Like many other resident physicians, I had credit card debt when I started working. I accumulated the bulk of it during my postgraduate days living in a high-cost-of-living area when I was 22, but I added to that amount when I had to pay for med school applications, secondary essay fees, and travel costs to interview. During my time in med school, I lived off student loans, but during the 3 months between my med school graduation and my first paycheck as a resident doctor, I had accumulated even more. I needed money to move to a different state, pay my first month’s rent, and cover things like food and gas while I was awaiting my first residency paycheck. I didn’t have a spouse to help and my parents, while loving, didn’t give me the money I needed either. Before I knew it, I had $10,000 in credit card debt. Fortunately, I was able to pay this off in a year a half after starting residency. Here’s how:
I realized I didn’t like being charged interest on money I’d already spent. My first temptation was to delay paying it off. I was only making around $60,000 per year as a resident so I didn’t have a lot of extra money to spare. I knew that my income would increase when I finished residency, so it seemed logical to just wait to pay it off when I got the income boost. That changed the minute I logged into my online bank account. I was shocked when I realized I was being charged $100/month in interest. When I looked further, I saw that the interest rate on my credit card was 12%. This meant that I was going to pay an extra $1,200 a year in interest until I paid off the debt. Seeing how much interest I was being charged motivated me to pay it off quickly, even while I was still in residency.
I decided to pay it off in less than 2 years. As most folks know, a resident’s salary is not very high. Paying off $10,000 in credit card debt when you’re only making $60,000 a year can be tough, but I made a decision to do it. I knew that if I delayed paying it off, each dollar I was paying in interest was less money I could use to invest and build my net worth. Although I could have dragged the payments out during my entire time in residency, I really wanted to pay it off sooner so I could have the freedom to invest more money. This motivated me. I made a goal to pay it off in 2 years. (One year would strain my budget too much but 2 years gave me a realistic goal I could look forward to).
I lived with a roommate to make extra monthly payments. As a resident, I knew I would be working a lot. Although I really wanted my own living space, I knew I wasn’t going to be home very often to enjoy it. I figured I might as well share the space with a co-worker and use the money I saved in rent to pay down my debt faster. So that’s what I did. I got a 2-bedroom 2 bathroom apartment for $1700 a month. My roommate split the rent, electricity, cable, and internet bills with me. Instead of paying almost $2000 a month for rent and utilities, I only had to pay half of that cost. Saving nearly $1000 a month in living expenses gave me extra room in my budget to not only pay down my credit card debt but to also save a little money in cash to start an emergency fund.
I set up automatic deductions to pay $500 each month. This seems aggressive but $500 was my number. I knew I wanted to pay this exact amount each month, but I also knew I couldn’t be trusted to make this payment of my own volition. Thus, I had 20% of my net pay go to an entirely different checking account, which I called my “wealth building account.” I set up a $500 deduction from this account to my credit card each month and let the remainder of the money build up in that account as my emergency fund. Because this money was deposited and deducted from an entirely different account, I never saw the money in my main account and thus didn’t miss it too much. I got used to living on the remaining 80% of my net pay. Doing this did make me feel more “broke” than some of my co-residents who had more disposable money to spend each month, but it made me feel good to know that I was paying down my credit card debt and building up my emergency fund at the same time.
I used money from my tax refund and the first stimulus checks to pay it off. When I was in my first year of residency, coronavirus hit. While this was devastating for many reasons, the silver lining of this occurring meant I got a stimulus check. I used most of the money I got from this stimulus check and my tax refund in early 2020 to make extra payments on my credit card debt. While many other folks went online shopping with their money, I was paying down my debt. When I got the second stimulus check, I was able to pay off the credit card debt completely. A goal I had set for 2 years, had been accomplished in 18 months. I was thrilled.
I was diligent about not accumulating more debt once the balance had been repaid. Making that final payment to my credit card felt great, but I’d be lying if I said it lasted forever. Ironically, I was very tempted to charge even more expenses on my credit card, especially when I wanted the newest iphone, newer clothes, or the ability to take more vacations with my friends. Many people argued that I could just charge the money on my credit card and pay it off when I became an attending, but I chose not to go that route. I hate debt and the more debt I had the less I could invest to grow my net worth. Plus, I didn’t want to set bad habits. As someone who blogs a lot about personal finance, I know that finance is more about changing behavior than being good at math. If I got into the habit of buying things that I couldn’t afford now, I would likely buy more than I needed, accumulate substantially more debt, and have a harder time being debt free as an attending. I wanted a different life.
