By Dr. James M. Dahle, WCI Founder
I woke up early one morning a few months ago worried about a financial situation. It wasn't my financial situation. It was yours. At least many of yours. And the more I thought about it, the more angry I became. By the time I drug my butt out of bed, I was furious. Truly. I'm mad at everyone in this situation. And I'm angry that nobody else is as pissed off about it as I am. So instead of eating breakfast, I'm sitting here ranting into the internet to try to get over it.
I had a colleague walk up to me at the hospital the other day. He said, “Hey, I'm reading your book. I didn't even realize that was you.” This has happened to me many times, and it is kind of fun to be “internet famous.” When you write a financial blog and book and share intimate details of your financial life with the world, others get very comfortable sharing theirs with you. Here are the basics of his story:
- 1-2 years out of residency in a lower-paying specialty with a stay-at-home wife and some kids
- Did an MPH, delaying his career by a couple of years
- Borrowed the full cost of attendance each year and most living costs
- Despite attending a relatively cheap school, finished residency owing $400K, 1/3 at 7.9% and 2/3 at 6.8%
- Working 25 days (12-24 hour shifts) a month including many nights/call
- Has a “local physician transitioning into finance” who has already given him a whole life insurance application he's filling out, calling it a “Life Insurance Retirement Plan (LIRP)”
Do you understand now why I'm so mad?
Get Mad at Debt
I'm mad at the doctor and his partner for not learning about finance earlier in life and for borrowing more than they knew they should have. I'm mad at his medical school attendings for not teaching him basic personal finance. I'm mad at his residency attendings for not teaching him basic personal finance. I'm mad at his medical school for jacking up the price of tuition. I'm mad at the government for funding stupid decisions. I'm mad at this other doctor who is an insurance agent masquerading as a financial advisor committing the equivalent of financial malpractice. And mostly, I'm mad at a system that is going to burn this doctor out before he ever gets back to broke. And I'm mad that this doctor, and probably many of you in the same situation, aren't nearly mad enough at the situation you're in. That fury will drive you to learn what you need to know about finance. It will give you the discipline you need to be successful.
It reminds me of Aragorn's conversation with Frodo about the ring of power in the Inn of the Prancing Pony:
Are you frightened?
Aragorn: You draw far too much attention to yourself.
Frodo: What do you want?
Aragorn: A little more caution from you. That is no trinket you carry.
Frodo: I carry nothing.
Aragorn: Indeed. I can avoid being seen if I wish, but to disappear entirely, that is a rare gift.
Frodo: Who are you?
Aragorn: Are you frightened?
Frodo: Yes.
Aragorn: Not nearly frightened enough. I know what hunts you.
I Know What Hunts You
Like Aragorn, I know what hunts you. It might not be a black rider, but it is equally dark. It is waking up five or 10 years out of residency, sick of working 70 or 80 hours a week, and realizing you can't cut back a bit without a dramatic change in your financial life, and you don't even like the financial life you have now. You still owe hundreds of thousands in student loans, own little of your house (and perhaps are even underwater), pay too much in taxes, and have built little wealth. Maybe your spouse wants to leave you because you're always fighting about money and he or she never sees you and you realize that this is what the next 30 years of your life are going to look like.
This doc I ran into in the hospital is a great doc! There are lots of great docs out there. They're getting chewed up and spit out. Is it partially their own fault? Sure. Is it partially a systems problem? Absolutely. But part of it is your problem and my problem. We've got to get this message out to our peers sooner. And we certainly can't be contributing to the issue by selling them crappy insurance they don't need while they owe hundreds of thousands of dollars at 7%-8%!
A Race Against Burnout
Many doctors think they have decades to pay off their student loans. They look at the burden and it looks like a mortgage. In fact, these days it may be even larger than the mortgage. But there is a huge difference. You can sell the darn house at any time and pay off the mortgage. You've taken a mortgage out on your brain and you better hope you can pay it off before someone forecloses on it. You don't have three decades. You've got five years. Ten at the most. Trust me. By then you will want to have that debt out of your life. You will want to cut back a bit from that crazy pace you agreed to after residency because it seemed so much easier than the 80+ hours you had been working. By then that $200K-$300K you're being paid won't seem like nearly that much money. And this career that you desired so much as a 20-year-old may feel like golden handcuffs 20 years later. You want to practice on your own terms, but you can't. Because of that stupid debt that felt like monopoly money back in med school.
