Unnecessary debt
A car loan
The classic example is a car loan. It could be an attending physician who goes through financial records several years out of residency and lists a $10,000 car loan. Assuming there is no working spouse, this person earns $20,000 – $40,000 per month. How long does it take to pay off a €10,000 car loan? When will your next salary come? Then it has to be paid off. I would be ashamed to say I have car debt. Poor people have car loans. People with incomes between $250,000 and $500,000 shouldn’t be bankrupt for long 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 is not driving a nice car; it is a paid for car.
Credit card debt
The other silly debt I occasionally see on doctors’ lists is credit card debt. Take virtually anything sent in the mail from a credit card company. Turn it over and look for a large box at the back. Read that box. Somewhere in that box it says that borrowing money from that credit card will cost you somewhere between 15% and 30% interest. If I could find an investment that yields 15% to 30%, I would buy as much of it as possible, take out a home equity loan, and let my kids clear the driveway to get extra money to invest. If you have credit card debt, you are someone’s great investment. As my children have long known, interest is something to be given, not given.
More information here:
How quickly can you get out of debt?
Getting into debt is not okay
An emergency fund and debt?
Another interesting combination is people who say they have an emergency fund and still owe money. As physicians, we generally have access to all kinds of credit. I think I could probably rack up $150,000 in credit card debt in the next hour if I wanted to. Emergency credit is usually not difficult to obtain. For us, the purpose of an emergency fund is to prevent you from going into debt if you find yourself in an emergency situation.
If you are already in debt, you already have an emergency.
Your emergency started several thousand dollars ago. Use the emergency fund to deal with the emergency and pay off that credit card.
Debt management?
There seems to be a popular concept that encourages people to ‘manage’ their debt so that they can use it to become rich. The arguments look good. The idea is basically to borrow at 4% and earn at 8%. Mathematically speaking, there is great truth in this. But behaviorally, people don’t really seem to work that way. Once your mindset shifts from eliminating debt to managing debt, people seem to get “comfortable,” savings rates go down, and spending goes up. Twenty years later, they wake up to find that they are still in debt, and that they haven’t really benefited from a huge arbitrage. It only works if you invest the money that doesn’t go toward paying off the debt (or avoiding it), and most people don’t do that.
The other problem is that people don’t really calculate how much this arbitrage is paying them. For example, suppose you are offered a 2% loan for a car. You have the $10,000 the car will cost, but you think you’ll do better than investing 2%. So you invest. Things are going pretty well, and over the next few years you’ll be earning 6% while carrying this debt. You earned 4% per year for two years. What is 4% of $10,000? It’s $400, and $800 for two years. And after tax? Maybe $500. How long will it take you to earn $500? What else can you get out of your budget to get $500? Precisely. Obviously, if you make $200,000 a year, you can afford to pay off a $10,000 debt at 2% interest. It won’t break you. But it’s a bit stupid.
I also find it very unusual for wealthy people to have a significant amount of debt. As mentioned, good arguments can be made for carrying debt throughout your career and even into retirement. But in practice, I know very few rich people who do that. The same mentality that makes people rich also causes them to pay off their debts sooner than necessary and avoid taking out more debt. Dave Ramsey occasionally does ‘Millionaire Segments’. These are generally Millionaire next door Types who earned $60,000 – $150,000 during their career and are now millionaires. Granted, this is a very self-selected group, but few still have debt (perhaps a mortgage). And they all deny that debt played an important role in their wealth accumulation. The same goes for the retired millionaires down the road the Bogleheads forum. The same goes for most of the people on the Milestones to Millionaire podcast.
Can you do something about it? Certainly. We once funded our Roth IRAs during my PGY-3 year with a 0% credit card. We started a taxable account a year before we paid off our mortgage (we did that the year this post was first published). Our wealth did not come from arbitrating debt. In fact, most of our financial success comes from living well below our means, which meant taking on a lot of debt. The recipe is (almost) always the same: earn a lot of money, save a large part of it and invest it in a reasonable way.
More information here:
Should you pay off debt or invest?
