Use these 4 tricks to pay off veterinary debt faster
Everybody in our profession is talking about debt. It’s drowning new veterinary graduates, and clients’ household debt prevents them from visiting our practices for wellness visits. While the topic of debt seems to be on everyone’s lips, many of us could better understand the intricacies of borrowing, interest rates, repayment schedules and other financial realities.
Albert Einstein once called interest the most powerful force in the universe. As veterinarians we can learn to manage it—and it can even be used for our benefit.
1. Realize that debt is not evil
First and most importantly, we need to realize that debt and interest are not inherently evil—contrary to the opinion of my parents, whose Great Depression experiences convinced them debt was to be avoided at all costs. Borrowing is the life blood of commerce, education, development, poverty mitigation, capital accumulation and sound financial planning. Saying that paying interest is a bad thing is like believing that fire is evil because the White House burned down during the War of 1812. Debt and fire are not bad things¬. Both just need to be respected, monitored and actively managed.
2. Learn the Rule of 72
Second, we need to heed the Rule of 72. While older readers are likely familiar with this concept, our debt-burdened younger doctors may not know about it or realize its significance. The rule works this way: you can roughly calculate the amount of time it will take for a debt (or an investment) to double by dividing the compound interest rate into 72. The result is the number of years it will take the amount to double.
So, for example, inflation at the rate of 7.2 percent (as it has been at times in the past) means prices will double in about 10 years. Or, more saliently speaking, if you have credit card debt at the rate of 18 percent, your debt would nearly double in four years if you did not make payments. The power of an interest rate that high makes it such that making the minimum monthly payment barely reduces the principal balance. Consequently, it can take decades to retire credit card debt.
So Einstein wasn’t kidding! The take-home point is this: you should do almost anything necessary to avoid incurring credit card debt. Current law allows credit card companies to hit you with an interest rate that was only charged by mobsters when I was a kid. However, usury is no longer a felony. It is an established business model designed to make the unaware owe his or her soul to somebody’s company store.
3. Understand long-term loans
Third, understand the significance of an interest-only mortgage or loan product. This concept has become increasingly popular with young borrowers because it provides a route to acquiring the thing you want—a house, a veterinary practice, a student loan refinancing arrangement. It’s based on the assumption that you’ll have more income with which to pay down the debt principal in the future.
Unfortunately, this assumption is half right and half wrong. Later in life, you probably will have more income as your career advances. What you will also have, however, are more financial obligations—babies, property taxes, medical bills, car payments and so on—which will lead to you “sitting” on this never-abating debt principal.
So with a long-dated debt obligation, you have very little equity in your purchase until near the end of the loan period. If you buy a house or a clinic building with a 30-year mortgage, you owe nearly as much 10 years into the mortgage as you did at the beginning of the loan. That may not seem all that important, but it will be when you go to apply for a second mortgage to finance a kitchen remodel or construction of a new kennel room.
4. Leverage debt to win
Lastly, harness the power of debt and compound interest for yourself! With the caveat that you need to discuss any strategy with a qualified CPA, I submit that you may want to look carefully at “recategorizing” your debt and interest payments. These strategies let you 1) take some of the steam out of the Rule of 72 and 2) get the federal and/or state government to lighten your burden of debt repayment. Here are a few of the many approaches I have used for my clients and myself:
Make the interest tax-deductible. When I was starting out as a veterinarian, all interest was deductible from income taxes, which effectively meant the government was willing to pay anywhere between 20 percent and 50 percent of my interest payments. Sadly, those days are long gone as far as retail debt, credit card debt, car loan interest and so on. However, mortgage interest is still deductible. Therefore, if you’ve decided where you want to live, consider buying a home sooner rather than later. If you’re disciplined, you can pocket major tax savings from your deductible interest expense and use it to pay off credit card or other nondeductible debt.
Utilize margin interest. Again, consult your tax advisor before taking any steps, but think about this: If you put your savings and investments into a free brokerage account with Schwab or Fidelity, you can actually borrow against those investments up to a certain amount. Used with care, these margin loans can be used to pay off credit card debt. In so doing, tax filers who itemize deductions may be able to take a deduction for investment interest (margin loans). In the current world of the Federal Reserve’s “quantitative easing policy,” margin interest rates are running well below credit card rates and sometimes below student loan rates.
Accelerate your plans to buy a practice. If you’re still paying off student loans, it may seem impossible to imagine buying a veterinary clinic or buying into an existing partnership. But delicately handled, practice ownership may not be as unattainable as it seems.
Think about this example: Assume that you are burdened by credit card debt of $10,000 at 18 percent interest and $50,000 in student loan debt at 8 percent. Thrilled with your veterinary skill and productivity, your boss offers you the chance to buy into 25 percent of his million-dollar practice and will finance the buy-in at 8 percent.
Assuming the deal is otherwise on the up-and-up, your employer’s offer could yield a net increase in your annual disposable income—which you could use immediately to pay down the credit card debt. The interest rate on your buy-in loan is no worse than your student loan interest rate, and it is probably deductible as business loan interest.
In effect, you’ve used your employer’s money to secure a business rate of return of (if the hospital is well-managed) 15 to 20 percent. If paid as a dividend from the practice, payments will be taxed more favorably than your salary. And the extra dough will retire that credit card balance, and eventually the student loan, much more quickly than if you had not bought into the practice. You have successfully used the Rule of 72 in your favor.
These four strategies prove that you don’t need to fear debt and interest. Rather, you can harness the most powerful force in the universe to your advantage instead of being subjugated and strangled by it.