How should physicians pay off their debt?

By this point, a lot of people have heard the famous Dave Ramsey quote, “If you live like no one else, later you can live like no one else.”  Ramsey is known for being a proponent of attacking debt aggressively when people ask, “How should I pay off my debt?”

He proposes one method that I think works for the vast majority of Americans, but today I’ll argue that method isn’t necessarily the best way to combat debt for high earning medical professionals.

I’ll tell you exactly how I am paying off $200,000 in student loan debt in two years, and how you can use the same method to eliminate your debt quickly.

The debt snowball method

Before we describe the method that I used to destroy our debt, let’s first discuss Ramsey’s approach, which is often called The Debt Snowball method.

The name of the method is meant to provide a picture of a snowball starting at the top of a mountain.  As it rolls down the mountain (and crushes debt) it picks up more snow (more cash flow) and turns into a formidable snow boulder that can crush debt very quickly.

The idea here is to put any additional discretionary money towards your smallest debt.  When that is paid off, use that money plus what you are currently paying to pay off the next debt.  With each debt being paid off, you’ll have increasingly larger cash flow to pay off the next debt.  Hence, its name – the snowball method.

The avalanche method

A second method that is available to pay down debt involves what is called the Avalanche Method.  (These people are obsessed with snow!)

The idea here is the opposite of the snowball method.  Simply locate the highest interest rate debt you have.  Take any additional money you have above your monthly minimum payments and start hammering away.

The more you can throw at it, the larger the avalanche, and the sooner your debt will be gone.

This is the method that I chose as I paid off $150,000 in student loans in my first 15 months out from training.  Using the snowball method, I should have paid off our remaining car loans first before getting to the student loans.

The snowball method: behavioral finance

The reason that this method is good is because it has a psychological motivation behind it.  With each debt that is paid off, you are encouraged that you are doing the right thing. And with the next debt, you can watch it disappear quickly as the snowball gets larger.

Most people that follow Ramsey’s method simply cannot see a way out of their mountain of debt.  For this reason, Ramsey’s goal is to prove early and often that anyone can eliminate debt.  After the first one is gone, it provides hope.

That is what the snowball method is all about. So, if you find yourself in a situation where you cannot imagine financial escape, cut your lifestyle down and start finding discretionary funding to chip away at the smallest debt you have.

In the end, this method has been shown to have a higher compliance rate than the avalanche method.  But at what cost?

The math behind the avalanche method

The bad part, of course, is the math and the rules behind student loans.

First, math just doesn’t work for the snowball method.

The snowball method encourages you to pay off your smallest debt.  Not your most expensive or highest interest rate debt.  Assuming 100 percent compliance to both methods, you will pay more interest on the snowball method.  That’s unless you start missing payments.

Second, there is an issue that isn’t commonly discussed when comparing these two methods.  For people who have refinanced their student loans, there isn’t always a guaranteed forgiveness upon death.  However, if you do die, your spouse can probably just sell your car and not have to worry about it anymore.

For this reason, it almost always makes sense to pay off any debt with interest rates greater than 10 percent and then your student loans prior to paying off anything else.

How should I pay off my debt?

Honestly, this is a tough question to answer for most doctors.  Physicians usually don’t have a debt problem or a savings problem as much as they have a spending problem.  Simple math will show you that you cannot save or pay down debt if you spend all of your take-home pay.

If young physicians could simply follow the path of Dr. EFI — and not Dr. Jones — they would be fine.  Instead, most physicians inflate their lifestyle and place themselves in a situation where paying down debt becomes very challenging.

When you have a $3,000 mortgage, $1,500 car payments, $2,000 in childcare costs, and a huge student loan debt burden … the debt can seem insurmountable.

So, how should you pay off your debt?  The first answer is to avoid lifestyle inflation.

The second answer depends more on your personality.  If you have a personality that can visualize a plan, stick with it, and do what needs to be done, the avalanche method is going to win every time.

However, if you know yourself and need the small “wins” to keep you going, the snowball method may still be your friend.

Regardless of which snowy debt pay down path you travel, the take home is to pay down your debt.  Make a goal, write down a date, and chase after it!

Take home

Paying down debt is paramount to financial success for most early career physicians.  For this reason, you should know that there are multiple methods to this madness.

However you ski this course, make sure that you pick one path and stick with it.  In the end, sticking with it matters infinitely more than which method you chose to use to attack the problem of debt.

“The Physician Philosopher” is an anesthesiologist who blogs at his self-titled site, The Physician Philosopher.

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