When is the right time to start saving for retirement? In Episode 3 of The Financial Checkup, we discuss with Dr. Paul Healey, cofounder of the Physician Financial Independence online community and a member of the Advantages Retirement Plan™ Investment Committee, about the realities of paying off student debt while also planning for a secure financial future.
When is the right time to start saving for retirement? In Episode 3 of The Financial Checkup, we discuss with Dr. Paul Healey, cofounder of the Physician Financial Independence online community and a member of the Advantages Retirement Plan™ Investment Committee, about the realities of paying off student debt while also planning for a secure financial future.
Dr. Paul Healey: The advice that we talk about for young staff when they're starting out or new staff is still live like a resident. Try not to upscale your life too much because you really need those dollars to pay off your debt.
Speaker 2: Welcome to The Financial Checkup, a podcast series devoted to improving the financial health and retirement readiness of physicians and their spouses. This series is brought to you by the award-winning Advantages Retirement Plan from OMA Insurance.
Jonathan Weisstub: I'm Jonathan Weisstub.
Alex Mazer: And I'm Alex Mazer.
Jonathan Weisstub: We're the co-founders of Commonwealth, a mission-driven business that works for associations, unions and employers to provide collective retirement plans, including the Advantages Retirement Plan for Ontario physicians.
Dr. Paul Healey: My name is Dr. Paul Healey, and I'm an emergency physician, co-founder of the Physician Financial Independence online community with my wife, Dr. Jane Healey. I'm also a member of the Investment Committee for the Advantages Retirement Plan.
Alex Mazer: This series is for educational purposes, and should not be considered investment, tax, financial, or other professional advice. Physicians spend more time in school than the vast majority of Canadians, and as a result, accumulate more student debt. I think the median debt load for medical school graduates in Canada is over $100,000. And so I'm curious to hear kind of what advice you give to young physicians who are just graduating, as they're thinking through the problem of paying down debt versus investing for the long term.
Dr. Paul Healey: Yeah, this is a question that gets asked a lot. And you have a young physician who has now just finished their training. They often have a significant debt load, but now they also have some income because now they're working. And so the question they're asking is, "What should I be doing with this income? Do I start to pay down my debt? Do I start to invest?" And it's a really good question. And the answer to it, like a lot of financial questions, is it depends. I think the answer to the question, there's two ways that you can approach this. When you look at, "Hey, should I pay down my debt or should I start investing for the future?" And the first answer is the numerically correct one. And I think the second answer is the one that is a bit more common sense and a bit real-world.
The numerically correct answer is that people will look at this question and they'll say, "Well, hey, interest rates are really low and I'm not paying much on my debt. I should probably be investing that money because that money will grow. And I'd make more money than if I paid down my debt in the long term." And you can't really argue with that because it's true, interest rates are low right now. But the problem is that you need to be a really disciplined investor to pull that off, because essentially, it's leveraged investing. What you're doing is you're borrowing money and you're investing it, and you have to be fairly sophisticated to do that well. And a lot of young physicians coming out are just not financially sophisticated enough to do that. So I think that then you get into the more practical answer, which is, "Should I just pay down my debt and wait before I started to invest?" And I think that that is a bit more practical because if you are paying down debt, it's a sure thing, you're not paying that interest every year.
And you, I think can get your head around paying down debt. It's easy to understand. And it also teaches you some really good financial habits because if you're being frugal and saving the money you earn to pay down debt, you're picking up really good frugality skills and you're picking up money management skills. So I think it is a very good idea to pay down non-mortgage debt when you have the opportunity and when you're a young staff. And then once your debt is under a more manageable level, I think that's a good time to start investing just to kind of get your feet wet. Learn what it's like to set up your investing accounts, start making small contributions, so you kind of understand the process. I know, personally, that's what I did. My wife and I, Jane Healey, who's the co-founder of the PFI group, we paid down debt first because it was something that we understood and it was something that was easy, and it helped us to build our frugality skills. And then we started investing.
