I get a lot of comments and emails from docs, and spend a fair amount of time on both physician-specific and financial forums. I’m often surprised to see doctors carrying debt that I see as completely unnecessary.

A Car Loan

The classic example is a car loan. It might be an attending physician several years out of residency going through their financials and they list a $5K car loan. Assuming no working spouse, this person grosses $15-30K a month. How long should it take to pay off a $5K car loan? Well, when does your next paycheck arrive? That’s when it should be paid off. I’d be embarrassed to say I’m in debt for a car. Broke people have car loans. People with an income of $200-400K shouldn’t be broke unless they have terrible money management skills. Therefore, if you are a doctor with a car loan, you probably have terrible money management skills. The status symbol isn’t driving a fancy car; it’s driving a paid-for car.

Credit Card Debt

The other silly debt I occasionally see doctors list is credit card debt. Now, take pretty much anything that came in the mail from a credit card company. Turn it over and look for a big box on the back. Read that box. Somewhere in that box it will tell you that borrowing money from that credit card will cost you somewhere between 15% and 30%. Now, if I could find an investment that paid 15-30%, I would buy as much of it as I could, take out a home equity loan and send my kids out to shovel driveways (it’s December as I write this) to get extra cash  to invest. If you are carrying credit card debt, you are somebody’s awesome investment. As my 6 year old will tell you, interest is something you should get, not give.

An Emergency Fund and Debt?

Another interesting combination is people who say they have an emergency fund and yet still owe money. As physicians, we generally have access to all kinds of credit. I think I could probably run up $150K in credit card debt in the next hour if I wanted to. Emergency credit isn’t usually difficult to get. So for us, the point of an emergency fund is to avoid going into debt if you have an emergency. If you are already in debt, YOU’RE ALREADY HAVING AN EMERGENCY. Your emergency began several thousand dollars ago. Use the emergency fund to take care of the emergency and pay off that credit card.

Debt Management?

There seems to be this popular concept out there that encourages people to “manage” their debt so they can use it to get wealthy. The arguments look good. The idea is basically to borrow at 4% and earn at 8%. Mathematically, there is great truth there. But behaviorally, people don’t really seem to work that way. Once your mindset changes from debt elimination to debt management, people seem to get comfortable, savings rates go down, spending goes up, and 20 years later they wake up and find they are still in debt and really didn’t take advantage of some huge arbitrage.

The other issue is that people don’t really calculate out just how much this arbitrage is earning them. For example, let’s say you are offered a 2% loan for a car. You have the $10K the car will cost, but think you’ll do better than 2% investing. So you invest. Things go pretty well, and over the next couple of years while you carry this debt  you make 6%. So you’ve made 4% a year for two years. What’s 4% of $10K? $400. $800 for two years. And after tax? Maybe $500. How long does it take you to earn $500? What else could you cut out of your budget to get $500. Exactly. Obviously if you’re making $200K a year you can afford to service a $10K 2% debt. It’s not going to break you. But it’s kind of silly.

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I also find it very unusual for wealthy people to have a significant amount of debt. As mentioned, there are good arguments to be made to carry debt throughout your career and even into your retirement.  But in practice, I know precious few wealthy folks doing that. The same mindset that makes people wealthy also makes them pay off debt earlier than required and not take out any more. Dave Ramsey does “Millionaire Segments” occasionally. These are generally Millionaire Next Door types who made $60-150K throughout their careers and are now millionaires. Granted, these are a very self-selected bunch, but few of them ever still have debt (maybe a mortgage) and all deny that debt had any significant role in their wealth accumulation. Same thing with the millionaire retirees over on the Bogleheads forum.

Can you do some of it? Sure. I’m doing a little debt arbitrage with a taxable investing account instead of paying off my mortgage. My justification is that my effective after-tax rate (2.75%*56%=1.54%) is less than the rate of inflation. But guess what? At the time of this writing I would have been better off sending the checks to the mortgage lender. I think that’ll probably come around over the next few years, but there is certainly no guarantee. [Update 6/2015- I am now actually ahead, especially after tax loss harvesting benefits.] My wealth has not come from arbitraging debt. In fact, most of my financial success comes from the fact that I lived well below my means, eliminating much need for debt. The recipe is (almost) always the same- make a lot of money, save a big chunk of it, and invest it in some reasonable manner.

