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After years of studying and financial sacrifice, it can feel liberating when you begin your career as a physician and finally start earning a substantial income. Visions of buying a home, building a practice and travelling now seem within reach. But before signing up for any new loans, consider a few statistics.
In Canada, the average education debt upon graduation from medical school was $71,721 in 2014 but can be as high as $250,000. Although 17.5% of students get through medical school with no debt, Queen’s University’s School of Medicine reports that 6.2% have debts of more than $200,000, and that percentage is steadily increasing. More than one quarter of these students were already carrying debt when they entered medical school.
The average home mortgage is $301,000 and then there’s the ever-increasing cost of opening a medical practice, which, according to the Canadian Medical Association, can cost as much as $139,613 in the first year for a solo practice. These three common loans tally almost $1 million – without yet factoring in a vehicle loan, credit card debt, personal or business lines of credit, and other types of loans, which some medical school graduates accrue during their education. In fact, according to Queen’s University’s School of Medicine, 32.5% report having to take on additional debt for purposes unrelated to education, with the average amount being $23,976.
But now you’re done school and you’re making money. Plus, there’s plenty of credit available to you; bankers know doctors are typically a low default risk. Before taking on additional credit to fulfill your aspirations, it’s important to consider how you will manage your debt obligations. While bankers may be eager to extend funds, taking on too much credit can negatively impact your lifestyle and your professional career for many years. Debt overload can also put your business and personal assets at risk – it can even affect the financial security of your loved ones.
Don’t allow debt to direct your life. By taking control of your finances, you can make informed decisions, meet your obligations, and achieve your financial goals. Here are some ways to accomplish this.
Setting goals helps you focus on what you want to achieve for the future and to estimate what this may cost. Take some time to think about your personal, professional and financial goals for yourself and for your family. Involve your household members in the discussion to ensure you’re all on the same page. Then establish a timeframe for each goal so you can determine what you need to do by what date in terms of saving, investing and paying down debt. Consult with your accountant or trusted advisor for help with evaluating options and to support your ongoing efforts to effectively manage your debts.
One of the biggest mistakes physicians starting out in their careers make is to use credit to buy things that depreciate, like vehicles. Consider putting off owning expensive material goods until later and use available credit now to purchase assets that appreciate, like real estate, so you get a return on your investment.
Determine what risks you’re comfortable with to achieve your goals. You don’t want to place yourself in a situation where you’re constantly worrying about finances. Some people are content with high debt and low savings; others are not. Consider your age, income, cash flow, time horizon and personality. And keep in mind that when you borrow more today, you’ll need to use more of your future earnings to service credit obligations.
Know where you’re starting from. Create a baseline by tracking your personal and business spending for a few months. This will give you insight into the inflow and outflow of funds so you can make knowledgeable decisions.
When making decisions about financing options (Should I take that line of credit? How much do I need?), consider the impact on the rest of your liabilities. What would be the total principal and interest? Monthly payments? How will this impact cash flow? How long will it take to pay off this debt? How will this affect your financial security? It’s important to consider your entire financial picture before taking on new credit.
Generally, physicians don’t find it difficult to secure personal or practice loans or lines of credit. However, what this credit will ultimately cost can vary widely depending upon the source and type of financing. Some financial institutions offer special rates and packages to healthcare professionals. Ask your accountant for referrals to ensure you receive the best rate as well as the right form of financing to address your needs.
Too often, doctors reach their 50s and 60s and discover they are still carrying hefty loans and don’t have sufficient savings to retire. Along with Registered Retirement Savings Plans and Individual Pension Plans, debt elimination is key to a comfortable retirement. The less interest you pay, the more you can save.
Ask your accountant to help you develop a loan repayment schedule that will enable you to pay down debts in the most timely, cost-effective way. Balances, interest rates and tax consequences are all important considerations. For example, if you have an unincorporated medical practice, you would be paying any debt associated with the business on an after-tax basis. If you own a professional corporation and wish to withdraw funds to pay down personal debt, you could trigger a significant tax hit. Careful planning is essential to minimize the cost of debt obligations.
Essentially, the better your credit score, the less you will pay for a loan. To ensure you maintain a good credit rating, avoid overextending your credit, always make payments on time and never ignore overdue bills. Making a payment even one day late can weaken your credit profile.
Unexpected things happen in life, which is why you should have a reserve to safeguard your financial security. At a minimum, set aside sufficient funds in a bank account to cover your daily personal living expenses for three months.
If you own a practice, determine what ongoing expenses need to be paid every month for the business to operate. Then set up an account with funds to cover at least six months of expenses should an emergency arise.
Ensuring you have sufficient insurance coverage is another important aspect of protecting yourself, your loved ones and your medical practice from debt and other financial challenges. Insurance can serve a variety of protective purposes, from collateral for a practice loan to protecting your family’s wellbeing if something were to happen to you and you were unable to work.
Strategic tax planning also offers opportunities to manage debt effectively. Talk to your accountant about the options available to you. For example, if you set up and structure a professional corporation to allow family members to be shareholders, you can tax-effectively pay down personal debts by paying out income to those who are taxed at a lower marginal rate than you.
Should you find yourself overextended, don’t fall behind on payments. This could negatively impact your credit rating for years or, in the case of late government remittances or payroll, could trigger major penalties. Instead, meet with your accountant to discuss possible solutions. You may, for example, be able to refinance a student assistance loan or to consolidate certain debts to reduce interest rates.
You deserve the lifestyle you’ve worked hard to achieve. By following this prescription for managing debt today, you can look forward to a healthy financial future.
Calvin Carpenter, CPA, CA, is the Vice President of MNP’s Professional Services team. Working closely with medical and dental professionals, Calvin provides valuable advice to help clients reach their business and personal goals. Contact Calvin at 1.800.661.7778 or [email protected]
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