With inflation and interest rates being what they are, one of the most common questions that we get nowadays is, “Should I invest or pay off debt? What should I be doing with my money?”

Everywhere in medicine, inflation has an impact. One of the common areas where this naturally happens a lot is in regards to reimbursement rates and income. Doctors realize, “Hey, I haven’t gotten a substantial raise in five or ten years, maybe more. And yet, inflation in 2022 is 6-9%.”

The Consumer Price Index (CPI) from the US Bureau of Labor and Statistics tracks inflation. For the last 12 months leading up to this episode’s release, inflation is at 6% according to the CPI. That’s compared to the historical average for inflation which is typically 2%. So, for example, what a gallon of milk costs you today, it would typically cost 2% more next year.

At 6%, that means the gallon of milk that would’ve cost you $1 last year will now cost $1.06 – which may not sound like a lot until you start scaling the numbers.

Consider it this way: something that cost you $10,000 a year ago would now cost you 6% more than $10,000. It impacts everything from the interest rates you get on your car and your house to gas prices, which is the highest current increase on the CPI at 14.2% over last year.

So when we face these unprecedented rates of inflation, it makes sense to ask, “Should I invest or pay off debt?” (And if you’re even asking that question, you’re already winning the game of personal finance.)

Deciding between investing or paying off debt

We have to think about this situation with a little more nuance now that we have such a high inflation environment impacting our financial decisions.

There are a few different ways that your high-interest environment can really impact you as a physician, so let’s dive in by covering specific financial tasks that doctors need to take into consideration.

Student loans

The mathematical argument around student loans tends to be, “Interest rates are at least 6% and inflation’s high… Shouldn’t I just put money into the market and leverage it?”

That is what you do when low interest rates exist, but now that there’s high interest, maybe you’re considering putting your money into other things and living with your student loans.
Because mathematically, it makes sense. Student loan interest rates are 0% as of the recording of this episode.

But let’s not ignore the psychological burden of student loans. All of a sudden you’re trying to make a mathematical versus psychological burden decision. For me, I felt very much in the psychological sense that I wanted my debt gone, even though it was 3%. Personal finance is personal and that was my choice.

And Lisha correctly points out that the answer isn’t as simple as a lot of people make it out to be. We find that sometimes people aren’t making the right comparison. They compare a market average of 8% to a student loan interest rate of 2%. They forget about inflation and inflation adjusted returns.

So even though the market average might be 8%, when you factor in inflation, that becomes 6%, and actually you’re gaining 2% on your money. And so when you compare that inflation adjusted return of 2% to your student loan interest rate, which might be 2, 3, 4, 5%, all of a sudden paying down that debt looks a lot better than it used to.

Not having debt gives you more freedom. Not even just a psychological benefit, but freedom in your career. Since Lisha has federal student loans, one of the things she has to look for in a job is that it qualifies for public service loan forgiveness (PSLF) and she works a minimum of 30 hours a week per the terms of the loan. If she didn’t have that debt, she wouldn’t have those same stipulations. She would have a little bit more freedom to consider jobs in private practice, or working two to three days per week because she wouldn’t need to work 30 hours.

Sometimes we don’t fully consider the weight of cash flow. When your debt is gone, you have higher amounts of cash flow. Cash flow being king, there’s a need to protect it.

Disability insurance

Speaking of cash flow protection, getting reliable, high-quality disability insurance is hands down the best way to do that. Disability insurance, I believe, is the number one financial task for doctors. And one of the riders that come along with disability insurance that’s important to consider is called a COLA rider, or a Cost of Living Adjustment rider. The entire purpose of that rider is to keep up with inflation.

So for people who were disabled in 2022 when inflation went up by 8%, that rider would be massively important for increasing those doctors’ income in lockstep with the inflation rates that happened. In today’s high interest environment, this rider feels like a no brainer.

Emergency funds

We often talk about building a three to six month emergency fund should the worst happen.

Three things you want your emergency fund to be are:

• Separate
• Accessible
• Safe

I’ve historically kept my emergency fund in a regular savings account and ignored the interest rate that I could get in a high-yield account because it wasn’t that significant. But now that things are changing, my approach likely will, also.

Lisha, as a fellow, has about two months of expenses in her emergency fund. Her strategy was to start off with a thousand dollars during residency and then slowly increased that over time. About half of her emergency fund is in a savings account in a credit union, but the other half is in a money market fund.

For clarification, a money market fund is similar to loaning money to the bank and in return, they invest it with a guaranteed interest rate on that money. Historically speaking, interest rates on money market accounts have been pretty low, around 1%, similar to what you could get in a regular savings account. But right now the interest rate (or the yield, if you will), is over 4%.

This is a good example of money that’s completely safe, with a guaranteed interest.

Categorizing your debt

Personal finance is personal, but as a general guideline, interest rate is the indicator that shows you how you want to start favoring your money in one direction (pay off debt) versus the other (invest).

To put this in Lisha’s practical terms, ask yourself, “What debt do I have? What’s the interest rate on that debt? Take the highest interest rate debt and prioritize paying that off. Medium interest rate debt is something you’ll pay off too, right now. Then low interest rate debt depends on how much I value being debt-free, because in high inflation times, the value of the debt decreases. When inflation increases and more money is printed, it decreases the value of the actual debt people owe.

For Lisha, whether it’s a low interest rate environment or a high interest rate environment, she’s usually prioritizing paying off anything between 4-8%. And then the low interest rate debt that’s left is the only category that might change given the inflation times.

Which financial strategy or factor you choose to work on right now will be dependent upon your personality, the psychological burden that you feel, what you want to do, and your risk tolerance. Personal finance really is personal. And give yourself credit for the work you’re doing and the questions you’re asking. You’re way ahead of the game.

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