Long Student Loan Repayment Terms

I have a lot of student loan refinancing companies who advertise here. They laugh at me when I tell them I want my readers out of debt in 5 years and that I don’t really care what their 10-20 year rates are. Why do they laugh? Because they know what you guys are actually doing. And you’re refinancing into 10 and 15 year student loan terms. I think you ought to be a millionaire 10 years out of residency, not a debtor. But hey, if you want to still be in debt a decade after finishing your training, pretend your student loans are a house and get yourself a fifteen year fixed student loan mortgage. I look at it like this- the longest anyone ought to be in debt for med school is four years after finishing training, because that’s how long it would take to pay for medical school via the HPSP “Scholarship.” If you can’t get out of debt in four years, you’d be better off in the military.

One issue with a long term student loan is that you get a crummy rate. Sure, 5.5% beats 6.8%, but if you were going to pay it off in 3 or 4 years, not only could you get a 3.5% fixed, but you would probably be comfortable with a 2% variable rate. And 2% is much better than 5.5%.

But the main issue is that you still have debt after 5, 10, or 15 years. It is a very rare doctor who is just as excited about practicing medicine 10 years out of residency as she was one year out of residency. It’s not that she’s burnt out (although that is the peak for burnout as well,) it’s simply that life happens, other interests develop, part-time work starts looking more attractive etc. If your loans have been gone for years and you have a huge nest egg at that point, then you can cut back and pursue other interests. If you’re still in debt slavery, well, sorry. Get back to work.

Forgiveness programs almost make things worse. With the possibility of federal forgiveness programs and employer loan payback programs hanging out there, many doctors start thinking maybe they won’t have to pay back their loans at all. So they subconsciously take out more or delay refinancing and paying them back as quickly as they could.

30 year Mortgage?

Yet another area of silly physician debt is a long mortgage on your primary residence. You might be surprised to learn that nobody used 30 year mortgages prior to World War II. GIs came home and were eligible for a 30 year VA mortgage. Prior to then, shorter mortgages were the norm. Why did they go with the 30 year? Because they figured a typical career was 30 years and wanted the home paid off prior to retirement. Do you really want the VA to decide how long you should be in debt for a residence?

My daughter and her cousins on Angel's Landing. Yes, we roped them up.

My daughter and her cousins on Angel’s Landing. Yes, we roped them up.

Now, if you practice in Boston, or Manhattan, or the Bay Area, you may not be able to afford to buy with a 15 year mortgage. The rest of you have no excuse. Don’t buy a house so expensive that you can’t pay it off in 15 years. Not only do you get out of debt in 15 years, but you get a lower interest rate too.

The flexibility argument is bunk (“I want a 30 year just in case something happens, I’ll still pay it off in 15.”) Your mortgage ought to be such a small percentage of your income anyway that if something happened that kept you from making the payment on a 15 year, you probably won’t be able to make it on a 30 year either. Plus, you have an extra decade and a half of exposure to “something happening.” Do yourself a favor and get the 15. If you want to be skinny, do what skinny people do. If you want to be rich, do what rich people do. Rich people use 15 year mortgages (and pay them off in less than 15.)

Personal Loans

I have had a lot of advertisers come to me and want to advertise their personal loan and personal loan consolidation services. I uniformly turn them down. (I took one, which also does business/practice loans. But I demanded they remove any reference to personal loans from their banner ad.) They thought I was strangely demanding, but I don’t want you getting the idea that it’s okay to have consumer debt. Paternalistic? Perhaps. I’d certainly be wealthier if I took their money. But nobody borrows their way out of debt, and nobody borrows their way to wealth.

Rich people don’t “manage” debt. They eliminate it. Not stupidly, but reasonably and consistently. It’s a behavioral thing, not a math thing. There’s a reason debt makes you uncomfortable.

What do you think? Do you have “little debts?” Why or why not? Do most of the wealthy people you know carry a lot of debt? Are you “managing your debt” or “eliminating your debt?” Why? Comment below!