Should Doctors Pay Down Debt or Invest?

Ah, the age-old question. This is not necessarily a ‘doctor only’ personal finance question. Many in healthcare professions (and outside of healthcare professions) will have to decide how to prioritize their money. I have found, however, that physicians and doctors ponder this dilemma frequently. Given the amount of debt doctors accrue through their medical education, they must prioritize their income towards debt elimination or creating a sizable nest egg. What do you think is the right decision? Better phrased… is there a right decision?

I would not ask that question unless it was more nuanced. There are many aspects of debt and investing to consider when answering the question: Should doctors pay down debt or invest? With this post, we seek to answer that question.  

The Doctor’s Dilemma: Debt and Investing

I have taken to calling this the ‘Doctor’s dilemma.’ With medical school graduates leaving their formal education with an average of $209,000 worth of student loan debt (according to the AAMC’s 2020 data), many physicians and doctors must decide how to prioritize their debt elimination. Look, doctors find themselves burdened with substantial debt. Simultaneously, they understand the importance of building wealth and securing their financial future through investments. Balancing these two competing priorities can be challenging, but doctors can make informed decisions by considering specific factors.  

The remainder of this post will focus on the individual aspects of debt elimination and investing. There is not ‘one size fits all,’ but knowing the intricacies of both can better help doctors understand how they should prioritize their money. Let’s start by discussing the importance of paying down debt, while we ask the question should doctors pay down debt or invest.

The importance of paying down debt

Ok, I will avoid getting on my soapbox too much here. We all know that debt is a big issue for physicians. Further, eliminating debt as fast as possible can help doctors better secure their financial future. Debt elimination, and its many nuances, is an critical aspect of financial success.

Financial freedom and reduced stress

By minimizing debt obligations, doctors can experience greater financial freedom and alleviate the stress associated with overwhelming debt. Given some of the abovementioned statistics, many medical school graduates will have to shoulder the weight of 6-figure debt. This can be anxiety provoking and influence their chosen specialty. Choosing to prioritize your early career income toward rapid debt elimination can help you drastically eliminate one of your largest liabilities. This can further reduce the stress associated with looming debt and interest accumulation.

Lower interest payments

Speaking of interest, high-interest debts like credit card balances or student loans can accrue substantial interest over time. By paying them off quickly, doctors can save money in interest payments. This can allow for more significant savings or investments in the future. That is a simple concept, but important. The sooner you throw money at your debt, the sooner you prevent interest from working against you. Further, your money will take a larger and larger bite out of your principal. 

This is why the longer your pay down your debt, the more effective it becomes; as your principal lowers, interest accrues on less principal and thus less interest. It is a glorious cycle that means each subsequent dollar contributes more towards principal elimination than just interest. It is a great feeling.

Improved creditworthiness

Paying down debt also positively impacts your credit scores. Improvement in credit scores enables doctors to access better loan terms, such as lower interest rates, when financing homes or expanding their practice.  

See, debt elimination has many benefits. From helping you expedite financial freedom to improving your creditworthiness, debt elimination is crucial to financial success and well-being. However, is it more important than early investing? Let’s find out.  

The importance of early investing

Now on to investing. Many physicians feel the need to invest early and often. The Motivated M.D. spends ample time writing about the importance of investing and diversification. It is important to note that the dollars you save early in your career have more time to work for you than dollars saved in your later career. 

Because of this, many advocate prioritizing investing over anything else. What is an early career doctor to do when they stare down a mountain of debt, but here the roar of the masses shouting, ‘Invest it all!’  

Wealth accumulation

First, investing allows doctors (and anyone, for that matter) to generate wealth and achieve financial independence over time. Investing provides opportunities for growth, capital appreciation, and passive income streams. Investing is one of a handful of vehicles that can help one accrue substantial wealth. For some, predominantly the FIRE movement, it can expedite your ability to live financially free.  

Retirement planning

Another reason that investing is important regards retirement planning. Doctors often have long and demanding careers. This can make retirement planning essential. Investing in retirement accounts like 401(k)s or IRAs can help build retirement nest eggs early and help doctors take advantage of tax breaks from these savings vehicles.  Want more on this topic? Check out How Much Do Doctors Need to Retire.

Inflation hedge

Lastly, investments have the potential to outpace inflation. This preserves the value of money over time. This ensures doctors’ wealth retains its purchasing power in the face of rising living costs.  

The interest of your debt(s)

Another important factor that likely will influence how you prioritize your money will be the interest rate on your debt(s). Be it your student loans (private or federal), your credit card debt, car loans, etc. The interest rate on these debts can greatly impact your ability to build wealth.  

Your interest rate matters

Understanding the interest rate is crucial when deciding whether to pay down debt or invest. Generally, if the interest rate on your debt is higher than the expected return on investments, it may be wise to prioritize debt repayment. By eliminating high-interest debts, doctors can free up future cash flow and avoid paying unnecessary interest expenses.  

Target high interest debt first

Many articles and blog posts in the personal finance niche are dedicated to this specific idea. When I graduated from medical school and formally created my written financial plan, I reviewed my debts. At the time, my only debt was (and still is) the loans I accrued during my medical education. Originally, the combination of federal student loans and grad PLUS loans averaged 6-8%. This was overwhelming, and the interest inflated my debt by the year.

