Financial Planning for New Doctors and Dentists: Manage Debt (or It Will Manage You)

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First in a series.

Many dentists and physicians just entering professional practice face a mountain of debt. The Medscape Resident Salary & Debt Report 2014 notes that 36 percent of residents had more than $200,000 of education debt.

Add in a mortgage, a car loan, credit card debt and financing to start or buy into a practice, and you could easily find yourself burdened by more than $1 million of debt — debt that will impact your finances for years to come.

With this in mind, it’s critical to establish a plan for managing debt — and to develop some sound financial habits for the future.

Consider the pay-down payoff.

Consider a recent dental school grad with $200,000 in student loans. At a fixed rate of 3.8 percent over 15 years, our new dentist would be writing a check for $1,459 every month, and wind up paying $62,694 in interest over the life of the loan. But if she decided to pay down this debt by increasing payments to $2,500 a month, the loan would be paid off in nearly half the time — seven years and eight months — and save $31,697 in interest.

If paying down debt is a priority for you, consider these two popular methods for tackling repayment:

1. The Snowball Method — Start by paying off the debt with the lowest principle balance. To the extent that your budget allows, begin making extra loan payments. At the same time, make the minimum payment on other debts. Once the target debt is paid off, take the amount you were paying on that debt and apply all of it to your debt with the next lowest principle balance. Keep doing this until all debts are paid. This debt reduction method is popular because it provides “quick wins” and encouragement and momentum to borrowers.

2. The Avalanche Method — Here, you pick the highest-interest-rate debt to pay off first — again, making the minimum payment on other debts. Once done, you then apply those payments to the next debt in line. Work your way downhill like an avalanche to the lowest-rate debt. Note that you’ll want to prioritize debt reduction so that the highest rate non-deductible interest is paid off earliest (e.g., student loans or credit card debt versus a loan for practice acquisition).  The avalanche method is the preferable method because this method reduces interest expense on the highest interest rate loans first.

Consolidate and refinance loans.

Medical and dental professionals with good credit scores and professional incomes are desirable customers for private lenders who may be willing to consolidate student or other loans at lower interest rates than federal loans. Just be sure to compare lenders’ origination and closing fees with the same diligence that you compare interest rates and loan terms.

Set goals for sound money management.

Consider following the tried-and-true rule of thumb: Keep your monthly debt commitments below 35 percent of your monthly income before taxes and other deductions (maybe even shoot for 25 or 30 percent). It’s helpful to perform a regular review of your personal finances, including income tax planning, with a qualified CPA.


 Next up: Smart Moves for Newly Employed Physicians and Dentists

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