Discipline is the key
In contrast to what the “debt consolidation” or “debt relief” commercials would have you believe, there is no secret or easy formula for paying off debt. The mechanics however are quite simple. You figure out how much you owe, how much money you have available after taxes, how much you need to live a “bare minimum” lifestyle, and then you throw all the rest of the money at the debt month after month for years until it is gone. This does not require complicated math, but it does require a healthy dose of discipline.
Digging the hole
Throughout medical school and residency, my financial knowledge was nonexistent. I took out the maximum in federal student loans and even took an extra year to complete a research project through the NIH (extra year of tuition!). Despite a net worth plummeting into oblivion during this time, I purchased a $25,000 new car on credit, four $3000 bikes, ate out at “The Farm” in Park City, indulged in two trips to Maui, one trip to Mazatlán, and multiple weekend getaways in fancy hotels. I did not track my spending during this time, but I estimate it at around $30,000 per year. I did not save any money during residency and did not fund my Roth IRA (big mistake). Luckily, I somehow managed to get through all of this without any credit card debt or private loans.
Tallying up the damage
Near the end of my residency in 2014, I somehow stumbled upon the White Coat Investor and Dave Ramsey. I decided that the debt needed to be annihilated to have any chance of a secure future with options and freedom. I added up all of my debt, which came in over $400,000. This was exclusively federal educational debt, but it came with a bloated 6.8% interest rate.
Damage Control
Although I knew very little about personal finance at this point, I could calculate that 6.8% interest on $400,000 was around $28,000 per year. That seemed ridiculous, and around this time, student loan refinance companies such as DRB and Sofi were competing to refinance federal student loans. I applied with DRB and Sofi. Sofi came out the winner, offering me a 5 year 1.9% variable interest rate. I decided to take the risk on the variable rate, as fixed rates were 3.5% or higher. At 1.9%, I was now only wasting around $8,000 per year instead of $28,000 per year, which sounded like a huge win.
Developing the Plan
To be successful at anything in life, you must have a plan. The plan must be SMART, or Specific, Measurable, Attainable, Realistic, and Time-Based. Here’s how I developed my plan:
- After 14 years of higher education (5 years of undergrad, 5 years of medical school, 4 years of residency), I had lined up my first job with a base salary of $250,000.
- I estimated my federal, state, and payroll taxes on this salary to be around $75,000. This meant that I had approximately $175,000 available for living expenses and paying off debt.
- Using an excel spreadsheet with various budget categories, I estimated that the bare-bones living expenses for my wife and I living in a high cost of living area would be around $40-50,000 per year. My wife also had a job making around $40,000 but she had around $20,000 worth of her own debt and we had decided to tackle our own debts separately.
- After living expenses, the amount available to pay down my debt was around $125,000/year, or around $10,000/month. Therefore, my initial goal was to pay off $400,000 worth of debt in 40 months, or around 3.5 years. I made an excel spreadsheet with a goal to pay $10,000 per month towards my loans. I updated the spreadsheet every month to keep myself motivated and on track. It looked something like this at the beginning:
Staying the course to the end
Again, the math is easy but the discipline is hard. As luck (opportunity? hard work?) would have it, I made some bonuses after my first year at my job, which allowed me to accelerate my student loan debt payoff to around 2.5 years. My wife took on a second job which helped her pay off her $20,000 debt in two years. We did NOT increase our base expenditures or lifestyle with the additional income, which all went towards paying off debt. We lived in a 1200 sq. foot apartment, paid off our cars, didn’t buy any new bikes (a big accomplishment), went out to eat no more often than once per month, usually at Qdoba, purchased items on Craiglist, shopped at Walmart, and did not take any exotic vacations. Of course, many people live more frugal lifestyles (Mr. Money Mustache lives on under $30,000 per year). However, in my estimation, some luxuries, like fruits, vegetables, outdoor gear, road trips, and a safe place to live, keep you rested, healthy, and energized to keep destroying the debt. It’s amazing how great it feels to finally hit submit on that last loan payment.