Long student loan repayment terms
We have numerous student loan refinancing companies advertising here. They laugh at me when I say that I want my readers to be out of debt in five years and that I don’t really care what their ten- to twenty-year interest rates are. Why are they laughing? Because they know what you actually do. And many of you are refinancing your 10- and 15-year student loans. I think after ten years you should be a millionaire, not a debtor. Anyway, if you still want to be in debt ten years after graduating college, pretend your student loans are a house and get a 15 year mortgage with fixed student loans and you can knock yourself out. It’s your money and your financial life. I look at it this way: the longest anyone would have to be in debt for medical school is four years after completing the program, because that is how long it would take to pay for medical school through the HPSP “Scholarship.” If you can’t get out of debt in four years, you would have been better off in the military.
One problem with a long-term student loan is that you get a lousy rate. Sure, 5.5% is better than 6.8%, but if you paid it off in three or four years, you could probably get a 4% fixed rate and would probably be comfortable with a 3.5% variable rate. And 3.5% is much lower than 5.5%. Lower interest rates = debts cleared faster.
But the main problem is that after five, ten or fifteen years you are still in debt. It is a very rare physician who is as enthusiastic about practicing medicine 10 years into their residency as they are one year into their residency. It’s not that they’re burned out (although that happens so often that that might be true), it’s just that life happens, other interests develop, part-time work starts to look more attractive, etc. If your loans have been gone for years and you have a huge nest egg at the time, you can cut back and pursue other interests. If you’re still in debt, sorry. Get back to work.
Forgiveness programs almost make things worse. With the possibility of federal forgiveness programs and employer loan repayment programs, many physicians are beginning to think that they may not have to pay back their loans at all. So they unconsciously purchase more or postpone the refinancing and pay it back as quickly as possible.
30 year mortgage?
Yet another area of silly doctor debt is a long mortgage on your primary home. You might be surprised to learn that before World War II, no one used 30-year mortgages. GIs came home and qualified for a 30-year VA mortgage. Shorter mortgages used to be the norm. Why did they choose the 30-year-old? Because they thought a typical career lasted thirty years and they wanted the house to be paid off before retirement. Do you really want the VA to decide how long you should be in debt for a home? And now, with the housing crisis, people are talking about 50-year mortgages!
If you practice in Boston, Manhattan, or the Bay Area, you may not be able to afford to buy with a 15-year mortgage. The rest of us don’t have such a good excuse, although given what housing prices have done since this article was originally published, we have more excuses in 2026 than we did in 2016. Still, I think there’s great wisdom in not buying a house that’s so expensive that you can’t pay it off in 15 years. Not only will you be rid of your debts within 15 years, but you will also receive a lower interest rate.
The flexibility argument is nonsense (“I want a 30-year term in case something happens; I’ll still pay it off in 15 years”). Your mortgage should ideally be such a small percentage of your income anyway that if something were to happen that prevented you from making the payment over 15 years, you probably wouldn’t be able to make it over 30 years either. Plus you have a decade and a half of extra 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 get rich, do what rich people do. Rich people use fifteen-year mortgages (and pay them off in less than fifteen years).
More information here:
How to Pay Off Medical School Debt in 2 Years
Pay off your spouse’s student loans together
Personal loans
For years we had no advertisers on this website offering personal loans. We have a few now, but I hope only a few of you use their services. If you need these loans, we also hope that you pay them off very quickly and get back to building wealth. No one lends their way out of debt, and no one lends their way to wealth.
Rich people don’t ‘manage’ debt. They eliminate it. Not stupid, but reasonable and consistent. It’s a behavioral issue, not a math issue. There’s a reason why debt makes you uncomfortable.
[FOUNDER’S NOTE: A week ago, Josh (our content director), brought this post, originally published in 2016, to me and asked if there was anything I wanted to update. I did find a few things to update, but mostly the message I would give now is exactly the same as the one I penned more than a decade ago. Debt might be a tool, but it’s not one that most financially independent multimillionaires thought wise to use.]
What do you think? Do you have ‘small debts’? Why or why not? Do most of the rich people you know have a lot of debt? Are you “managing your debt” or “eliminating your debt?” Why?
[This updated post was originally published in 2016.]
#Stupid #debts #doctors #White #coat #investor