A Game of Numbers

Debt management is the increasingly larger elephant on the financial priorities list for a new physician. The average educational debt alone was $169,901 for the class of 2013 (Source: Association of American Medical Colleges). While it would be nice to focus exclusively on paying this down, you likely have competing demands – retirement savings and buying a home, for instance. Here’s a quick list of average figures and why you should manage all your financial demands:

• Student debt – Assuming a total of $225,000 in Federal Direct Loans at 6% interest, the monthly payment for a 10-year payoff is $2,497. The sooner you’re done paying this, the better. If rates were much higher, say 10-12%, you would want to be even more aggressive with your repayment schedule. If rates were much lower, like 3-4%, it would be just the opposite. A silver lining is that you can deduct the interest paid on your tax return.
• Mortgage – Assuming a $400,000 30-year fixed mortgage at 4.5%, the monthly payment is approximately $2,700. In this case, you’re borrowing against a real asset that’s going to have some level of appreciation – historically near the rate of inflation, which is 3%. An added benefit is that you can deduct the interest paid on your taxes, an important consideration for higher tax brackets.
• Pre-tax 401(k) – This is a $17,500 per year maximum contribution, or $1,458 per month. By starting to save early you leverage the growth of capital markets. For example, if you contribute $1,458 a month over the next 30 years at 8% annual interest, you’ll accumulate $2,172,944. If you wait five years, that figure drops to $1,386,596.
• Saving for your child’s education – This figure can vary widely. For example, do you want to fully fund? Private or public school? In state or out of state? For now, start by simply getting the ball rolling. Even if it’s $100 per month to start, get in the habit of saving now. In the not so distant future, you can reevaluate. If you start at birth, you have 18 years to set aside money in a tax-favorable investment. Just like with your 401(k), it’s an incredible opportunity to leverage the stock market. I think you’d agree it’s preferable to writing checks out of your bank account when your kids turn 18 and head off to college.

With an average first-year compensation of $224,693 (MGMA Physician Placement Starting Salary Survey, 2013), managing all four of these expenses should be financially feasible. If not, it might be a good time to review your budget. If you can continue to live like a resident for the first few years, saving money and reducing your debt, you’ll be able to retire earlier and with more financial security.