So if you are a really sophisticated young person, who's very financially aware, and you want to start investing when you have debt, I think that's fine. But I know that wasn't me when I started. And I don't think that I would've done it well. And the big problem with doing that is that everyone will hit a big market crash in sometime in their investing career. And if you are someone who is leveraged, so you have a whole bunch of debt and you've invested money, and now that money, those investments that you purchased, are worth 30% less than when you started, psychologically, that's very difficult. And you may do something stupid, like sell your investments. So now you have debt and now you have investments that no longer cover that debt and you're underwater, and that's where the sophistication comes in. So I'm a bit more practical. I say pay down your non-mortgage debt and then start investing.
Alex Mazer: There's also the psychological benefit of accomplishing something that comes with paying down debt, right?
Dr. Paul Healey: Absolutely.
Alex Mazer: You talked at the beginning about the math versus the reality, which also includes the emotional element. I guess there's also the other flip side danger, which is sometimes people get into mindset of, "I'm not going to save for retirement until I've paid down my debt. Oh, now I'm going to save for a house so I'm not going to save for retirement until I've bought my house. And now I've got childcare expenses." So there is a scenario in which you put that off for a long period of time. So I like what you said also about starting to save once the debt is under control. Maybe it's not fully paid off, but you're starting to develop that habit of regular savings, even if it's a smaller amount. I'm sure you get asked all the time about debt management strategies and ways to bring down the cost of carrying your debt. So what would be some of the top things you'd talk to physicians about, if they've got a large debt load and you're trying to help them pay that down more efficiently?
Dr. Paul Healey: So the first thing you need to do is you need to look at the interest rate that you're paying on your debt. This is a common thing in our group. And basically, you should be getting prime minus 0.25%. If you're paying any more than that, you're paying too much. You need to negotiate with your bank or you need to move to another bank that will give you that rate. So that's the first thing because that's hundreds of dollars in interest when you have hundreds of thousands of dollars in debt. So that's the first thing, is make sure you have the lowest interest rate. And the other thing you need to do, and this is one of the things that we like to talk about in our group, and it's not the sexy part that everyone wants to talk about, everyone wants to talk about investing, but you need to talk about your savings and you need to do learn to be frugal.
So you need to be really managing your spending. There is a real sense, when physicians get out, of their training, that they've delayed gratification for a very long time. And now that they're out and they're working, this is their chance to reward themselves. And that often means spending, spending on a house that's maybe bigger than you need, or buying a car that's more expensive than you should. And the thing is, that when you carry debt, when you're a young staff and you carry debt and you start buying those things, you are debt financing all of those purchases. And when you're debt financing, that interest that you pay compounds against you. And so that can be a real problem. So watch your spending. The advice that we talk about for young staff when they're starting out or new staff is still live like a resident, try not to upscale your life too much because you really need those dollars to pay off your debt. And the only place you're going to get those dollars is by not spending them, and really constricting your spending.
Alex Mazer: What would be an example of a common mistake you see people make in terms of lifestyle creep?
Dr. Paul Healey: Buying the bigger house than the need. Especially in this time period, I think that renting, there's absolutely nothing wrong with renting. And when you look at what are called price-to-rent ratios, that help you decide if you should buy or if you should rent, they strongly favor, at least if you're in Toronto or Vancouver, they strongly favor renting. And that's an option that a lot of people can't get their head around, that that is a good financial decision. So I think that renting is a good idea rather than buying a bigger house than you need. I also see people buying property when they don't have the long-term security or the long-term plan of where they're going to be. They know they're only going to be somewhere for a few years, but they're diving in and buying a house. Unless you have yourself established where you're going to be for maybe the next 10 years, it's probably not a good idea to buy a house. Again, that's why renting is really good.
The car thing is something I see a lot. People want the expensive car as soon as they come out of training, and that really can set you back because cars are expensive and they're depreciating, and you need that money to pay down your debt, you don't need that depreciation money just, poof, disappearing into the air, you need that for other purposes. So those are the big ones.
Alex Mazer: You mentioned earlier the value of getting the lowest interest rate you can. What are some practical ways physicians can pursue to get that lower interest rate, whether it's negotiating with the bank or consolidation, are there other strategies they can think about?