How Fast Can You Pay Debt Off?
The first question I asked my colleague was “How fast can you pay the debt off?” He thought he could do it in three years, but I'm not convinced he has actually run the numbers. You know why? Because the figure he threw out later in the conversation ($5K a month) won't pay that debt off in three years. How do I know that? Because I've actually done the math. Think about it. $400K at 7% = $28K a year in interest. $5K a month or $60K a year would only put $32K a year toward that debt. At $5K a month, he'll still owe $300K in 3 years. You can do it more formally with a simple spreadsheet or financial calculator. The function you want to use is the “Period” function, often abbreviated NPER. It looks like this:
=NPER(Rate, PMT, PV, FV, Type)
- Rate is your interest rate—divide it by 12 to get the approximate monthly rate
- PMT (Payment) is how much you pay each month, always a negative number
- PV (Present Value) is how much you owe (a positive number in a debt situation)
- FV (Future Value) is how much you'll owe at the end, i.e. zero
- Type is whether you make the payment at the end of the month (0) or at the beginning (1)
Let's plug his numbers in:
=NPER(7%/12,-5000,400000,0,0) = 108 months, or 9 years.
Now, nine years isn't the end of the world. Sometimes people run their numbers and it's 20 or 30. But it certainly isn't five years, much less three. The depressing part is, if he had let the military pay for medical school, he would now only be 2.5 years away from having his debt paid off, and I can assure you they wouldn't have him working any more than he's working now. Can he keep up the pace he's at now for nine more years? Can he do it without being grouchy? Can he do it while still giving competent, compassionate patient care? I hope so, but I know there are a large percentage of docs that cannot.
My general advice is to come up with a written plan to get your student loans paid off within 2-5 years of residency graduation. If you can save for retirement and a down payment at the same time, that's great (and will help you lower your taxes and housing expenses), but being done with the student loans within five years takes priority. Not only does this allow you to get out of debt before it starts feeling like you're stuck, but it also allows you to get the very best terms on a student loan refinance, which is usually a 5-year variable rate. Let's say this doc makes a commitment to get his loans paid off quickly and so feels comfortable taking that 5-year variable. Maybe he gets it for 3%. How much would he have to pay to be done in three more years? (Remember he's already a couple of years out of residency.) How much to be done in five more years? Let's run the numbers. This time we'll use a related function called “PMT” which solves for the monthly payment.
3-Year Scenario
Here's what the function looks like in a spreadsheet:
=PMT(Rate,NPER,PV,FV,Type)
Putting his numbers in:
=PMT(3%/12,36,400000,0,0) = $11,632
Is that a lot? It sure is. That's 50% of your gross income for a doc making $280K. If you're paying half your gross income, and a quarter of it is going to taxes, you're left to live on the other quarter (about $70K, just a little more than you made as a resident). And that's not even counting any sort of retirement investing, college investing, or heaven forbid whole life insurance premiums. In essence, you've already spent three years' worth of physician paychecks (i.e., three years of your life) and now you have to pay for it by essentially doing residency twice. The real sacrifice of becoming a physician isn't doing residency. It's doing residency twice!
5-Year Scenario
I don't actually know how much this particular doc gets paid. I hope it's at least $280K, but it might not be. Let's say the 3-year scenario is just impossible without selling the house and having his family leave him. So he opts for a 5-year scenario. What do those payments look like?
=PMT(3%/12,60,400000,0,0) = $7,187 a month.
That's more than he's planning to pay now, but not that much more. Especially if he can save the $18K/year insurance premium from the policy he's being peddled as a LIRP. $5,000 + $1,500 only leaves him about $700 a month to cut from their lifestyle. That's very doable with a few minor lifestyle changes. Eat out one less time each month. Go on one less vacation a year. Wait a couple more years to upgrade the minivan and you're there.
Get Out of Debt
It's time for you to get out of debt. Whether you're just finishing residency now or whether you're at that 5-10 year point and starting to feel a little crispy. Run your numbers. Refinance your loans. Quit worrying about the investing vs. loan paydown question and get it done. The cavalry isn't coming. You're on your own. There will be no white rider at first light on the fifth day. You don't get a pass on math just because you dedicated your life to healing the sick and injured. Get as mad as I am about your debt! Take control and seize the financial life you want and you deserve.
