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: Contact MD today. md.cma.ca | 1 800 267-2332 * 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.
Pages to are hidden for
"Five ways to lower your debt"Please download to view full document