Financial Planning for Doctors

One of the most common questions that I get asked is about paying down debt or investing money in the market.  It is a natural question when people start diving into the 20% of personal finance they need to know.  While the answer to this question always depends on the person’s situation, big-picture financial goals, and preferences – many times it is simply a choice.  Both paying down debt or investing are often both reasonable goals.  Why then do I often fall on the debt pay off side of the debate? Why am I not a big believer in leveraging your debt and preferring investments?

Today, I want to outline several reasons why paying off your debt is often the best choice, even when the math doesn’t make sense.

1) A Debt Free Life Provides Options

When you add up all of your anticipated monthly expenses, these are called your fixed expenses.  With each increasing fixed expense, you have locked yourself into a monthly required income that is higher with each expense.

For example, when my family and I finished training we had our house payment, student loan payment, tithing, two car payments, our childcare expenses, cell phone bill, insurance payments, and a few other fixed payments.  With all of these required monthly expenses, we had to meet a certain monthly income in order to pay for them all.  It was a substantial number, too.

Once our student loans and two car payments were paid off, it freed up more than $7,000 in monthly fixed expenses.  That amount of money each month provides a lot of options.

At this point, I was (and still am not) required to work full-time.  We can meet our annual savings goal even if I go part-time.  In fact, I could easily swing working 75-80% of a Full-time Equivalent (FTE).

In the medical world where close to 50% of physicians are burning out, having the option to take a step back is incredibly helpful.  This could mean pursuing part-time work through Partial FIRE, seeking locum tenens opportunities, or pursuing other forms of business inside or outside of medicine.

What allows us to do all of this is working towards a debt-free life where our fixed expenses are limited.

2) No Payments?  Big Cash Flow

Lowering those fixed expenses through paying off our debt doesn’t just provide freedom. It also provides a lot of cash flow, which has some very real benefits, too.

For those that are on the investing side of the “pay off debt or invest” debate, I will say that leveraging debt is a perfectly acceptable idea.  However, it often denies one major thing about the other side of the debate. Those of us in the debt pay off camp invest while we pay off debt, and then we invest even more when the debt is gone.

In my first year, we saved somewhere between $50,000 and $75,000.  After all of our non-mortgage debt was gone, we now invest between $115,000 to $125,000 per year.  That’s our new annual savings goal, which will allow us to be financially independent in our mid-40’s.

So, now when unexpected expenses come up, we simply cash flow the expense.  We rarely (I think one time when our AC unit went down for $5,500) have dipped into our emergency fund because of the cash flow excess.

The side benefit of all of this cash flow, of course, is that it has led to dramatically less financial stress.

3) Financial Stress is Real

I remember being a medical student or resident and having a car repair.  It was painful. I’d have to check the bank account to see if we had enough money to pay for the expense.

Whenever an unexpected expense came up, it was always stressful. This even included events that we knew we could count on costing money – like the holidays.  We knew nothing about personal finance at the time, and had a hard time keeping money in our bank account.  Inevitably, this led to financial stress regularly.  It also led to many arguments!

When we finally started figuring out this whole personal finance thing, we painted our big personal finance picture.  Then,  we created an intentional plan to get to our goals.

After these discussions, we decided to pay off our debt.  And, as we chipped away at the debt, more cash flow was provided with each notch in our debt pay off belt.

The end result is that we now have very little financial stress in our lives.  We are going to conquer our financial goals at a very early age.  All the while, we spend money in ways that make us happy now while we pay ourselves first by saving for tomorrow.

4) The 10% Rule Can Become The 20% Rule

Any long-time reader will know that The 10% Rule is one of the major reasons for our ability to reach our financial goals.  For those unfamiliar with the idea, we looked at the difference between our take-home pay as a fellow and then compared this to my first paycheck as an attending physician.  The difference was about $10,000.

So, we took 10% of this ($1,000) and spent it on whatever we wanted. This involved financing a car (yes, I just said that) and a country club membership.  The other 90% went directly towards our student loans and investment goals.  When the loans were gone, this money went towards a new house payment and our two car loans.  In less than two years, we paid off over $250,000 in debt.