What do you think? How long should you take as a doctor to get out of debt after residency? How was your motivation to work long hours 5-10 years after residency compared to when you took out your student loans? Comment below!
Love, love, love this post. I was even getting a little bit angry by the middle of it. This should be posted on bulletin boards in lounges and locker rooms in med schools and hospitals across the nation.
Even with simple math and no interest, anyone who passed middle school arithmetic would know that $5k per month would not knock out the debt in three years.
Really enjoyed the LOTR references, too. Would like to see more in the future.
PRIVATE DENTAL LURKS AROUND 500K 4 YEARS!!!!!!!!!!!!
You have every right to be angry and then some. Excellent post.
I am angry too!
I totally agree with WCI: GET RID OF YOUR LOANS! Just because I’m super excited about this accomplishment, I’m going to share…I paid off $450,000 in student loans in three and a half years! Just made our final payments in December. My loans were obviously crazy high (I attended a private medical school in an expensive city with no financial assistance), but I took that into consideration when selecting a specialty. My wife and I are both very risk-adverse and agreed to live as residents until our loans were gone. We paid about $13,000 per month and pounded away that debt. It feels SO good to be free to practice how and where I want! If you’ve made it to the point of becoming a doctor, you’re obviously disciplined. Apply that discipline to your finances and you’ll never regret it!
Congratulations! That is no small accomplishment.
Impressive
How high was the rate?
I would have bought 1.35M in income generating real estate with that cash then used other peoples money to pay off my med student loans and have the homes as assets in the end….
Just Sayin….
Leverage works until it doesn’t. Everyone I know who has gone bankrupt was using debt.
Congrats to you & your family! What an accomplishment! I love hearing these stories.
Thank you for this!! My parents were lecturing me just the other day because we’re not planning to buy a house as soon as my husband finishes residency. I tried to explain that we want to max out both our 401k’s and pay off our debt within three years (I had run the numbers before, but love the formula you provided! Makes my spreadsheet much more accurate) and then save for a down payment on a house once loans are paid off. They told me how stupid that was and how we need to build equity and how he’s a doctor so we don’t have to worry about money. I appreciate posts like this because it validates our plans and let’s us know there are others out there like us who would rather not have debt hanging over our heads, even if our families don’t support our decisions.
(Also love the LotR references).
Wow! That’s a lot of family pressure to withstand!
Lindsey,
Here is some more ammunition. There are other reasons not to buy a house right away. Have your parents read this article. Then they might get off your back.
https://drcorysfawcett.com/dont-buy-a-house-when-you-get-a-job/
Best of luck to you on fending off the family.
Dr. Cory S. Fawcett
Prescription for Financial Success
Thank you for your response! I did just send your article to them, so we’ll see what they say. Either way, we know what’s right for us and buying a house before we’re ready is not it. Thanks again!
You’re doing the right thing. I would advise you save as much as possible, make as much as possible, and invest and pay down debt as much as possible for the first 5 years post-residency (without burning out). If you do that the result will not only be life-changing, but, perhaps more aptly, future-changing. Because of the power of compounding what you do in the first years of earning a real salary is crucial. I was in a similar position to you getting pressure from every which way to spend and live the “doctor life”. Don’t do it. The incredible satisfaction and security you will feel later is worth the sacrifice. Because I didn’t buy a massive McMansion or expand my lifestyle in myriad other ways right out of residency I am able to now start enjoying some of the fruits of my sacrifice including taking a luxury vacation later this year, sending my kids to an excellent private school, and upgrading my car. All without worrying I’m not going to have enough for retirement or that I’m going to have to work more hours to maintain my lifestyle. In fact I’m working less this year and exploring opportunities to earn income outside of clinical medicine which is really exciting for me.
Bottom line is have a solid plan and stick to it no matter what kind of pressure to spend you’re getting from others. It’s ultimately your money and your life. Make the best of it.
The generic comment on buying or not buying a home is so regionally dependent – I think most mean ‘don’t live above your means’ – right?
My home bought during residency just traded again after the person I sold it to held it for a decade – the price was 5% less than I sold it for – A DECADE AGO!
Meanwhile my properties in Boston have made most of my wealth in the past 5 years
The key: And this is where I differ from most here……
I didn’t focus on getting out of debt— I focused on top line growth and income generating real estate.
