In this chapter we focus on the debt side of the balance sheet, with emphasis on the toughest challenge faced by many medical practitioners—the burden of student loans. We also cover car purchases, home mortgages, credit cards, and credit scores.
What is Debt?
Debt is a liability that arises as a result of borrowing. If you don’t have enough cash to buy an asset on your own, you can borrow money to buy it. The debt agreement obligates you to gradually pay back the amount borrowed (the principal), plus interest. Financial penalties apply for missed payments. Assets may be seized (repossessed) in lieu of payment.
Pros and Cons of Debt
American culture encourages debt use, but this doesn’t mean you have to accept debt—and its accompanying anxieties—in your life.
Pros of debt: Debt allows us to acquire assets and enjoy them now, even if we don’t have the cash to purchase them outright. Examples: home or car purchases.
Cons of debt: Debt obligates us to repay. If we’re unable to pay, we face financial penalties at high interest rates, loss of the asset we purchased, loss of equity in the asset, and damage to our creditworthiness. Bad credit makes subsequent borrowing more expensive or impossible, and may harm our ability to rent a home, qualify for insurance, or find a job.
Debt levels for highly educated professionals are high
Unlike many undergraduate college peers, who get jobs and begin paying off student loans in their early 20s, doctors incur even greater amounts of debt during medical school. Furthermore, doctors are often unable to make debt payments as interns, residents and fellows, which can lead to unpaid interest being capitalized (added to their outstanding principal). The result in many cases is a mountain of debt.
According to the Association of American Medical Colleges (aamc.org), the median education debt for indebted medical school graduates in 2019 was $200,000. The class of 2020 median 4-year Costs of Attendance are estimated at $255,517 and $337,584 for graduates of public and private medical schools, respectively. Median premedical (undergraduate) and non-education credit card debts are a very small portion of outstanding indebtedness by medical school graduates ($25,000 and $5,000, respectively).
For the sake of comparison, the American Dental Education Association (adea.org) states that, “Average educational debt for all indebted dental school graduates in the Class of 2019 was $292,169, with the average for public and private schools at $261,305 and $321,184 respectively.”
Other highly educated, non-medical professionals, have substantial debt, but it is not as high as physicians and dentists. According to a CNBC article, the average debt for PhD graduates in 2019 was $98,900. The figure includes undergraduate debt. 
The main message in these numbers, and in numerous articles dealing with the subject, is that medical practitioners, weighted down by massive debt burdens, live on a razor’s edge where any misstep can lead to harsh consequences.
One such consequence is that medical practitioners who default on student loans made by the U.S. Department of Health and Human Services may have their licenses revoked or suspended.  This, in turn, can disqualify them from participation in programs receiving Medicare and Medicaid reimbursements. Adding insult to injury, a government program dating back to the 1990s set out to publicly shame delinquent medical practitioners by including their names in a Medicare Exclusions List.
In addition to student loans, many doctors take on sizable home mortgages and auto payments. Some young couples face a dizzying amount of debt. I’ve spoken with dual-physician couples; dentist married to physician; physician married to attorney, who have combined school debts in excess of $500,000! Add a home mortgage and two car loans and you’ve got a million-dollar barrier which could take decades to overcome.
Now introduce a surprise variable: what if one spouse, clutching that first newborn, decides s/he wants to stay home with the baby? That mountain of debt is suddenly much harder to scale.
Reducing that mountain of debt is harder for doctors who become accustomed to spending and relying on credit cards. Here’s another all-too-common example. A doctor calls his accountant and says he needs to talk, urgently. When they meet face to face, the doctor says: “I made around six-hundred thousand dollars last year. This year it looks like I’m only going to make four-hundred thousand.” Then the doctor sighs heavily, and says, “That’s not enough, I can’t make it on four-hundred thousand. I’m not making enough money. My income is not high enough.” The accountant stifles the urge to shout out, “You don’t have an income problem—you have a spending problem,” and instead politely points out that annual income of $400,000 puts the doctor in the 99th percentile of earnings.
High earning doctors may be tempted to spend on real estate, cars, fancy gym memberships, travel, and a variety of other products and services. In fairness, after many years of study doctors should be able reward themselves. But while some of these expenditures may be justifiable, others are likely unnecessary and inadvisable, and result in higher debt.
