician. Jim emphasizes this as a short-term strategy so that you have a long-term gain. We then dive into detail with a real answer on, should physicians pay off debt or invest.
So, check this out.
[easy-tweet tweet=”As Will Rogers once famously said, “Even if you’re on the right track, you’ll get run over if you just sit there.”” user=”physicianwealth” url=”https://twitter.com/WCInvestor”]
What’s the point in continuing your years of long sacrifice?
An advantage in gaining the type of freedom that changes your life view.
After all, financial freedom is personal freedom.
Why Should You Continue to Live Like a Resident?
“Live Like a Resident“ is the perhaps the most important thing you will hear from White Coat Investor. After all, he’s dedicated most of his blog to helping physicians understand its value. Once you truly understand this, the answer to the pay off debt or invest question becomes a little clearer.
Give yourself a 50% raise after becoming an attending physician.
[easy-tweet tweet=”@WCInvestor says, “Give yourself a huge raise. Give yourself a raise that anybody in corporate America would be ecstatic about—50%.” Why do you think this is important?” user=”physicianwealth” url=”https://twitter.com/WCInvestor”]
The first two to five years after completing residency can be a crucial time in building the foundation for your financial success. If you remain on a similar budget as you navigated as a resident, for just a few more years, you can build a solid foundation of wealth.
By continuing to live the financial life of a resident, you will get a jumpstart in paying off student loans, saving up a sizeable down payment on a home or building a generous retirement fund. Living like a resident allows you to do both simultaneously and solves the pay off debt or invest problem.
Many of you will be resistant after years of long hours, unending sacrifice, and financial struggle, all while striving to reach each new goal on the road to becoming an attending physician. You feel like you’ve crossed the finish line, and you deserve a reward!
We say the solution is to give yourself a 50% raise. That increase will serve as your reward, and you will still have a significant amount of income to use for building wealth.
How much income a physician makes will depend on several factors.
A few factors could be:
- Location (especially if you are running your own practice)
Something we strive to prevent is jumping from living on $50,000 a year, to living on a typical attending physician salary of $200,000 to $300,000. The goal is to live under your means. You will want to live like a resident to strengthen your financial future.
Understanding Your Finances
Do you want to build a solid financial foundation?
Do you know the difference between a Roth IRA or 401K?
Do you understand mutual funds?
If not, it’s time to build your financial literacy.
The first step is to learn some basic terms. One book we suggest is the book “The Millionaire Next Door” as a starting point.
Avoid a future net worth near zero.
Jim’s other suggestions were to first delve into financial topics by reading a few blog posts. Ask your employer for a 401K plan document and read it. His other great tips were learning about any fees you must pay and what your investment options are.
It’s also important to focus on the savings rate and when the investment return becomes important. This is extremely important when trying to decide if you should pay off debt or invest.
Create a balance sheet.
The second step is finding out what your income is by creating a balance sheet. We delve into the variables that impact your actual income including taxes and debt. I’m a firm believer in managing your personal finances like a business. Know what your assets, liabilities, and net income are by tracking your spending and investments. By educating yourself and becoming familiar with your finances, you will become aware of the gaps in your knowledge.
Then you can then take steps to fill those gaps.
Sounds simple, doesn’t it? Well, it sorta is.
You begin with a written financial plan. As your knowledge increases, and life changes occur, you can adjust the plan.
A one-page financial plan template can be accessed after joining the private Facebook Financial Residency Group.
Pay Off Debt or Invest? The GOLDEN Answer.
The most frequently asked question is “Should I pay off debt or invest my money”? The answer lies with the individual—with you. It depends entirely on the unique circumstances.
Some of those circumstances are your percentage of credit card debt, interest rates, how much you are investing in 401K to get a potential employer match, or if you are eligible for tax-protected retirement accounts.
However, something to keep in mind is anytime you have debt, everything youbuy is on borrowed money. Eeek.
Maximize retirement accounts.
If you are still in your “Live Like a Resident” period, and your retirement accounts are maxed out, the advice is to put any additional savings money toward student loan debt depending on the interest rate.
[easy-tweet tweet=”It’s a problem when people are willing to change how they file their taxes, when they’re willing to have kids or not, or get married or not to deal with student loans. That’s a problem.” user=”physicianwealth” url=”https://twitter.com/WCInvestor”]
Pay off high interest rate debt.
If an interest rate is low enough, it might make sense to carry the debt, but only if you are investing the money. Most people fail to invest, they instead treat themselves to a new car or a luxury vacation, which defeats the point of carrying the debt.
Where real estate fits into the plan.
Real estate is another possible investment opportunity. Real estate can be a good investment if you know what you are doing and can hold on to them long-term.
Investing in assets and taking risks.
