Financial Planning For Resident Physicians Item #3 High Interest Debt Is Not Your Friend
This is the fourth article in a series dedicated to helping the resident physician take steps to put their house (financial and otherwise) in order. My previous articles on the subject may be found here.
There are varying philosophies on how much debt is good debt. I believe that there are great benefits both financially and psychologically to being completely debt free. In your residency, this is probably an impossible task, but it is the perfect time to get rid of toxic debt.
Remember, the choices that you make early in residency will shape who you are for the rest of your life. This may be especially true for your spending habits. Sticking to a budget and avoiding high interest toxic debt are important first steps to you achieving financial independence over time.
As a resident physician, you likely have student loan debt, you may have a car loan, other personal loans, and perhaps credit card debt. You should treat credit card debt as toxic debt to be avoided. This debt has got go before working on other important financial steps.
Credit cards charge usurious interest rates on balances left unpaid at the end of the month. Generally speaking, these rates are much higher than the rate of return that you will likely achieve in your investments. If you’re hoping for a 7% return in your aggressively allocated Roth IRA, but your credit card has an interest rate of 15%, you should focus your efforts on paying off the credit card debt first.
When the credit card debt is completely paid off, do a Dave Ramsey “debt free scream” and then never carry a balance on the card again. If you find that the temptation is just too great, credit cards probably aren’t for you and you should cut them up.
When I was younger, I cut up my credit card. Although I paid off my card every month, Dave Ramsey was so avid that you shouldn’t have a credit card that I went ahead and got rid of it. Looking back, I’m not sure it was the right move. My family and I do a fair amount of travelling and I could have benefited from airline miles. I now have a personal credit card that I pay off every month, and enjoy the flight reward points.
However, this can be playing with fire. Some of the blogs geared to physician financial planning have lately turned to articles that detail how to churn credit cards and best take advantage of points. I get it. You have to have things to write about, and it’s something that people are interested in. But my gut tells me that credit card companies aren’t losing money on their cardholders. So be wary if you think you’re getting the better end of the deal.
While it’s not a bad thing to carry a credit card in order to benefit from the points and rewards from your regular and normal purchases, be careful. If you’re carrying a credit card balance, focus your efforts and energies towards eliminating it now, or create a plan to get rid of it as soon as possible. Credit card debt will hold you back from being able to achieve other important financial goals in your life.
These are my opinions, unless I’ve specifically cited other material. The information and ideas I’ve presented are for information purposes only. Before you implement anything, make sure you have a thorough discussion with a qualified professional who understands your situation.