The best advice is to: (1) avoid debt to begin with, and (2) live within your means. The former minimizes your debt burden. The latter allows you to generate excess cash to pay down debt and invest
Avoid Debt to Begin With
The best strategy to avoid the burden of debt is to minimize its use to begin with. You can elect to zealously reduce borrowing by living modestly: live at home with your parents if that’s an option; live with roommates and share utility expenses instead of living alone; avoid owning a car if you can walk or use public transportation—instead of paying for insurance, gas, and parking you can read on the bus or subway; buy used textbooks or borrow copies from friends; and avoid the urge to match the more extravagant lifestyles of fellow students or friends who are not juggling large amounts of debt.
If you have debt, or plan to take on debt, you must also have a plan for paying that debt off. If you can’t formulate a plan for realistically paying off the debt—then you can’t afford the debt!
As a reminder, it’s crucial to distinguish between “good” and “bad” debt. Good debt is money borrowed to create more value or accumulate more assets in future. Examples are borrowing to buy real estate as an investment or to attend school and command a higher salary in future. Bad debt refers to money we borrow and spend without a commensurate return.
Real Example of Living Within Your Means
Disheartened young physicians often ask me whether it is realistic for them to overcome high debt burdens. For an answer let’s turn to a real-life example (name changed by request). In the early stages of their marriage, Dr. Jones and his wife were on a typical financial trajectory: upon graduation from medical school he had a large amount of school debt, and when they initially settled into a new home in Massachusetts, a sizable mortgage. Several years later they found themselves in New Hampshire, with a bigger house, a bigger mortgage, and three children.
Around this time Dr. Jones began to question the usual approach of borrowing to fund all major purchases. When it came time to replace the family’s two cars, he decided to pay with cash. This led to a bizarre situation in which the car salesman wasn’t sure how to proceed, never before having had to process a car purchase that wasn’t financed with debt.
Soon, the family found itself moving to Virginia, and the couple made an explicit decision to avoid debt wherever possible. They bought a house at a price that was well below their purchasing power, requiring a very small mortgage which was soon paid off. They were also able to aggressively pay down school debt.
A decade later, the family was debt-free. They still drove the same two cars, two of their children had completed post-secondary education, and their daughter was married. They had enough saved up in a college savings plan for the youngest child to attend college.
Other than replacing the two cars, there were no major expenditures in sight. All the family’s excess cash could be directed into retirement savings.
The key to being in this favorable position was the family’s explicit decision to live below their means. This allowed them to pay off debts, ensure high quality education for all (Dr. Jones graduated from an Executive MBA program), and put some money away for retirement. Over this entire period the family donated 7-10% of gross income annually to causes such as the Salvation Army, Doctors without Borders, and Mercy Ships.
The key lesson here is that there’s no magic to financial planning. All progress hinges on earning more than you spend and using that excess cash to pay down debt and build pillars.
In your financial planning, prioritize debt repayment to reduce your lifetime debt servicing costs.
If you have multiple debts, a good rule of thumb is to pay off the debt with the highest interest rates first.
The "Austerity" Strategy
If you have significant amounts of debt, or just want to turbocharge your retirement planning with early investments, commit to a few years of modest living after you get your first job. Use this time to generate a lot of excess cash and put it to good use. Once your debt load is under control and or you’ve seeded a few investment pillars, you can expand your spending.
The easiest time to enforce “austerity measures” is when you are still accustomed to living under similar circumstances as a trainee, and before you’ve become accustomed to a more luxurious lifestyle. It’s much harder to scale back expenses once you and your family become accustomed to them.
This advice must be tailored to your family’s circumstances. It’s relatively easy to live like a resident for a few years when you’re single. If you have dependents, such as small children or elderly parents, living like a resident may not be an option. In such cases it’s even more important to plan carefully and use the family’s scarce financial resources most efficiently to preserve an acceptable lifestyle while successfully meeting all financial obligations.
 See https://www.cnbc.com/2019/05/13/heres-how-much-student-debt-americans-with-phds-have-on-average.html
 See https://oig.hhs.gov/exclusions/authorities.asp