How to Break Free from Debt: An Aussie Doc Guide

How to Break Free from Debt: An Aussie Doc Guide

Doctors are wealthy, right?  Well, that is the expectation.  Australian doctors are well compensated in arguably the country with the highest standard of living country on Earth.  But the truth is, income does not make you wealthy.

Doctors are graduating from medical school with between $60,000 and $150,000 debt.  On top of that come mortgages, a car and yet more debt.  Doctors often feel pressure to keep up with societal expectations of wealth and status.  In order to build financial security, doctors (like everyone else), need to spend less than they earn, actively pay down debt and invest for the future.  Financial freedom and a comfortable retirement are not automatic.

It’s time to face the truth.  Although it is very tempting to hide your head in the sand, facing up to your debt is without a doubt the fastest way to get on top of it, so you can start building financial security.

Give yourself an hour to look through your debts and work out the following:

Debt

Amount

Interest Rate

Minimum Payment Necessary

Bad debts…

Tolerable Debts…

Good Debts…

I think its important to reflect on which debts are “good” – helping you build wealth, and those that are “Bad” – so that you are less likely to make the same mistakes again.  Most of us have had bad debts at some point.  There’s no point in beating yourself up, no judgement!  Just mark which debts were Good, Bad or Tolerable after reading the explanation below.

Bad Debts

These arise from periods when expenses were unable to be met by income – either from lack of willpower, inability to earn income, or unanticipated expenses.  They are often avoidable with forward planning and an Emergency Fund. These debts will keep you poor, especially if you are unable to pay them off quickly – the interest compounds and you are literally throwing your money away instead of using it to develop a financial base.  Once your out of “bad debt” and have an emergency fund, life gets cheaper.  You don’t pay interest if your car blows up and needs an expensive repair, credit gets cheaper when you need it for better debt too.

When I graduated from medical school I had a few “F*!% it, I’m almost finished and then I’ll have loads of money” moments, resulting in a the debts below

Debt

Amount

Interest

Store Card

$500

29.9% (!)

Credit Card

$2000

17%

Included in the bad debt category

  • Afterpay/Zip pay or equivalent
  • Personal loans
  • Car loans
  • Credit cards
  • Store cards
  • Harvey Norman (Ive done this too! They may be interest free, but they add fees and charges to your account each month!)

And any other debt that hasn’t helped you financially.

A special note about cars.  It’s often seen as sensible to borrow from the mortgage to buy a car, after all interest rates are at a record low.  But if this is not paid off quickly, the compounding effect of paying the car off over 30 years is astonishing!  I am of the belief cars should be paid for with cash if at all possible – it stops you getting carried away and upgrading too much!

Car financial mistake

And that’s at record low interest rates! At 6% your $40,000 car will cost $53,290 over 10 years, or a whopping $86,335 over 30 years.

Bad debt will keep you living pay check to pay check

Tolerable Debt

This is your mortgage for your principle place of residence (PPOR) UNLESS your choice of residence meets criteria to be a good debt.  Most houses are tolerable debt – they give you accommodation and so are necessary, but aren’t really helping you build wealth. Alas my own PPOR is in this category.

Good Debt

HELP Student Loans

To find out your up to date HELP debt including inflation adjustments, you need to create (if you haven’t already) and log in to your My Gov Account.

When you sign your employment paperwork you need to let them know you have HELP debt.  Repayments will be taken out of your wage by the tax office as soon as you hit the income threshold ($45881 this year).  You have to make repayments, based on your income as long as your working here, or overseas and the debt does not go away if you declare bankruptcy. The ATO website outlines how much is to be repaid based on income

For those about to start their intern year, this probably means you will have a few months pay (6-9 months) before having to start paying HECS back.

There is no rush to pay your HELP off faster, unless it’s bugging you.  As I say, it’s the cheapest debt you will ever have so while you have any other debt, prioritize that.

Private Student Loans

These may be charging you 10-15% interest and so are obviously a priority to get paid off over HELP

Mortgage on Carefully Chosen Principal Place of Residence

If you are clever enough to have brought a great quality property in an area destined for significant and sustained capital growth, your mortgage can also be considered a good debt.  Although it won’t provide an income while you’re living in it, the value will grow and can be used to build wealth through other investments.  Do not make the mistake of assuming any house you have brought is likely to have good capital growth.  Look up the capital growth of your suburb over the past 10 years – if it’s been growing consistently over the interest rate over a long time, this is a promising sign.

Tax Deductible Investment of Business Loans

Are used to build wealth.  But they have to be used to buy strong investments.  If you borrow to buy an investment that does not appreciate in value it is not growing wealth so is probably a bad debt.

The Strategy

Now if you haven’t done so already, check in to those accounts and document all your debts.  It is critical to TAKE ACTION if you want to get ahead.

Next, you need to work out how much income you can spare to pay off bad or high interest debt.  For interns to be, your net pay is likely to be $4300-$4900 per month and I recommend saving 20% – (~$860/mo) this can be used to pay off bad and/or high interest debts, build an emergency fund and then invest.  If you stick to this and increase the amount saved every year when your pay goes up, you will be in a strong financial position very soon. Perhaps you already have financial commitments, and 20% is really not realistic?  Start with what you can – 5 or 10% but make sure to increase every pay rise and you will be on the right track

The first few months before you have to start making repayments are a great opportunity to pay off any naughty debts off fast.  At $70,000 you will be expected to to pay back 4.5% – around $233 per month.  Prior to repayments starting, this can also be directed towards debt repayment.

You need to prioritize debt repayment.  You will need to make the minimum repayments on all debts, but will want to pay more to get rid of one debt at a time, in order from highest to lowest interest rate makes the most financial sense, although some people like to pay off a smaller debt first for the psychological encouragement.

If you would like a more detailed guide to paying off debt, managing your finances and building financial security Scott Pape’s “The Barefoot Investor” is the most loved among doctors, for good reason.

By now you should have

  • Researched and documented all your debts
  • Decided which are good, bad or tolerable
  • Worked out a plan of attack
  • Be able to identify bad debt opportunities and be able to avoid making these mistakes again and again!
  • Remember, once bad debt is paid off, to divert the cash flow freed up to wealthy building -mortgage pay off, additional superannuation payments or investments

Good Luck with managing your debt and moving on to a more secure future

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