Balancing Debt Repayment and Retirement Investments For Early-Mid Career Professionals
Welcome back readers! I hope you are all enjoying the last few weeks of summer. I recently had a meeting with a couple that prompted me to write this month’s newsletter. They are both early-mid career physicians who are just getting started in their careers, have student loan debt, a mortgage, and saving to pay for a wedding next year. When they first came to me, they were unsure of where to start. They felt unorganized and needed help prioritizing their financial goals. After a couple of meetings, we came up with a financial plan that will not only help them repay their debts, but also save for retirement and accomplish their other financial goals. There is a lot to consider when trying to figure out how to prioritize paying off debt and saving for retirement. My goal with this post is to outline some of the considerations so that you can make informed decisions in your own planning.
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Introduction
?Being a mid-career doctor or medical professional who has just started their career is a unique position to be in. On one hand, you've invested many years into your education, likely accumulating a fair amount of debt. On the other, you have a potentially lucrative career ahead, providing you with opportunities to not just repay your debt but also accumulate significant wealth for retirement. The big question is: Should you focus on investing for retirement or paying off your debt?
?Both debt repayment and saving for retirement are important financial goals that come with their own set of advantages and drawbacks. Making the right choice depends on several factors including the amount of your debt, the interest rates, your risk tolerance, and the type of retirement you envision for yourself. Let’s dive in!
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The Case for Paying Off Debt First
?Psychological Benefits
Having large amounts of debt can have negative psychological side effects like stress anxiety, and depression. According to a study done by BankRate , “Of those who say money has a negative impact on their mental health, 48% say that being in debt is their top issue.” Eliminating debt can provide psychological freedom, allowing you to focus on other areas of your life and career. For some, the peace of mind that comes from being debt-free can far outweigh the potential financial gains from investments.
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Guaranteed 'Return'
When you pay off a loan that has a 6% interest rate, you're essentially 'earning' a guaranteed 6% return on your money, something that few investments can promise with certainty.
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Improve Cash Flow
Paying off debt can free up monthly income, which can be rerouted towards other financial goals later.
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The Case for Investing in Retirement First
?Time & Compound Interest
Time is one of the most powerful factors when it comes to compounding interest in retirement accounts. The earlier you start, the more you can take advantage of compound growth.
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Employer Matching
If your employer offers retirement account matching, failing to contribute could mean you're leaving free money on the table.
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Tax Benefits
Retirement accounts often offer tax advantages. Contributions to a traditional 401(k) or an IRA can reduce your taxable income, providing immediate financial benefits.
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Striking a Balance
?For many people, especially those in lucrative careers like medicine, it's not an either/or scenario. The key is to implement a balanced plan that allows you to act on both goals simultaneously. Here are some strategies to help you create more balance in your personal plan.
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1. Analyze Interest Rates
If the interest rate on your debt is high, it often makes sense to prioritize debt repayment. If it's lower, you might consider investing while making minimum payments on the debt. The logic goes like this, if you can potentially earn a higher rate from your investments than the interest rate of your debt, let the investment continue to compound. On the other hand, it is unlikely that your investments will return the interest rate required to outpace a credit card with 20% APR.
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2. Emergency Fund
Before going full-throttle on either goal, make sure you have an emergency fund in place to cover at least 3-6 months of living expenses.
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?3. Utilize Windfalls
Use bonuses, tax refunds, or other unexpected income to make a dent in your debt or boost your retirement accounts.
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4. Budget for Both
Allocate a portion of your income for both debt repayment and retirement investments. The exact ratio can be adjusted over time depending on your financial situation and life events.
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5. Reevaluate Periodically
Your financial situation is not static. It's advisable to reevaluate your strategy periodically, especially after major life events like marriage, having children, or buying a home.
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Final Thoughts
Being an early to mid-career medical professional comes with its own set of financial complexities. But remember, you're not alone! Discussing financial matters with your peers or a trusted advisor can help alleviate some financial stress and help you gain a new perspective on your situation.
?Paying off debt and investing for retirement are both important, but they don't have to be mutually exclusive. By taking a balanced approach and staying adaptable, you can work towards achieving financial freedom while also preparing for a comfortable retirement.
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Resource:
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The economy
?US Job Growth Slows Down
According to ADP, US job growth slowed more than expected for the month of August.
???This is music to the Federal Reserve’s ears
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Why This Matters: The labor market is one of the key metrics that the Fed is monitoring and a major factor in economic growth this year. They have been raising interest rates to slow down the job market and inflation.
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Stocks
?Dow: 34,859.10 (+5.20%) YTD as of 08/31/23
S&P: 4,525.32 (+18.34%) YTD as of 08/31/23
NASDAQ: 14,085.88 (+35.61%) YTD as of 08/31/23
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August News Round-Up:
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Disclosure: Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. The strategies and topics discussed in this issue do not assure profit or protect against loss.
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