For this reason (and many more), I decided to refinance my student loans to a lower rate. By my second refinancing, my interest rate was down to 3%, significantly more tolerable than 6-8%. This lowered the total amount I will accumulate in interest and has helped motivate me through the debt elimination grind.  

Every doctor’s situation differs, but a good initial target should be between 6-8%. If you carry debts with interest rates between 6-8% (or higher), eliminating these debts should be a top priority. Low to medium-interest debts (i.e., interest rates of 4-6%) are debatable. Once you weigh the pros and cons of prioritizing eliminating debts in the 4-6% interest rate range, other factors may influence you, like debt aversion, etc. More on that later!

The real rate of return on your investments

Another important concept to understand when deciding whether doctors should pay down debt or invest is the real rate of return on investments.  

Considering the real rate of return on investments is equally important as understanding the interest rate on your debts. The real rate of return is the actual cash value of your investments over time. The real rate of return accounts for inflation and taxes/expense ratios.

If you purchase an index fund that advertises a return rate of 6%, that may sound good. However, if inflation is high (let’s say 3%), and your expense ratios to manage the fund are 1%, then your actual rate of return (the real rate of return) is already down to 2%… and this does not even factor in taxes yet. Do you see where I am going with this?

If you understand your real rate of return on investments, you have a more realistic grasp on the actual cash value of your investments or potential investments. The real rate of return can be a better value to compare to your debt’s interest rates. This better guides what takes priority, paying down debt or investing. If debt interest rates are low, and your real rate of return is higher, then there is an argument for prioritizing savings and investing early on. If you want to learn more about the real rate of return, click here!

However, there is one last aspect to consider.

Debt aversion

As I mentioned earlier, a doctor’s debt aversion will likely factor into the decision algorithm. Let’s face it: some of us are less comfortable being indebted than others. My debt aversion likely played an outsized role in my decision to refinance my debt and eliminate it as fast as possible. Personally, the anxiety I derive from my student loan burden is substantial. I want it gone, and I want it gone now. 

Some doctors feel this strong aversion to their debt, and the psychological impact can influence their decision-making. If the debt burden is causing significant stress or affecting personal well-being, prioritizing debt repayment can provide peace of mind and create a solid foundation for future financial decisions.

Be practical when deciding how to prioritize your money, but please do not shy away from the visceral emotions that debt can bring. Everyone is different, and we all have varying degrees of comfort in debt accumulation and management. If you are averse to debt, factor that into your decision making as debt elimination may benefit you mentally and emotionally.  

Balancing Act: You can do both (and should)

So, should doctors pay down debt or invest? Well, as I hope you have gathered by this point, it isn’t very easy. However, I am here to tell you that there is no correct answer. Answers are likely highly variable based on the individual and the particular circumstance. Further, you can find a healthy balance of both.

There are a few important points. First, if you have high-interest debts in the 6-8% range, it would be sound advice to prioritize your money toward eliminating them. Only some investments will have real rates of return in this range with consistency. Pay it off if you have credit card debt or high-interest student loan debt.

Second, as you begin weighing the pros and cons of eliminating low to medium interest debt, factor in your debt aversion. If you are wildly debt averse (like me), consider prioritizing rapid debt elimination. Ridding yourself of debt may help you mentally and prevent burnout. However, if debt does not bother you, review your financial plan and decide how to prioritize your money to meet your financial goals best.

Avoid the extremes

You can do both. After you have eliminated high and very high-interest debt, strike a balance between debt and investing. With our debt refinancing to a more digestible rate, we now have options. As such, we have decided to max out our retirement contributions offered through our employers. This allows us also to get our employer match (don’t leave money on the table).

After we maximize our employment retirement savings and our HAS, we put approximately $8,333 towards our student loans monthly to meet our goal of paying $100,000 towards our debt annually. With the implementation of these strategies, we both max out important retirement savings vehicles, receive a match, and still rapidly pay down our debt. It is a win-win!  

Take home points

Deciding whether to pay down debt, invest, or both can be challenging. It can be made worse as you come into your attending salary, and the pressure to expand your lifestyle begins to creep in. As you decide who to prioritize your money best, remember a few things:

• Prioritize debt repayment, particularly on high-interest debts (6-8% or more), to reduce financial stress and improve your creditworthiness.
• Investing is crucial for long-term wealth accumulation, retirement planning, and combating inflation.
• Consider the interest rate of your debts and the expected real rate of return on investments. 
• Overcoming debt aversion can positively impact financial well-being and open doors for future investments.
• Strive to balance debt elimination and investing by creating a comprehensive financial plan. 

Need a financial plan? Look no further; here is a great introduction to How to Write a Financial Plan. Whether doctors should pay down debt or invest is highly individualized and depends on multiple factors. By understanding the importance of debt repayment, the benefits of investing, and considering personal circumstances, doctors can develop a strategy that suits their financial goals. Remember, finding the right balance is key to achieving long-term financial success as a doctor. As always…

Stay motivated!

The Motivated M.D.

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