Five ways to lower your debt by suchenfz

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									            Best practices for debt minimization

            Five ways to lower your debt
            Minimizing debt during medical school is important to help start your career
            on the right foot. Here are five best practices to help you minimize your debt
            over the next few years:


            1. Develop an annual budget
            Work through a detailed budget before the beginning              credit can lead to overspending, which can make it
            of each year of medical school by estimating your                difficult to finance the last years of medical school
            costs and potential income, including:                           or residency.

                                                                             4. Properly time your withdrawals
             Basic costs            Other costs          Sources of income
                                                                             Try to minimize the interest that will accumulate on
             Tuition                Travel               Summer work         your line of credit by properly timing your withdrawals.
             Books                  Membership fees      Grants              For example, do not transfer large amounts to your
                                                                             chequing account if you do not plan to use the money
             School fees            Insurance            Scholarships
                                                                             right away. If you do, interest will accumulate on your
             Rent/                  Interest accumula­   Gifts and family    line of credit. One alternative is to use your line of
             accommodation          tion on debt         assistance          credit as your primary transaction account. If your
             Food                                                            school allows payment of your tuition in two install-
                                                                             ments, take this option rather than making one
             Entertainment
                                                                             payment at the beginning of the school year. By
                                                                             waiting to pay the second half of your tuition in
            A budget will help you determine how much you need               January, you will save on interest charges.
            to borrow and help you manage your money better.
            Your MD advisor will help you develop an annual                  5. Reduce the amount borrowed when possible
            budget and a financial plan for the future.                      Deposit incoming funds to your line of credit whenever
                                                                             possible. For example, if you have a summer job or
            2. Use your budget wisely                                        have received a grant, deposit this income to your
            Try to stick to your budget as closely as possible and           line of credit account—rather than your chequing or
            meet with your MD advisor every year to review your              savings account—as it comes in. This will reduce the
            budget, plan for the next year, and stay on track.               daily interest charges that accumulate on your line of
                                                                             credit account. Then, just borrow the money back as
            3. Borrow only what you need                                     you need it for rent, food and other expenses. This will
            Each year, borrow only the amount you need for that              save you money over the long run.
            school year by using your annual budget to determine
            your maximum credit limit. Having excess available




Financial   Practice       Living
                                                                                                                                     md.cma.ca
                  Case Study
                  Three physicians graduated from medical school at the same time, each with different amounts of educational debt.*

                   Dr. Wilson                                        Dr. Smith                                          Dr. Jones
                   Dr. Wilson worked with his MD advisor             Dr. Smith made a budget each year, but             Dr. Jones didn’t make a budget at all.
                   each year to create a budget, which he            borrowed more than what she needed                 His bank gave him a line of credit with a
                   followed carefully. Based on his budget,          in each of the first two years. When she           $150,000 limit in the first year of medical
                   each year he applied for and borrowed only        graduated from medical school, she had             school. As a result, he rented a more
                   what he needed. Upon graduation, he had           borrowed $110,000.                                 expensive apartment than he had originally
                   borrowed a total of $100,000, including                                                              planned and bought a car in the first year
                   accumulated interest.                                                                                of medical school. He had used all of
                                                                                                                        the $150,000 line of credit by the time
                                                                                                                        he graduated.

                  The chart below shows how much the full interest charge would be, once interest becomes payable, on the amount
                  borrowed for each physician—with a compounded monthly interest rate of 4.75%. Assuming all follow the advice
                  of their MD advisor and make payments of $1,000 per month to cover interest and some principal, Dr. Jones will
                  take more than eight years longer to pay back his loan than Dr. Wilson. Alternatively, he would need to make
                  higher monthly payments to pay it back in the same amount of time. Dr. Smith can pay her loan back almost
                  seven years faster than Dr. Jones, but will still take longer and pay more interest than Dr. Wilson.

                                                                                                  Dr. Wilson              Dr. Smith             Dr. Jones
                   Debt accumulated by graduation from medical school                             $100,000                $110,000              $150,000
                   First monthly payment — covers interest charges only     1
                                                                                                  $396                    $435                  $594
                   If each person made $1,000 monthly payments to cover both interest             10 years and            12 years and          19 years and
                   and principal, the number of years to pay off the loan would be:               8 months                1 month               1 month

                  Make interest payments throughout residency if possible.
                  By not paying interest during residency, amounts owing at the end of residency increase significantly as shown in
                  the chart below, and will take much longer to pay off. Dr. Wilson was able to minimize his school financing debt
                  with proper budgeting, sound financial planning practices, and help from his MD advisor.

                                                                                                  Dr. Wilson              Dr. Smith             Dr. Jones
                   If no interest payments were made during a two­year residency,                 $109,945                $120,940              $164,918
                   after two years each would owe:
                   If no interest payments were made during a five­year residency,                $126,748                $139,423              $190,122
                   after five years each would person owe:



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* The information in this article is for illustrative purposes only. The names and figures used do not represent actual clients.
                                                                                                                                                                                       BNK-10-00736 November 2010




1
    Amount of monthly payments required to cover interest charges would vary from month to month for this example.
MD Physician Services provides financial products and services, the MD family of mutual funds, investment counselling services and practice management products and services
through the MD group of companies. For a detailed list of these companies, visit md.cma.ca
MD does not intend to provide taxation, accounting, legal or similar professional advice to clients or potential clients. The information contained in this document is not intended
to offer such advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals.

								
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