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DM 68 - Debt Strategy - Step 3 In A Resident's Financial Journey

Hey guys, here's step 3 in a resident's financial success journey. It's Jon from Financial MD and welcome to today's didactic minute.

Now as the title implies, we've talked about steps 1 and 2 in previous videos so be sure to check those out but we're going to get into step 3 today which is getting a Debt Strategy. Now I want to be very clear and iterate on this point that a debt strategy does not mean getting out of debt before you can move on to the next step. It just means putting a strategy together because if you've done steps 1 and 2, meaning, figuring out your Cash Flow – what's coming in and what's going out, okay; some called it budget; otherwise, it's just knowing and putting some sort of plan in place for your monthly, weekly income, figuring out what your surplus is. Income minus expenses equals surplus – there should be a surplus; if there's not, we can talk more about that. But taking that surplus on to step 2 which is your Safety Net, that's comprised of both insurance, which protects you from the big things, and the bank, your emergency fund, which protects you from the small things. Combined, they make a strong safety net, okay, the insurance – your home, your life, your health, your auto, your disability – those are kind of the big five; your emergency funds should be three to six months of your fixed expenses, and then we move on to step 3 which is today's talk of the debt strategy.

Now for the debt strategy, your first thing, so 3A, would be just getting organized – figuring out what you have. A lot of residents we talk to don't even really know the grand total of their debts and what kind of debts they are and so we want to look at those and categorize them into two main categories – so it's short-term and long-term. Long-term debts can be student loans; can be mortgages…things like that. They typically have a lower interest rate and have a longer payment period. Short-term debts are obviously shorter but can often have a higher interest rate; not always but usually and we call these high-interest consumer debt – things like credit cards are the big one; a lot of us use credit cards to get through. I know lots of our clients have used credit cards to get through, you know, gaps between med school and residency, residency and attending…whatever the case might be. I get it, but now's the time we got to talk about it. There are also high-interest student loans that people have gotten. Private loans, car loans, RV loans, jet ski loans, boat loans…any of these kinds of loans can be high interest and need to be prioritized. So that's step 2 is we're going to prioritize which debts to pay off first.

Now as you probably guessed, the high-interest ones, we definitely want to put into that category but beyond that, which ones of those should we pay off first - and this is where we kind of take a chapter from Dave Ramsey. And if you haven't read Total Money Makeover, you should, and this he talks about the debt snowball and it's taking your smallest balance loans first and paying those off and then moving on to the next one then on to the next one and you can kind of see the snowball effect. Why not pay off the highest interest first? Doesn't that cost you more money over time? Good question. It can. It probably will a little bit but to us what we've found, the success that comes or the likelihood or probability of success that comes with doing the lowest balance first outweighs the minute extra costs that come from doing your highest interest first. So, do that. It's the psychology of winning that comes into play here from getting those small victories early will help you to stay the course because I'll be honest, it sucks. Man, if it's going to take you a year, two, or three to pay off these loans, it's hard to keep going. It's fun the first few months and then it gets real old to be kind of putting some discipline in your life and not seeing much growth in any of your other financial areas.

So, hope that helped. Be sure to subscribe here and like it, share it. I want you to comment because I love to know if you want to argue with me, do it. If you agree with me, do it, or if you've got any additional tips, please put it in the comments below. It helps things to get out. We want this information to get out to other residents and young physicians. So, subscribe to the Financial MD Show, our bi-weekly podcast, and check us out. This is Jon Solitro, we'll see you next time.

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