We used the 10% rule any time we had a bonus, unexpected windfall, or additional money of any kind. The purpose of the 10% rule is to serve as a guide, or guardrail.  It allowed us to enjoy a little bit of our money today, while we did what we should with the vast majority.  We felt like we were living like royalty, all while increasing our networth $250,000 in 12 months.

Now that we have all of this extra cash flow, this rule may soon become the 20% rule where we enjoy even more of that extra money that we have coming in.  We have realized that a slightly higher savings rate does not really speed up our progress towards financial independence.

However, we can enjoy a little more money today to find the balance we should all strive to find.  We must pay our future selves first, but we also have to enjoy today, too.  Who knows how many we have left?

Now that our debt is gone, we can enjoy even more of this money.  Another win for the debt pay-off clan!

5) Financial Freedom is a Burden Lifted

The last reason that we should consider paying off our debt is the one that I see most commonly cited.  It often goes something like this, “Have you ever met someone who has paid off their student loans and regretted doing so?  See?!? Just pay off the debt!”

While the argument isn’t always true (I do know people who wish they invested instead of paying off their 2% student loans), the idea behind the argument is spot on.

Very few people who pay off their debt regret living a debt free life.  With each step towards eliminating debt, there is a feeling of a giant burden being lifted.  You know that you are that much closer to your other goals.  It also provides an amazing amount of reinforcement that you can do this financial stuff!  All that is needed is a little bit of knowlege about personal finance, some fortitude, and staying the course!

Take Home

Eliminating the burden of debt is often the first step towards creating those options we discussed above.  If you feel trapped in a job that you don’t enjoy or would like to change, and yet feel trapped in your current situation – it is often because of your monthly fixed expenses.

Learn how to fight back by taking control of your backwards budget.  Then, attack those debts one by one.  Whether you use the debt snowball method, avalanche method, or the debt hatred method I employed – make a plan and eliminate that debt.

After you pay it all off, you might find how big of a burden you were carrying the whole time.  You’ll also experience the freedom that comes with living a debt-free life.

Did you pay off your debt or invest?  Or was it some kind of hybrid? Did you regret paying off your debt?  Or are you in the middle of the debt pay-off journey right now?  Leave a comment below.

TPP

8 thoughts on “5 Reasons to Pay Off Your Debt (Instead of Investing)”

  1. Love this list of reasons. I’m a big proponent of paying off debt, after all, I wrote the book on it. The freedom of no debt is not something you can describe with a math equation. I didn’t realize what burden was on my shoulders until the burden was removed and I experienced that freedom. It is very seldom that someone who pays off their house decides it was a mistake and borrows the money again and gets a new mortgage to invest that money in the stock market. I’m planning on adding this article to next weeks Fawcett’s Favorites. Thanks.

    Dr. Cory S. Fawcett
    Prescription for Financial Success

    • That is a good way to think about it, though I do know a lot of people who leverage debt doing real estate. (You are right, though, I don’t know people who paid off their house who get another mortgage so that they can invest money in the market).

      Thanks for sharing!

      TPP

  2. I am like you and sided on the pay off debt side rather than invest. Paying off my student loans and mortgage and becoming completely debt free was the biggest weight off my shoulder lifted.

    And you are right that because of not having debt, that money can now be used to invest so you can catch up the time lost from paying off the debt in the first place.

    Similar to your line about student debt, you rarely see someone say I have a paid off house but I want to borrow it to invest in the stock market.

    • It’s interesting how many people end up feeling this way. Certainly makes paying off that mortgage seem like something worth pursuing! My wife and I are finally at that point where we have to make that decision (invest money in the market, or pay off the mortgage).

      To provide a bit more security, we are doing a bit of both… so I guess I am straddling the fence before I fully commit. I’ll fall off one side or the other eventually!

      TPP

  3. This is something I’ll be struggling with over the next year or so. Most of my debt has been refinanced to ~2%, which makes it pretty hard to convince myself to pay it off ASAP. Tackling higher-rate student debt and car payments for now, but before long there will be a real decision to make. Good news is that it’s a 5-year loan and minimum payments are $3k/month anyway, so I can’t stretch it out forever (until I refinance again!!)

    • I feel ya. I have this struggle now that we are only down to our mortgage, and – trust me – our mortgage is not at 2%. So, I get it.

      Once we have a little more capital that is immediately available to us should we need it, I’ll consider hammering away at this mortgage.

      TPP

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