Your Turn
What do you think? How much debt have you paid off and how long did it take you? How do you keep yourself motivated?
Remember, it’s not about the money; it’s about the freedom.
Fantastic job annihilating those massive loans, LFMD. It’s refreshing to read about how it’s possible to reach a lofty goal if you make appropriate “sacrifices” and remained focused.
Your timeline was aggressive and you crushed it. It would have been much easier to start living “the good life” while ignoring the balances. You chose wisely.
Cheers!
-PoF
Thank you for the shout out on Twitter!
Thanks for writing this and for sharing. It will be encouraging to new grads who are deep in debt. Your future looks bright!
Hehe! Congrats! I thought I was good for getting rid of ~$170k of student loan debt! Ultimately, your situation supports what I’ve experienced after I finished my fellowship too–since doctors can usually generate a relatively high income, the student loans that we accumulate are only a temporary hurdle if we can grind out a few years without lifestyle inflation.
Luxuries like fruit and veggies, eh? 😉 I think that you deserve to splurge for your discipline!
Good luck to 2017!
Thank you Smart Money! I live up in Alaska, home to the $5.00 cucumber and $10.00 cantaloupe. Fruits and vegetables are definitely luxury items! : )
Nice work Live Free MD. I look forward to reading more of your posts. I was in the same boat, not becoming smart with my finances until I was 33 years old (second year as an attending).
We paid off all of our non-student loan debt in about 1 year (I wrote a post about it, but it was near $100K). Bad choices such as new cars, tempurpedic mattresses and an expensive wedding. I recently paid off my wife’s school loans (approximately $50,000 at over 6%!). Now I have my own- $177,000 at 3%.
We were on track to pay that down and then bought a expensive home with a beautiful view (welcome to California!). I thought we could be frugal (much like Mr. Money Mustache) but we are not. We are also not big spenders, likely somewhere in the middle of doctors. Going forward I am hoping to have the $177,000 paid off as quick as possible but am hit with the hurdles of home repair, home furnishings, and other painful aspects of home ownership. I will keep you updated! Thanks again for a great post.
Hi EJ! That was very generous of you to pay off your wife’s student loans. How to combine finances at marriage is a very personal decision. I didn’t want my wife responsible for my past financial indiscretions, so we kept our loans separate and we paid them off with our separate incomes. I think my wife felt a great sense of accomplishment paying off her $22,000 worth of debt in 2 years on her $40,000/year income. With regard to California, it is a beautiful state and there is something really special about being able to ski and surf in the same day, but I think it would be very challenging to get ahead financially in California. Good luck and I look forward to hearing more about your journey!
That’s amazing! I saved up enough in my first 10 months of working as an attending to achieve a net worth of zero, although I still have about $135,000 of debt to repay. I chose to focus more on investing than on debt repayment, as my interest rate is prime, and I can get some major tax savings from investing (important with a 45% marginal income tax rate here in Canada!).
Hi Solitary Diner. Getting to a net worth of zero 10 months out of training is very impressive! In our low interest rate environment, it can certainly be argued that it makes more sense to invest than pay down debt (especially since my loans were at 2%). However, for me it was more of a psychological goal. I wanted the loans gone more than I wanted to optimize the math. Good luck with your financial goals!
We were in the same boat. I made some poor decisions in medical school , residency, and fellowship. We had about a 100K in non-educational debt (cars, trips, expensive wedding, and a tempurpedic mattress) when I started as a attending. In my second year I realized I had to make some changes. I started focusing on paying off the debt and was able to pay a 100K off relatively quickly. Then we paid off my wife’s educational loans (approximately 50K at 6%!).
Now I have my school loans (177K at 3%). Unfortunately we bought a house (with a beautiful view) for way more then we wanted to spend (welcome to Cali!). Now money is being tied up in home repair, home furnishings, and general home headaches. I love the house, but it definitely is a speed bump on the path to being debt free! Reading some Random Guys blog and your post, I am motivating myself to however keep pushing forward with debt pay off!
