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Physician Finances: Prioritizing Debt Payoff

Physician Finances: Prioritizing Debt Payoff
By Cameron Hamilton, CFP®, MBA, CPWA®
Partner, Director of Financial Planning

Key Takeaways:

  • Living within your means is a prerequisite to being able to pay down debt.
  • Tackling small debts first can establish confidence quickly.
  • Prioritizing highest-interest debt is optimal – ONLY IF you stick with it.

There is a difference between good and bad debt.  Good debts are those that will appreciate or help grow your net worth over time, such as a medical school loan (hopefully yours was subsidized!), a note for a practice acquisition, or a (reasonable) mortgage.  Unfortunately, we don’t always get the opportunity to give our input before someone takes on debt.  Today we discuss our ideas on what to do after you’ve already accrued good or bad debt.

Paying down debt is a lot like losing weight.  It doesn’t matter how many miles you run if you’re eating cheeseburgers every day.  You must address the root cause to make any progress, which means focusing on your diet.  First, you must eat a reasonable amount, and then additional exercise can accelerate your progress.  With debt, your daily diet is your budget.  There’s simply no way to pay down debt if you are living beyond your means by spending more than you bring in as income.  This must be step one in prioritizing debt payoff: dollars in > dollars out.  In our experience, this can be especially difficult for practitioners that receive quality or productivity bonuses, or owners that have more “lumpy” Income.  Nonetheless, everyone needs a balanced budget to improve their balance sheet.

Once you have your budget balanced, we can address how to best exercise off that excess debt.  Where should debt payoff reside in your ranking of household priorities?  This is a personal decision, but there are a few items we believe supersede debt payoff.  Everyone needs health Insurance and to take advantage of a retirement plan match, and most physicians should consider disability insurance, especially if they are the primary breadwinner.  After that, an emergency fund Is needed to protect against creating new debts In case of accident or slowdown In Income.  Ideally, these items are squared away before we tackle how to prioritize debts.

After covering these basics, it’s time to pay down debt with your excess cash flow.  There are two schools of thought on prioritizing different debts.  The first is the snowball method, popularized by Dave Ramsey.  He says you should pay off your smallest debts first so that you make progress by eliminating individual debts, which helps your financial confidence grow like a snowball rolling down a hill. 

An alternative method that seeks to maximize your financial well-being.  It is often referred to as the avalanche method to provide contrast to the snowball method.  This strategy prioritizes paying off the highest-interest debts first to minimize the total interest paid.  It will maximize your household net worth if you stick to the plan, but the progress is less tangible and immediately gratifying.  Most physicians we meet are good candidates to optimize here, because their debt comes not from a history of overspending, but due to getting a later start to their prime Income-earning years.

Whichever method is a fit for your family is the one we advocate.  Having a written plan to eliminate debt and build liquidity outside of retirement accounts consistently puts physicians In a better place.  Creating this flexibility as early as possible will put you in a better place to capitalize on opportunities, medical or otherwise, that present themselves throughout your career.

About Ballast

Ballast is an employee-owned, financial planning and investment management firm located in Lexington, KY. Ballast provides individualized services to high-income earners, high-net-worth clients, and those individuals/businesses who have complex situations. To learn more about the intricacies of the information above or to learn about our firm, please visit, email us at, or call our office at 859-226-0625.

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