The White Coat Investor and Rockstar Finance are two of my favourite personal finance blogs. Occasionally, a topic will pique my interest and help me overcome a severe case of writer’s block. I found an interesting topic on the WCI boards and decided to use it as a basis for a thought experiment. Even if nothing else, we’ll get to pretend to be a financial advisor for the day.
Requesting Financial Advice
An aspiring physician little over a year into his or her career has established this thread in order to get some help on a particular problem. They submit their demographic and financial information, which is summarised below:
As a family of four, we are married and file as one unit.
$600,000 base salary plus $100,000-$150,000 in yearly bonuses
Currently maxing out my 403(b) with an employer match of 6% of my income of $18k per year.
Roth IRA: $6,000
My current cash/money market position is $250,000
529 accounts must be set up for children (projected 15-20 years)
About $8,000 a month in expenses, including mortgage payments.
Debt:
7.125 percent interest rate for direct subsidised loan: $65,000
$400,000 in unsubsidized loans at a rate of 7.125%
Paying $2,250 a month in REPAYE, which is now enrolled.
unable to take part in PSLF (Public Service Loan Forgiveness)
Preliminary Assessments
As soon as I saw the post, my immediate assumption was that this doctor was doing fine financially. Did you check out their pay? $600,000!! Then there’s their annual bonus, bringing the total to between $700,000 and $750,0000! Even though they have $465k in student loan debt, their salary gives them a powerful spade to work with. In addition, it’s not obvious if the spouse has a job. Maybe there will be even more money to pay off the loan in the future.
My attention was drawn to the $250,000 in cash on hand as well. To be continued.
Finally, despite having completed their residency more than a year ago, they are still paying interest on their student loans at a rate of 7.125 percent. There is no refinancing to be found here. It’s incomprehensible that they haven’t applied for PSLF by now, given their ineligibility.
They have a lot going for them, but the most important factor is their money. They’re also taking advantage of a company match of 6% of their pay for retirement savings. Even yet, there are a few areas in which improvements might be made. Considering their current financial state, let’s try to devise a quick and dirty financial strategy for them.
Continue Investing in Tax-Advantaged Retirement Accounts to Their Fullest Potential.
Their tax-advantaged accounts should be no problem for this doctor. Before handling their debts, all doctors, in my opinion, should do this first. In addition, it’s not obvious who owns the Roth IRA, and if the spouse is employed or not. The maximum amount of Roth IRA contributions that can be made by either of these two individuals is $11,000. If the spouse does not have a job, they can still open a Roth IRA for them.
Put Your Money to Use!
Having $250k sitting in cash, especially with the amount of student loan debt they have, is a huge opportunity cost. In light of their $8k-a-month monthly expenditures, it could be an emergency reserve. Alternatively, they may not know what else to do with the money they’ve saved or invested.
This individual’s funds may be put to good use in a variety of ways, in my opinion. They may put the money to good use by investing it. Saving money versus investing it is a distinct concept, as I discussed in a previous post. Investing that much money in low-yielding accounts will have little effect on long-term growth.
They might also put that money toward paying down their student loan debt faster. They can pay off their school debts with $200k, leaving them with $265k in debt and $50,000 in savings for emergencies.
Planned Student Loan Debt Disposal by SRGO
In the event that I were in a similar circumstance, here is what I would do.
Pay $200,000 of the college loans using the money you’ve saved up. ‘ As previously stated, this payment would reduce the outstanding balance from $465k to $265k.
Refinance what’s left on the loan. The 7.125 percent interest rate on federal loans is unnecessary because I’m not eligible for PSLF. Over the course of the loan, refinancing to a lower interest rate would save me money. A lower debt-to-income ratio could result in a cheaper interest rate on a new loan when refinancing.
To get out of debt as quickly as possible, I’ll spend as much of my salary as possible. If I had a gross salary of $700,000, how quickly could I pay off my debts? After deducting monthly taxes and costs, I calculated that my net monthly income would be $25,500. The student debt would be paid in full in around a year’s time if I put all of this to my repayments (give or take).
Celebrate!
Start preparing for early retirement and financial independence.
In a nutshell:
From the beginning, our physician friend had all of the necessary tools at their disposal; they simply needed a strategy for how to best utilise them. Even so, don’t be too harsh with them. It’s possible that the good doctor lacks personal finance understanding based on the large cash balance and college loans that haven’t been refinanced. When it comes to taking charge of your finances, studying about the subject matter is essential. Making a financial strategy and putting it into action are both difficult without a solid foundation of information.