Thanks for writing and I look forward to reading more!
Great job paying off such a large debt! Good thing MDs should make multiple six figures for a very long time.
I’m curious to know about MDs who want to retire early. Is it kinda nuts after all the schooling and debt?
Sam
Hi Sam! I understand how it might seem crazy for MDs to retire early. I mean, why put in all that money, time and energy if you aren’t going to do it for the rest of your life! I think there are several reasons why MDs might want to retire early. Some MDs come to realize that they don’t actually enjoy practicing medicine any more. Others still enjoy practicing medicine, but they want to do it on their own terms, which may involve taking a huge pay cut that they can only absorb if they are financially independent. Finally, some MDs simply have many other interests that they want to pursue outside of medicine. It’s really a personal decision, and the ultimate reason is different for every MD. I hope this helps to answer your question. Cheers!
Thank so much for the story my wife is in the exact stituation w/400k but still in residence for another 2.5yr I read your story to her out loud
Any Thoughts on refi now sofi and others will not aprove her now do to low income.
Hi Sean. Is your wife planning to go for Public Service Loan Forgiveness (PSLF)?
If so, she should NOT refinance and instead should make minimum payments through the IBR (Income-based repayment) or REPAYE (Revised Pay as you earn) programs. If she works for a nonprofit 501(c)(3) corporation after residency and makes minimum payments for a total of 10 years (including payments made in residency), then her remaining balance will be forgiven tax free.
If she is not going for Public Service Loan Forgiveness, and she is unable to refinance at a lower interest rate during residency, then she should make minimum payments through IBR or PAYE during residency. When she completes residency and has a contract in hand, she should then attempt to refinance at a lower interest rate with Sofi, DRB, or one of the many other players, and pay down the loans as quickly as possible.
Check out this post for further details: http://whitecoatinvestor.com/repaye-vs-refinancing-student-loans-as-a-resident/
I hope this helps. Please let me know if you have any other questions.
You must be my doppelganger or something. So many eerie similarities. I graduated in 2014 and discovered WCI near the end of my residency. I had a pretty large student loan debt, but not as much as yours. Our goal monthly payments were also pretty similar… $10k a month. Congrats on wiping out your debt! I can’t wait to be done with mine later this year.
Good luck slaughtering the loans!
Great job and this is very inspiring! What are your thoughts about forgoing maxing out your retirement accounts during that time and losing those 2-3 years for future compound growing of retirement? Would it be worth it to max out some retirement accounts and put the rest towards paying off loans aggressively?
Hi Sean. Great question. It would definitely be worth it to max out 401k and Roth accounts while paying off loans aggressively. I started contributing to my 401k and Roth about 1 year into my aggressive loan repayment plan, so I certainly lost a year of tax-advantaged space there. I also lost 4 years of Roth space during residency when I lived large and failed to contribute to my Roth. If you don’t use that tax-advantaged space, it’s gone forever! There’s nothing more powerful than maxing out a Roth as early as possible in life.
Let’s see you didn’t live like a Schlub in Med school and undergrad, took trips you could never take now that you’re full time and will also never forget and you say that was a mistake?
Stop living for tomorrow constantly. That 30k/yr you spent living wasn’t wasted. You had fun and memorable experiences.
I’m glad you paid off your debt in 2.5 years, but you making 250k and then having the wife the a 2nd job seems silly. The taxes you pay on her income is not worth it. And if you file separate you lose more on the dependent deduction.
This isn’t a wrong way to do it, but it’s also not the only way. If you had maxed out your Roth and 401k you’d lose 5k/mo pre tax that you lose, so that takes it down to 6-7k/mo instead of 10. What if you got injured? Did you have an emergency fund? Life and disability insurance?
I might have 9 years left on my loans, but I’ve enjoyed the hell out of the 4 years since I’ve been out of residency with 2 kids, an emergency fund and 100k in a 401k.
You bring up a good point. It is important to strike a balance between living in the present and planning for the future.