The debt is the past – If I focused on that I would have missed one of the greatest real estate run ups in history!!!
If I focused only on paying off med loans the homes I would be buying today would be more expensive and the interest rate is higher now too….so all this advice certainly matters on the interest rate environment and real estate market.
Notice i didn’t say my primary home as generating wealth – it doesn’t it sits there (offers a few tax deductions)
But rentals generate income ….
Focus on the future – not the past and be careful about advice that is too broad – may not apply to your situation
JustSayin
How’d that plan work out for someone who started in 2006?
I don’t disagree though can’t say I know specific cases so hard to say (loss is only realized if/when you close a position)
Point is/was – all advice and financial plans are people, place and time dependent and specific
Easy to look backwards to make a plan – I like to focus on future
The problem with the future is that my crystal ball is always so cloudy.
Ok, you started the LOTR references, so I’m sure you meant to say your Palantir is cloudy . . .
A palantir doesn’t show the future, it shows the present in a distant location, no?
Oh how embarrassing, you are absolutely correct. And Sauron manipulated what Denethor saw in order to get him to feel hopeless, which is different than seeing the future. Wikipedia tells me that the palatiri could also see events from the past . . . .which means, it IS exactly like the crystal balls used by stock market commentators and analysts! They know a bit of the past and what is happening right now, but know nothing of the future! Bingo!
I was fortunate to graduate residency in 2015 and found all of the helpful blogs, books etc within one year of then. Since 2016 I’ve gone from 360k down to 89k in loans and hope to knock that part off this year. Will be a huge weight off my shoulders. Thankfully my EM position has allowed me to do this and still max out 403, 457, IRAs and 529s. Thank you for getting me started in the right direction from an early point in my career.
Nice work!
Dude I totally understand the anger because I was that doc in the hospital! But thanks to you I have been able to channel that anger to extreme financial literacy and now have a written financial plan, am utilizing income to maximize happiness and decrease future worries, and have 2 months ago hit the $1mil net worth mark 🙂
btw please don’t tell me that doc now financial salesman works for NWM or else I’m gonna flip my s***! NWM is like an army of orcs! Hopefully though, like throwing the ring in Mount Doom, your efforts will result in every doc learning to be financially literate.
As a big LOTR fanboy, I have to applaud the Aragorn analogy. Too fun.
This is such great advice. I got my debt done in 6 years but if I would have been tuned into this site or been more financially savvy 6 years ago(as opposed to 3 years ago), I may have paid it off in 3 or 4 years.
Now that I’m out of student debt, I’ve already scaled back one shift while still being able to max out retirement, HSA, and we have actually started a legit contribution to a 529. All with less shifts. Not bragging. Just trying to reinforce how debt payoff can be a prophylaxis for burnout.
I see this was from 2018. Perfect for TBTuesday.
I’m going to pass this onto my residents and my young family members that are entering medicine,
I was able to pay off $110, 000 in medical student debt in 9 months post-residency. There was a significant jump in my income, of course. It also helped that the interest rate has been 0% on these federal loans for the past year.
I also just lived a really lean lifestyle – cheap apartment walking distance from the hospital, no car, minimal spending on fun stuff.
Now I can focus on investing, saving for a home down payment, and buying a snow cone machine. Thanks WCI!
We have a snow cone machine. You’ll love it. But you’ll need some space to store all the bottles of flavor!
Thanks WCI!! I started reading your blog around a year ago and it has been so helpful to kickstart my financial literacy.
Yass! The real goals in life: snow cone machine and multiple flavors.
I could not agree more with all that was written.
So many expect the burden of anxiety to be lifted following completion of training (residency, fellowship, subspecialty fellowship, etc). However, for many with medical education debt, the true weight of the financial burden of becoming a physician reveals itself as you transition to becoming an attending. Yes, I encourage every medical student, intern, resident to pursue financial education during every step of their training, as preparation can be pivotal prior to transition to attending status. Unfortunately, in my experience, most do not seek this council until they are already adjusting to an attending salary, and they have inflated their lifestyle to reflect this.
As mentioned in other articles, I personally think the idea of debt as “good debt” is a very slippery slope. Even if you have refinanced and achieved lower rates… paying down your student debt will always be one of the best returns on investments you can make, even in a strong market. Get mad, pay it down as fast as you can, and embrace the joy that comes with financial freedom.
Stay motivated!
TheMotviatedMD.com