Immediately after residency it’s tough to adopt frugality unless you were born frugal. It requires a great deal of energy to sit down and tabulate all the debt, come up with a payoff plan, and start consolidating the various accounts we’ve accumulated over the years.
This post is about focusing on your net worth and not your debt balance. The latter is a bit destructive and uninspiring. The former will rise much faster because it’s compounded by not only the lower debt balance but also investment appreciation, dividend income from investments, but also your various savings accounts.
A Handle On Debt
A year or two after residency, after we’ve dug ourselves into a bit of debt (credit cards, auto payments, mortgage), it starts being an opportune time to get our finances in order. We have more accounts, we have more debt, and more bills.
The next phase is to get a handle on all that. To cut back on the spending, to pay off some credit cards, to consolidate the fleet of vehicles, and to cancel some bills.
For those who remain inspired, they will pear things down to the essential and free up some payments to put towards debt. They’ll even be able to max out retirement accounts.
Finally, the next evolution is to keep a strict budget. It’s like going on a diet – it’s not the most pleasant process but the results are delicious.
Is Debt Bad?
It’s commonly debated what constitutes a good debt versus bad debt. Should you pay off your mortgage ASAP? Should you hold onto your student loan debt as long as possible with its absurdly low interest rate?
One can’t argue against the pleasure of not owing anyone anything. It’s like being an clinician without a boss – able to practice as you see fit. From that perspective, being debt-free early in your career means that you will have less financial pressure to produce income.
Alternatively, if you cannot resolve the debt-debate in your mind, you can just save/invest enough to cover the debt. If you have $250k in student loan debt and $250k in investments – it’s less troubling to carry debt.
The Daunting Debt Balance
It’s ineffective to follow your debt balance when the goal is to be debt-free. As healthcare professionals we have more household debt than most small business owners. If you focus mostly on your debt balance then you’ll see it drop down really slowly – that’s annoying.
Also, sometimes you won’t be able to pay extra towards your debt because of other financial obligations or because you’re trying to add to your emergency fund or max out your retirement accounts before the end of the year.
There are always windfalls. Few households are immune to windfalls. These are healthy sums of cash that drop into your lap unexpectedly.
Perhaps for the past few months you’ve seen your debt gauge stagnate. Suddenly you get a windfall and you’ll pay your debt down significantly. This is another reason why it’s better to focus on the net worth because once you’re on a debt-payback plan, it works itself out.
Less Debt = Less Interest
On the positive note, as you pay down your debt, you’ll have less of a debt balance that you’ll pay interest on. This is one of the reasons why your debt will almost always get paid off sooner than you think.
Therefore keep your focus on sending payments towards your debt but stay inspired by following your net worth.
V. who started attacking her law school debt late-2016 and now, end of 2017, she has $8,000 left – impressive. It went much faster than she thought.
Follow The Net Worth
It’s popular among personal finance nerds to follow their net worth in order to determine if they have enough for retirement. It’s not a very effective method of diagnosing your retirement success but it is a great motivator.
Your net worth is good for tracking your progress in paying down debt.
While you’re paying down debt you’re also putting money in your savings account, into your emergency fund account, and in your retirement accounts.
All this together creates a positive feedback loop. You see your net worth grow both from the effect of the lower debt balance and from the higher savings portfolio.
Furthermore, you got your investments which are kicking off dividends and hopefully enjoying appreciation of the funds within your portfolio.
Bear Market Encouragement
Your net worth can also go down at times when the market slows down or when your investment portfolio loses value.
During a bear economy where your portfolio value is constantly going down, the best way to see your net worth grow is to pay down your debt.
When the market was flat and dropping in 2013, I recall watching my net worth drop and so I slowed down a little with my investment contributions and put the extra money towards my student loan debt.
Wealth Accumulation Phase
Your first $100,000 is the hardest to accumulate.
The next hurdle is your first $1,000,000.
After that, your savings just propagate on their own as if it was alive.
I remember that it took forever for me to hit $100k.
The next time I looked up, my account value was $600,000 and soon $800,000. Now that I am close to $1M, it once again seems to be taking forever.
Once the debt is gone, the majority of your income goes towards investing. This is encouraging and further fuels your desire to want to save more. It’s a great feedback loop.