Should I pay down my debt or invest in the market?


An excerpt from The Physician Philosopher’s Guide to Personal Finance: The 20% of Personal Finance Doctors Need to Know to Get 80% of the Results.

At my little girl’s golf practice one day, I got to talking to her coach. I asked him how he decided he wanted to be a golf coach.

“Well, I didn’t always plan on this,” he said. “Actually, I was going to be a financial advisor.”

Of course, this piqued my interest and the natural follow-up question was to find out why he didn’t finish pursuing this line of work. He proceeded to tell me the following story, which will be useful for you to remember in your journey interacting with the financial industry.

To land the financial advising job at the particular insurance company where he applied, he had to undergo several preliminary interviews. He made it through and landed a spot with two other people at the final interview day. When they arrived, they were instructed to write down ten names of family and friends. Their task was to “cold call” these ten people and sell them a financial product.

When the future coach asked more about the product, the company representative said, “That’s the point, you are going to be a salesperson … if you want to make a commission from a sale, then you need to be able to sell something whether you know a lot or a little about the product.” When the future coach stood his ground and said that he could not endorse a product that he knew very little about, he was asked to leave. He was not invited back and—needless to say—he didn’t get the job. This was his first real taste of the financial industry.

The reason that this chapter starts out with this story is to remind you that as a physician (or a physician in training), you have a giant target on your back. You are a gazelle running carefree in a field full of lions. Everyone views you as their next meal. Never forget that. If someone tries to sell you something that you don’t understand, such as the latest and greatest individual security (i.e. stock), algorithm-based investing, hedge funds, or commodity-based securities, run the other way. When an insurance salesperson or advisor wants to meet with you to grant you access to special funds and stocks to which other people don’t have access, simply say, “no thanks.” At the very least, eat the free steak dinner and ignore everything they say. You’ll be better off for it, and you’ll be sure to avoid getting that phone call from a salesperson trying to make a commission off of your ignorance.

The Pareto Principle remembered

While the prior chapters on student loan debt management might be the meat of this book, this chapter serves as the potatoes. In no other chapter am I going to preach the Pareto Principle more. The topic of investing has produced hundreds or thousands of books. There are many ways to skin a cat, but our goal is to create something that is easy to manage and easy to ignore.

Clearly, we cannot cover the depth and breadth of this topic in a single chapter. Follow along, if you dare, as we discuss the 20% that you need to know to get 80% (or more) of the necessary results to reach financial independence.

Invest or pay down debt

Before we can get to the bulk of the investing advice, we need to answer the most common question that I get from people, “Should I pay down my debt or invest in the market?” There are two sides to each argument, and I land pretty safely on the paying down debt side, but with a firm balance on investing. The reason that I land on this side is because being debt free provides several benefits. Here are a few:

  1. The freedom of being out from underneath the burden of debt cannot be overstated. That is one less mandatory expense that would be necessary should you fall on rough times.
  2. You save yourself the interest you would owe on the debt by paying it off early. Once the debt is gone, you can then use the payment you were making towards debt and put it towards investments.
  3. Paying down debt is a guaranteed return on your money; if you invest, there is no guarantee that the market will do better than your interest rate on your loans. Also, once your debt is paid off, you can simply apply that previous payment towards investing.

To figure your debt-to-income ratio, simply divide your anticipated student loans at graduation by your anticipated annual income. Here are my guidelines for choosing whether you should pay down debt or invest, and in what order:

If your debt-to-income ratio is <1 (i.e., $250,000 in debt with $300,000 in annual income) -or- you are enrolled in PSLF, you have room to invest your money while you pay off debt.

  1. Max out your 401K/403B for both you and your spouse (if married) to at least receive all matches and contributions from your employer.
  2. Make the above in a pre-tax fashion so you can put extra post-tax money towards your debt.
  3. Max out your Health Savings Account (HSA) if you have a high deductible health care plan.
  4. Max out any governmental 457 for you and your spouse, if you have one.
  5. If not in PSLF, privately refinance and use any extra money towards destroying your debt.
  6. Max out your backdoor Roth IRA space for both you and your spouse (if married).
  7. If in PSLF, make minimum payments and max out other investment vehicles (taxable account, etc.).

If your debt-to-income ratio is >1.5-2 (i.e. $450,000-$600,000 in debt; $300,000 in annual income), you should pay off your debt at all costs.

  1. Make sure you take advantage of PSLF, if you can! Starting PSLF now (even if you’ve missed out on previous payments) may still be the best choice.
  2. Max out your pre-tax contributions to your 401K/403B for both you and your spouse (if married) to receive at least all matches and contributions from your employer. Otherwise, you leave part of your salary on the table.
  3. If you are not doing PSLF, every extra dollar should go towards debt.

James Turner, also known as “The Physician Philosopher,” is an anesthesiologist who blogs at his self-titled site, The Physician Philosopher. He is the author of The Physician Philosopher’s Guide to Personal Finance: The 20% of Personal Finance Doctors Need to Know to Get 80% of the Results.

Image credit: Shutterstock.com

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