Early in your career, a positive move to make is investing in assets that are much higher yielding than your debt. Later in your career, there will be other investment options. For example, during a previous show, our guest Veena Jetti, who is a founder and partner at Enzo Multifamily, discussed everything you need to know about multifamily investments. She spoke about higher yield syndication deals and crowdfunding.
Veena is a real gem!
This is quite the viable avenue for anyone wanting to pursue this avenue to build wealth.
During the first year or so of post-residency, it may not be possible for a new attending physician to invest in the higher yield investments due to a required minimum amount of $50,000 or $100,000, which the year you leave residency is a really big ask.
It’s tough to come up with that kind of cash even if you’re living really cheaply.
Even with this murky water, there are still pretty decent investments available to physicians. There are no right real answers, but as you get toward the extremes in interest, the obvious answers become more obvious.
Regarding real estate investments, the White Coat Investor quoted Josh Mettle who said, “Time heals all wounds in real estate.”
[easy-tweet tweet=”White Coat Investor quotes Josh Mettle who said, “Time heals all wounds in real estate.”” user=”physicianwealth” url=”https://twitter.com/WCInvestor”]
Early in your career, there are trade-offs for investing. As you get further down, there are alternative investments you could look at such as the ones mentioned here.
Saddling up the nuts and bolts
White Coat Investor brought a great perspective to the show for doctors who want to know whether they should pay off debt or invest. Obviously, there are several justifiable answers to that question, but the path you take is really dependent upon your own situation.
Jim told a story about when he was a military doctor making about $120,000 a year. He and his wife lived on $50,000 to $55,000 for four years after residency. They didn’t live in a majestic house, but rather a tiny rinky-dink home that wasn’t in a great neighborhood.
They didn’t live in a good school district.
Nor did they take awesome vacations.
In fact, the car he drove cost just under $2,000 and the AC was out!
He credits his frugality on being 43 today and able to do whatever he wants with his life.
That was his and his wife’s goal.
And now, it’s their reality.
[easy-tweet tweet=”“I made $120,000 a year. We lived on $50,000 to $55,000 for four years. Because of that, I’m 43 years old, I can do whatever I want with my life.” – @WCInvestor” user=”physicianwealth” url=”https://twitter.com/WCInvestor”]
Not many physicians are far behind this methodology, but for some reason many aren’t. Which physician are you?
It’s strongly recommended that you focus on what you want out of life, what your goals are, what you’re willing to give up now to better your future and the future of your loved ones.
Really, what are you willing to give up for the life you want?
The odds of you being in your early-to-mid thirties are extremely high right now, especially if you’ve gotten this far on this blog.
Jim says, you’ve got 50 or 60 years left in you. What’s two or three more years out of residency?
No matter what your income is, even though there is specialty pay differences than the inter-specialty pay differences (sorry about that!), you just have to deal with them as best as you can, unless you open up your own practice.
And even then, you still may be at overwhelming odds with debt. There is nothing you or I, or anyone else, can do over the next five years that corrects those disparities.
It’s a matter of making a decision based on your own personal volition to come out the other side of your finances a stronger and more finance-cognizant person.
At the end of the day, you can say that you are much more better off.
Whether it’s maximizing your retirement accounts or investing in real estate, you have the power within yourself to capitalize on the opportunities available.
As you’ve seen, there are a TON of options to help you pay off debt or invest considering the your own life goals.
So, knowing this…
What will you do?
What are your ideas?
Perhaps you have questions you want answered based on what you read?
Considering your answers, you may want to get someone (or a community!) behind you for support!
Find the Financial Residency Facebook community or ping me a voice message on.
As an extension of this show, we’ll have a Curbside Consult coming up in a few weeks with Jim.
He’ll be able to answer some of our community’s most pressing questions.
Be sure to watch out for it.
Until next time! Cheers.
Journal Club – WealthyDoc.org
In it, the author discusses why taking time out of your busy schedules to actually reflect and write down goals is critical to your overall financial success and personal happiness. He details out a framework that will help you in the process of determining goals and launching them into action.
I quote, “We must set our goals thoughtfully in the context of our life. Only 3% of all Americans have a goals programs designed to reap the most benefits from life itself. Why do so few have a goals program? The most important reasons are fear, poor self-image, lack of understanding of the benefits, and ignorance of how to develop a program. A successful program can only be achieved when steps are taken to develop a balanced, confident, hopeful picture of the future, despite any fear that may creep in.”
What I like really about this article is that he breaks down 6 ways to actually PICK your goals, and then includes 7 steps on how to actually SET your goals and get those goals into motion. In my experience, I see physicians bust their butts going through all the education and training to actually become a doctor, but once that course is already set, they rarely stop to think about WHY they are actually doing it. It is easy to get caught up in countless mundane tasks without making sure they align with solid values and goals.
Thanks Wealthy Doc for all that you do and another excellent article. For those that don’t regularly follow his content, you need to.