Debt management, or more accurately theinability to manage debt, is a widespreadnational problem—and physicians aren'timmune. Americans tend to spend everythingthey earn, and often, even more than they earn.They aren't in the practice of saving for a rainy day,and in the event that some type of emergency arises,they have no choice but to whip out the plastic. Theend results are not surprising.
According to the Administrative Office of the USCourts, a record 1.5 million bankruptcies were filed in2002. That record was short-lived; another 1.6 millionbankruptcies were filed in both 2003 and 2004.
"The majority of individuals actually spend $1.22for every $1 that they earn,"notes Mike Peterson,vice president of American Credit Foundation."Nearly 90% of divorces are financial-based innature. Poor debt management ruins people's lives."
Physicians, Peterson says, are particularly vulnerable."They finish their residency and their eyes get biggerthan their wallet,"he explains. "They feel a peerpressure to live up to the image of being a doctor, andthey often wind up going into debt immediately."Understanding what causes debt and recognizing thewarning signs that you might be incurring too muchdebt are the keys to managing it.
Causes of Debt
Credit cards are one of the major contributors towidespread debt problems. Peterson points out thatnot too many years ago, the payment requirements oncredit cards were higher, between 3% and 5% of thebalance. Today, the credit card companies havereduced those required payments to as little as 1% or2% of the balance. The problem, Peterson says, is thatconsumers don't recognize what's happening.
"People figure that if they're making the minimumpayment, eventually they'll get out of debt,"Petersonsays. "The problem with that thinking is that you'remaking minimum payments. Even if it's a $2000 loan,you're going to owe on that loan for about 30 years."
Peterson says that physicians face the same dilemmawhen it comes to their medical education loans.Assume that a doctor comes out of medical schoolwith $100,000 in Stafford loans and is paying that ona 10-year program at approximately $1500 a month.Over the course of the 10 years, the physician will payabout $50,000 in interest. But more recently, somephysicians are opting for the 25-year loan plan, thinkingthat they'll be able to bring their monthly paymentdown to a more manageable $800 a month.
"The staggering piece on the back end is that the$50,000 in interest becomes $200,000 in interest byspreading the loan over a longer period of time,"Peterson astutely observes.
The problem is compounded by credit card companiesthat offer astronomical credit limits. "It's theeasiest place to turn to,"says Jan Neri, a partner withthe West Hartford accounting firm Filomeno &Company, PC. She points out that if you wanted torefinance your mortgage, you could get turned downeven if you were late one time in paying a phone bill.The credit card companies, however, are "willing tothrow the money at you. They want you on the line sothey're going to give you the credit. It's a pitfallbecause it's too easily accessible."
It would be easy to pin all the blame for debt managementproblems on credit cards and consumers'inability to spend in a discriminatory manner. The truthis that debt management is a much more complex issue.
Brad Stroh, co-CEO of Freedom FinancialNetwork, a debt resolution firm, points out that personalfinancial hardships are nondiscriminating, andthey can come in the form of divorce, serious medicalillnesses, or a major loss of income. "Those scenariosdon't discriminate,"Stroh explains.
According to a recent study published on the Web site (www.healthaffairs.org), about half ofthe bankruptcies filed in 2001 were due to medical bills.Just over 46% of those participating in the study notedthat they had either unpaid medical bills of more than$1000 in the 2 years prior to filing for bankruptcy, lossof 2 weeks of work due to illness or injury, or mortgagingof their home to pay medical bills.
"Given the fact that you could have personal traumathat could lead to financial distress, the only way to preventthat is with financial stability,"Stroh says. "And theonly way to get financial stability, outside of winning thelottery or inheriting a large lump sum, is through personalsavings to cover a potential financial hardship."
That's a difficult challenge for physicians, Strohsays. He explains that doctors often have severalstrikes against them coming out of medical school.The first, of course, is a huge student loan obligation.That's combined with the fact that medical schools"haven't done a sufficient job of educating doctors onmanaging their business finances and accounting, aswell as their personal finances."
Lastly, a subset of physicians own their own practice,which means that these physicians have to personallyfinance an office, including extremely expensiveequipment. "Even if they get vendor financing,"Stroh says, "that's an additional, seriously largemonthly financial obligation."
Debt Management Strategy
The key to managing debt, most advisors say, is tohave a better understanding of what you're spendingon a monthly basis. Nathan Mersereau, CFP®, presidentof Oakland Wealth Management, Inc, suggeststhat if people are serious about changing their ways,they should carry a little notebook with them. He tellsthem that for a minimum of 3 days, preferably 7, theyshould itemize every single purchase they make, nomatter how small.
"You use that exercise as a stimulus to sit downeach month and see where your cash flow has gone,"Mersereau explains. "It's the catalyst for taking thetime to just be accountable for your decisions."
American Credit's Peterson agrees. He suggests hisclients do the same exercise, and illustrates with astory about a traveling salesman who was about $150short every month in paying his bills.
"We went through the 7-day programwith him and he has all theseexpenses listed for a Diet Coke and acandy bar,"Peterson recalls. "Everytime he would meet with a client on theroad he would stop and purchase thoseitems. We added them up over a 30-dayperiod and it was about $150. We findthat a lot of the time, people just don'tunderstand how much money theywaste on things."
Neri employs a similar approach.Clients bring her their checkbook forthe previous year and she analyzes theirexpenses item by item to see where theirmoney is going. Then she sits downwith the client and develops a budget tocontrol overspending.
"You make it a process and start toattack it,"Neri says. "I tell clients toline things up in pecking order and getrid of the highest interest credit cardfirst, and then the next highest. Pay offall your credit cards first because you'renot getting any deductions from themon your tax return."
Just Give Me The Answer$
For younger physicians just gettingstarted, Sheryl Garrett, CFP®, author of(DearbornTrade Publishing; 2004), suggests borrowinga page from a young couple sheknows. The husband is a physician, thewife, a stay-at-home mom. They havetwo children and a ton of debt due tomedical school loans.
"But they got so used to living likecollege students that they continued livingthat same frugal lifestyle for thenext few years,"Garrett explains."They didn't live up to the standardsthat one would presume for a physician.That enabled them to knock outtheir debts quickly and focus on the restof their lives."
For more seasoned physicians, Strohsuggests not using credit cards—or anyform of unsecured credit—for anythingthat would lose value or depreciate. Usethem only for convenience, and don'tcarry a balance from month to month.
"The only financial instruments thatwe think are justifiable to carry a balanceare things that appreciate or build equity,like a home, small business, or studentloans,"Stroh says. "Those things buildpersonal knowledge and income potential."