What about you? Are you developing bad habits by purchasing things you can’t afford using debt or are you willing to do what it takes to pay down your debt quickly and start investing, even while you’re in training or making the median income? If I can be credit card debt free, so can you.
How to pay off your loans: Debt Snowball vs Debt Avalanche
Those of us who took out student loans for school or weren’t as diligent about our finances in our younger years, may have accumulated some debt. Now that we have started our careers and are trying to follow a budget, one of the things on our to-do-list is paying off debt (or at least making payments towards it). When it comes to paying down debt, there are 2 main ways to do it: the debt snowball and the debt avalanche.
Debt Snowball:
With the debt snowball method, you organize your debt by the amount you owe on each loan and prioritize paying off the loan with the smallest amount first. One you pay off the loan with the smallest amount, you use the money you were putting towards that loan and stack it onto what you were paying on the next highest loan until you pay that one off too. You keep stacking payments and paying off loans until all of your debt is gone.
Example of the Debt Snowball:
Let’s say you owed $5,000 on a credit card, had $20,000 left on your car loan, and $40,000 in school loans. With the debt snowball method, you would prioritize paying off the credit card debt first, then the car loan, then your student loans. Specifically speaking, you would make the minimum amounts on all loans (say $100 each) and any leftover money you have (say $500) would go towards the smallest loan (in this case it would be your $5,000 credit card debt). Once you pay off the credit card debt, you would stack the money that went to that debt onto the next highest loan, which in this example is the $20,000 you still owe on your car. Once you pay off the car loan, you would take the money you were paying on that loan and add it to what you were already paying towards your $40,000 student loans. With the debt snowball, you end up stacking money on each payment as you pay off each debt (like you creating a snowball that stacks ice as it rolls).
Why the Debt Snowball works:
Paying off debt is mental. When you see yourself pay off the small loan, you may be even more encouraged to pay off the larger loans and more likely to eventually eliminate all your debt. The disadvantage of this method is that paying off loans with the smallest amounts first may cost you more money overall (since there may be other loans with higher interest rates). Despite this disadvantage, there are many advocates of the debt snowball method. Supporters of the debt snowball say that most people don’t end up paying off all of their debt because they get discouraged along the way. However, when they see themselves pay off one of their loans, they are more likely to pay off additional loans and eliminate their debt altogether. Thier point? People may pay more money overall with the debt snowball method, but they will eventually get it all paid off.
Debt Avalanche:
With the debt avalanche method, you organize your debt by the interest rate on each loan, (not by the amount you owe on each loan). You prioritize paying off the loan with the highest interest rate first (even if you have other loans of smaller amounts).
Example of the Debt Avalanche:
If you had the same loans from the previous example: $5,000 from your credit card with a 15% interest rate, $20,000 from your car loan with an 5% interest rate, and $40,000 in student loans with an 8% interest rate, then you would organize your loans by their interest rates and prioritize paying off the loan with the largest interest rate first. In this case, you would pay off the $5,000 loan, then the $40,000 loan, and end with the $20,000 loan (as if you are an avalanche that starts at the top of mountain and increases in speed as it travels downward).
Why the Debt Avalanche works:
The advantage of this method is that you end up paying less money overall because you get rid of loans with higher interest rates first. The disadvantage of this method is that oftentimes the loans with the highest interest rates are some of our larger loans. Thus, it may take awhile to actually pay the loan off. It may be harder to feel as though you are making progress towards debt repayment since paying off that first loan could take years. Many people may lose their zeal for paying off debt and get tempted to use that money for other things. Nevertheless, many financial advisors still recommend the debt avalanche for people who are dedicated to becoming debt-free, since it saves them hundreds, if not thousands, of dollars in the long-run.
Which method is better?
It depends. There are pros and cons to each method so you should choose the method you think you can stick to the best. If you know you are the type of person who needs to see small victories to stay encouraged along the way to becoming debt-free, then perhaps the debt snowball method is right for you. If you are the type of person who is more diligent about paying off debt, doesn’t rely on small victories, and has fully committed to paying off debt in the shortest amount of time, then perhaps you would do well with the debt avalanche method. I myself, have used each of these methods in the past and they both have worked well. For example, I used the snowball method when paying off my car note and credit card bills. I then used the debt avalanche method when paying my student loans.
Which method do you think would work best for you?