Dr. Paul Healey: Sure. So the first thing you need is you need information. So our group is great for that. There's always active threads on who's getting the best mortgage rate and who's getting the best rate on their line of credit. So the first thing you have to have is you have to have the information. So go to a source where you can get reliable information. And then negotiating with the banks is actually not that challenging. A lot of times, if you call whoever your contact is, if you have one and say, "Hey, listen, I'm in a group where there's a lot of other physicians, they're being offered X, Y, Z rate by these other banks. Are you willing to match it?" A lot of times, it's very easy and they will just match it. And it's as simple as a phone call.
If they're not going to match it, then you need to threaten to leave. And then if your threat goes unanswered, then you actually do leave, which is not that hard. So that isn't really a challenge, that is one of these low-effort things that makes a big difference. It's going to be you on a morning, for maybe an hour or two, making a few calls, that automatically puts money in your pocket. So that's something that I think everyone should do. And I think word has gotten out, the banks have learned now that we're a bit savvy. I think a lot of it has to do with our group actually. And they know that we all know, so they just don't bother trying to do the higher rates.
Alex Mazer: Yeah, I guess you think about that as an investment of time. And if you think about it, "Okay, I'm going to spend an hour. Maybe I do a bit of research on the Facebook group, then I call up the bank, or maybe I track a couple of times," and then you calculate the amount of savings you can make from that couple hours of investment. It's probably hard to find a better investment of your time in terms of bang for the buck.
Dr. Paul Healey: No, and you can take that a step further. It's not only the money you save, it's now all of the interest you're not paying on that money because you've paid it off. So that's why frugality pays such dividends. You can have money, not pay interest on it, and instead, eventually you're going to be at a point where you're investing it and making money on it. So that's why frugality is so powerful.
Jonathan Weisstub: And these small differences can make a total difference in the trajectory of someone's financial [inaudible 00:11:34].
Dr. Paul Healey: It's huge, it's huge. If you wait five years at the beginning of your career, before you get things set up and you get a plan in place and you start investing, the difference at the end, when you go to retire, is big. And this is all about compound interest. Compound interest or compound returns, it's a number you get, it's 5, 6, 7, 8%, but the other half of it is time, it's how long you leave it. And the earlier you start, the better it is for you. And the earlier you can retire or stop working or ease out of your busy practice. So it is an important thing to get established early in your career. And actually I think that physicians are doing a lot better, especially in our group. Our group has grown so much, it's over 20,000 members now.
Jonathan Weisstub: That's incredible.
Dr. Paul Healey: And people really do want to get their finances under control. The other half of that is that it's much harder for the new physicians coming out. It's very different for them than it was for me. I graduated at a time where there was a shortage of physicians, I got a job very easily. I worked, and the first years I worked, it was a time of increasing fees for physicians. And the newer physicians now don't have that, it's hard to get a job, fees are decreasing. Our jobs are being eroded to lower cost providers. So I had the luxury of being able to make mistakes. And unfortunately, they don't have that luxury. They kind of have to get it right in the beginning now.
Alex Mazer: Is there a piece of advice, that if you could give advice to your younger self, you would focus on?
Dr. Paul Healey: This is going to sound really bad. But if I met my younger self, I'd say, "You know what? You're doing things pretty well financially. The things that you and Jane did naturally, were young, wanting to pay off debt and being frugal, I would just say that they've paid real dividends for you in the future and just do what you did. It turns out well." I guess that would be the only message to, my younger self is, "You don't have to do anything different, just do those things and you'll be happy."
Jonathan Weisstub: Thanks for listening to The Financial Checkup.
Dr. Paul Healey: If you're a Canadian physician joined the Physician Financial Independence group on Facebook to learn more about saving and investing.
Alex Mazer: For physicians in Ontario, check out the Advantages Retirement Plan at omainsurance.com/retire.
Speaker 2: The Financial Checkup series is producing collaboration with OMA Insurance and Commonwealth, the administration and technology partner for the Advantages Retirement Plan.