To be sure, we don’t live an extremely austere lifestyle. We eat healthy high-quality food, live in a safe neighborhood, and drive modest but capable and reliable cars. My wife and I have had some of the most amazing experiences up here in Alaska – backpacking in Denali, backcountry ice skating in Nancy Lakes Recreation area, and kayaking in Katchemak Bay State Park. Luckily for us, these trips are relatively inexpensive. I think we’re striking a good balance between living in the present and planning for the future. The more exotic luxuries of life, such as trips to New Zealand and Switzerland, may come later.
This post touches only very superficially on my path towards debt elimination. You are correct that there are many more items to consider in the realm of personal finance, such as building an emergency fund, maintaining the appropriate types of insurance, contributing to retirement accounts, and tax reduction strategies. These will all be covered in upcoming posts.
And finally, there are many approaches to personal finance and getting out of debt. What works for one person may not work for every person. I am glad that you have found an approach that works for you. I’m also glad that you’re enjoying life. At the end of the day, that’s all that matters. Cheers!
great point !! personally i would rather pay off my loans asap than to be a slave to the lender and be at their mercy.
thanks for posting! keeps me motivated to keep going.
Hi there,
I managed to erase all of my educational debt within three years of graduating from my Fellowship in MS by working as a consultant for the pharmaceutical industry and giving MS therapies related lectures during my PTO. All the money i earned, about $100k a year, went toward loan payments. I acted as though the money wasn’t mine. It helped me to not spend it. I still did the usual splurging after training by buying a couple, or three, or four expensive cars, but put a halt to it fairly quickly when i realized it was now time to save for retirement. So now, all the money i earn from my consulting honorariums, goes toward my IRA.
Great to hear from you Gael! Nice job finding an excellent source of side income. This is a perfect example of using your skills for more than typical patient care activities. Congrats on your success!
It needs to be told again and again because this is the only way to pay off debt. Great story! My own story is pretty similar, except I didn’t have the luxury of refinancing with the student loan companies when I graduated law school in 2009, so I had to fight through that ridiculous 6.8% interest rate.
Great job working through that brutal interest rate. At one point in residency, when my loans were still at 6.8%, I was paying nearly $30,000 per year in interest! I’m very thankful that the refinancing companies were available when I completed residency. Now apparently there are companies (like DRB) that will refinance while you are still in residency. That would have been even better.
Hello there! Great job paying all those loans. I can only imagine how good it felt to hit “submit” at the last one.
I am 4 months away from my first attending job out of fellowship. I have 20k debt myself and my wife has 35k. We are tackling our debts together and my plan is to have it all gone by February of 2018. Hope I can make it!
Marvelous job keeping your debt loads down. February of 2018 would be paying off your debt in around 6 months. Sounds like a great goal!
Great story, very inspiring! Your listing of numbers is very helpful. I am going to share this with a lot of people – a tale worth telling.
Quick question regarding the variable interest rate refinance loans.
I was offered 2.665% variable rate loan for 7yrs with SoFi.
My concern is that the Fed is expected to raise interest rates 3x/yr in the next two years.
I think the days of flat rates are over.
Would you recommend a fixed rate option at this point?
We are looking into starting an independent practice & worried about being committed to high payments should our liquidity fall in the beginning.
I struggled with the same question when refinancing my loans.
There is no perfect answer to this question because the future is unknown. Interest rates are likely to rise, but it is unclear how quickly, or to what extent.
If you are planning to pay off your loans quickly (<3 years), then I would take the variable rate. If you are planning to extend it out longer (7-10 years), then I would take the fixed rate.
Remember that with the variable rate loan, your current interest rate will be lower than the fixed rate, so you will be saving money (with respect to the fixed rate loan). As the interest rate rises, it may eventually equal the fixed rate (that was offered at the time when you refinanced your loan). Even at that rate, you will still have paid less in total interest compared to if you had refinanced with a fixed rate loan. The variable rate has to actually SURPASS the fixed rate (at the time when you refinanced your loans), and surpass it enough so that you pay more than the amount you saved thus far with the variable rate loan.
