Smart Money MD

I recently came across a post on Sermo written by a family medicine doctor who claims to earn slightly more than a manager at Starbucks and is over half a million dollars in debt (not including the house mortgage and car payments). His wife apparently is going back to school and incurring additional debt. The rest of his post essentially consisted of contemplating what options he has to get out of his predicament.

Ho-Lee-Sheeeeet!

Is this guy for real? Last I checked, I don’t believe a store manager at Starbucks earns more than $75k a year. A family medicine doctor should earn at least a six figure salary, which is still a pittance for the level of education needed and debt incurred.  Many physician’s assistants command salaries similar to that of some family medicine physicians.  Unfortunately, this type of story is common on Sermo, which seems to have become an online venue for doctors to vent. While it’s not possible to verify the validity of his situation, it still does confirm my suspicion that physician debt is alive and well. I truly feel sorry for the guy and hope that he figures how to bail himself out.

He clearly has a spending problem.

Mr. Money Mustache calls it a “hair on fire” situation. Even if his family’s spending habits aren’t horrible, he still needs to cut out any lavish spending habits. If the car payments are going toward new cars, he’d better not be driving a Mexican-made German luxury vehicle that gets 15mpg! I see many doctors actually lease cars, stating that they deserve something new every few years. That’s one of the fastest ways to get yourself in financial trouble. His house should not be a McMansion, and he could even consider renting if his work environment is unstable.

Salmon at $28.99/lb at Whole Foods is definitely out of the question. As are Louboutins for the wife, $400 Burton ski jackets for his kids, or a monthly membership to the local car wash.

The spending problem started with educational debt.

While it’s not difficult to dig yourself into serious debt from medical school, it does take some effort to dig yourself half a million dollars in the hole during medical school. You simply combine a non-miserly lifestyle with a non-working spouse and kids. If you’re going to do that, then you need to have a strategy to get yourself out of debt and avoid financial ruin before you even start your career. I was able to pay off almost $150,000 in debt by the end of my first year of practice earning a low six-figure salary. That was without sketchy arbitrage business with loan disbursements either.

If this family medicine doctor were earning $150,000 a year, I’d expect him to take home at least $100,000 after taxes. I would expect him to dedicate at least half of that amount towards his debt for at least a few years until his income situation improves. His kids should not expect an inordinate amount of financial assistance for college either. The wife should consider helping the family diversify their income streams as well when she is able to. This is unfortunately their situation, but there is still hope.

Don’t panic and formulate a plan.

Doctors need to take some of their own medicine. I often have patients who are a nervous wreck for no reason, and fail to listen or take initiative in controlling their diseases. The “more” proactive ones ask for a magic pill to cure everything while others simply don’t attempt to do anything. Likewise, a debt problem isn’t the worse thing in the world. As long as you have income potential, you can still take control of it. Just formulate a plan, stick with it, and adjust as needed. Rinse and repeat.

What strategies have you implemented to get out of debt or avoid getting into debt?

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It can be done. I did not think it could be accomplished. My net worth looked horrible during my first year of medical school.  It looked even worse after 3 years of accrued interest during fourth year medical school when I was burning through my loans for my residency interviews. During residency and fellowship my mid 5-figure salary tempered the immediate pain of debt, but my net worth was still decidedly negative.  At this time, I decided to take control of my debt and kick its ass. By the end of my first year of medical practice, that debt was gone.

Background:

Like many other aspiring doctors, I did not consider the price tag involved with getting a medical degree. I worked hard, and went to the best medical school that accepted me to become a super doctor. I had about $230 in my bank account when I enrolled, and my mother gave me $50 of “emergency money” in case I got into trouble. The tuition alone per year was around $50,000. With room and board, annual expenses were beyond $60,000. I even received a solid 5-figure scholarship to attend medical school. The rest of my expenses came out of governmental and private loans.

Debt:

According to my loan statements, I had the following principal loan amounts:

• Federal Subsidized Stafford Loans: $17,000 @ 6.8%
• Federal Unsubsidized Stafford Loans: $89,260. The majority was at 6.8%, with some at 4.75%, and about $10,000 at 2.8%
• Federal Perkins loan: $23,000 @ 5%
• University private loan: $19,000 @ 10%

The total principal loan debt amounted to $148,260. Including the years of interest accruing, I paid close to $190,000 in total.

Smart Money Tips to destroy your loans (simple in principle but challenging in practice):

1. Track how much is going in and leaving your bank account. You must spend less than you earn. Only then will you be able to take control of your debt. This means no credit card debt, pawn shop dealings, and no payday loans.
2. Live way below your means. With six-figure debts, you really have to make frugal decisions. MMM calls it “hair on fire debt”. For me, that meant limiting $5 lattes, excessive restaurant and bar expenses, and frivolous materialistic purchases. No yachts, new cars, fancy clothing, or accessories. I kept a respectable appearance for a physician but did not have any sign of wealth to flaunt. I brought my lunch to work, and ate dinner at home. I bought discount groceries and chose to eat what I considered inexpensive yet still healthy.
3. Funnel what you have left over to your loans, high interest loans first. Dave Ramsey refers to debt snowballing and eliminating the smallest debt first to achieve a psychological victory–B.S. With turbocharged debt elimination for doctors and professionals, we want to pay the least amount of interest. Period.

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That’s it. Three fundamental principles. In my five years of training, I commanded a $50,000 annual stipend. After taxes and living expenses, I was able to fund about $15,000-$17,000 annually toward my debt. I lived quite comfortably, although I was fortunate that I did not have extra mouths to feed. You can still sustain a family of four easily on that income, although you may have less leftover to contribute to loans. When I became an attending physician, my housing expenses decreased slightly since I moved to a lower cost of living area. I maintained a similar quality of living and chipped away the rest of the debt. By the end of my first year in practice, all of my student debt was paid off!

Bonus Tip:

1. Contribute to your Roth IRA fully if you can. I only funded it two out of five years. In retrospect, I wished that I contributed every year. There is a fine line between paying down a loan versus investing, but having a tax-drag free vehicle that you carry throughout your entire working career vs chipping away at a relatively low interest loan is a no brainer. For a simple interest loan at 5%, 6.8%, or even 10%, funding the Roth IRA is the better option if you know that your income will increase significantly within the next few years.

Good luck to those who were in my shoes! If you have any questions, sound out below!