I hope that makes sense. I choose to do a variable rate because I wanted to pay off my loans in 3 years, and I was willing to take the interest rate risk. If a fixed rate loan helps you sleep better at night, then go with that.
Good luck with whatever choice you choose.
Wonderful Post!! My experience just a bit different. Paid off $225,000 in student loan debt in 9 years (Primary Care). Would have been much sooner but I opted to invest in my business with my fellow partners. We built and own our free standing building to do our medical practice….spent $60,000 each to finance the 2 million dollar building. We set it up as a separate LLC and the practice pays rent to the LLC. At the end of the year we each get $25,000 in dividend. We will get this amount each year until the building is paid off (12 more years) at which time we will each get $40,000 per year. This is a nice easy way to get income yearly later during the retirement years (20 years off for me).
Sounds like a great foray into real estate investing!
I really enjoyed reading your post. I would like to share a perspective. The average income for a single worker in the USA is approximately $51,000 a year and $16,000 goes to taxes. That means the average person has $35,000 a year for debt. If you have $175,000 after taxes and live like the average person in the USA you will have $140000 a year to apply to educational debt. As you have stated, it requires discipline. Congrats that you and wife have the discipline to be debt free.
Thank you! Discipline will get you far in life, whether with money, business endeavors, health, or relationships.
I have a similar story, but the debt:income ratio is far higher. I’m leaving my dream job as a veterinarian in a rural area so I can tackle my debt. Your post gives me hope but also crushes me – I will never see the earnings you STARTED with. I am considering returning to get my PhD/pathology degree to even out the ratio. I discourage every new pre-vet student I meet. The wage doesn’t support the schooling.
Hi Doc. I’m sorry to hear about your tough situation. Are there any positions for Veterinarians that qualify for Public Service Loan Forgiveness?
Hello,
So, I have taken out my final medical school loan thankfully! I am in the midst of interview season for radiology residency and will start residency in July (can’t wait for match day in March!).
My wife and I have a total combined debt of ~400k currently (student loans, car, etc). I am seeking advice for moving forward with dealing with this nightmare?
My wife has a decent job making 50k/yr currently and in the areas I’m looking PGY-I salaries are about 50k. I have it in my mind to use as much of my salary as I can spare to make payments on my loans trying to prevent them from getting significantly worse (radiology with fellowship will be 6 total years).
After I finish fellowship I plan to live off bare minimum and pay off my debt quick by paying 10k+ every month (plus putting every bonus/refunds towards loans). However, I am most worried about the immediate future, any ideas on how to prevent things from getting worse than the already nightmarish situation?
Thanks!
If you have $400k in loans at 6.8%, then you are accumulating around $28,000 per year just in interest. If you can live lean on your combined salary of around 100K, you may be able to pay slightly more than the interest each year, but as you point out, you won’t be able to make any significant headway until you become an attending.
I would recommend looking into the possibility of refinancing your loans to a lower rate during residency. This article from the White Coat Investor is an excellent starting point: https://www.whitecoatinvestor.com/refinancing-medical-school-loans-during-residency/
Good luck, and please let me know if you have any other questions.
Great story, thanks for sharing!
I’m currently in fellowship and had about $200,000 after medical school. I didn’t really know much about the financial side of things, just that I had a hefty loan to pay off.
Thankfully my spouse turned me onto the financial independence movement and we were able to knock out all the loans before the end of residency (she had a high paying job, we kept expenses to a minimum and put everything else towards the loans).
I’ve met faulty who 5-6 years out of training and still chipping away at loans (always because of expenses); it’s always nice to hear a success story like this!
Very impressive that you were able to destroy the loans before the end of residency. Two high incomes can create financial independence VERY early.
This is an excellent post and very inspiring. I have learned to save at a higher rate if freedom is the goal. I just eliminated most of my spending because I really didn’t need/want anything else. I went from saving $50 a month to $13k a year. I even wrote an ebook about it. I prefer FI over things any day. It truly is all about discipline.
Thanks for sharing this!
Miriam