Speaker 1 00:00:08 What's up, everyone. Welcome to the finance for physicians podcast. I'm your host, Daniel Raimi. Join me as we dig into what it looks like for physicians to begin using their finances as a tool to live better lives. You can learn more about our
[email protected] let's. Jump into today's episode. What's up everyone.
Speaker 2 00:00:27 Hope you're having a great day. I wanted to talk about debt today from a high-level standpoint. There's a lot of, uh, it's interesting. There's a lot of talk about good debt and bad debt these days. And so I wanted to kind of talk through the pros and cons of debt in general. I think that there is, uh, definitely cases where debt is fine to take on, but it's a very slippery slope. And so I think understanding some of these, uh, trade-offs and pros and cons, and just kind of understanding the psychology of debt can help as you navigate some of these big financial decisions that you may or may not choose to finance before I jump in, there's a good quote. I'm not sure who, uh, who to attribute it to, but, um, the quote is don't buy things you can't afford with money. You don't have to impress people you don't like.
Speaker 2 00:01:23 And that's, I think the classic situation where debt is a problem when you're buying things, you know, that you're, that are out of your means and really only doing it for status and trying to impress people. So we want to definitely want to stay away from that. But, uh, let's start today with, uh, some of the reasons people would get debt. So the big, the big ones that we tend to see and hear, and some of the things I felt myself, even it's a low interest rate. So debt is a lot of financing these days. It's just very competitive interest rates. Sometimes it's 0% interest rate. So that's a lot of times, uh, the reasoning we hear with our client planning clients, and I've even told myself that is that you might as well finance it because the interest rate is so low, that's a common reason or a cause of you deciding to, you know, at least consider debt.
Speaker 2 00:02:25 So I'll circle back to that in a minute. But another big reason I hear and see is I'm gonna, I'm gonna finance it because maybe I have the money to afford the thing, but I'm going to finance it because I'm going to use the money more wisely in some other thing, like, uh, investing it or for a business or whatever. Uh, the idea there is that the debt is efficient more. So you have another vehicle that you can be more efficient with and the debt is allowing to leverage that, uh, alternative. So that's a concept that comes up often. Probably the most common thing that comes up is I want to finance it because it's going to allow me to buy whatever thing sooner. Maybe people don't say that always, but that's typically, uh, the reasoning or at least one of the reasons behind why you finance things is that by financing it, you can get it now much sooner, or maybe you can do something you would never otherwise be able to do the last big reason I'll throw out there for why people get debt is I think it's just a cultural thing.
Speaker 2 00:03:39 So, you know, it's just what everybody else is doing. Uh, that's a common reason. You know, I grew up, my family had debt. It's normal for me to think of my life, including debt and just kind of what people do. And so culturally, I think those last two are probably the hardest is immediate gratification and cultural, uh, challenges or cultural influences. So you kind of feel the push to have debt. That doesn't mean you should have debt. So knowing those big primary drivers for debt, let's talk about reality and kind of how people experience that and what tends to play out over time. So I think it's really interesting to look at people and how things play out in their circumstances in relation to whatever given consideration we're looking at. So with that, for example, me personally, I think the purpose of money is to allow you to live a better life or be happy essentially.
Speaker 2 00:04:37 Otherwise what's the point. So with debt, for example, what I would look at is, is having the debt, making you happier or not. Are you happier with that or not in this given circumstance? So for example, if you're buying a house, is the debt allowing you to live a happier life versus like delaying the purchase or, uh, going to XYZ school? Are they expensive school over the less expensive school? Is that a additional debt allowing you to lead a happier life overall or buying the car, the new car instead of the old junker car? Like, does that translate to a happier life? Sometimes it does in cases and you probably feel like it's going to on the front end. But if you look at the, like the research on happiness and people, uh, in general, like more debt does not lead to greater happiness and it actually is the reverse.
Speaker 2 00:05:33 And so with that, it's kind of a slippery slope with that. It's, you know, you have to be careful with it and it can maybe lead to short term happiness. But the problem with debt is it's a long-term obligation. So you really want to think about what that translates to longterm. The more debt you have. I think there's, you know, you look at a lot of people without debt and or people that have recently paid off debt. If you know, somebody that's paid off a debt, look at them in their life. It's rare that they're like regretting that decision. I don't hear a lot of people complain about having debt paid off. They tend to be like ecstatic about having debt paid off. People that pay off their student loans are just pumped about it. And so that, that all kind of paints that picture of, um, maybe debt, maybe having less debt translates to more happiness.
Speaker 2 00:06:30 There's also different types of debt. So going back to the low interest rate and using money wisely argument, if you're taking out a loan to start a business, for example, it's a legitimate business and you're essentially investing the money. That's a completely different scenario than if you're taking out a loan or debt to finance your education. And that's a completely different scenario than if you're taking out a loan to buy a car. So there, those are very different situations. So I would be more cautious the further away you get from having an asset or investing that money. So for example, if you are just using the debt to finance a depreciating asset, like a car, I would know exercise the most caution in that situation, uh, because it's not, it's, it's not gonna provide any return. In fact, it's going to provide negative return. The car is gonna lose value.
Speaker 2 00:07:36 It's gonna provide a negative return. Education is something we could probably argue. Um, I agree education is a good investment, but the way I would look at it is, is there an alternative way to do it? That would be less expensive, or maybe you're using some of your, uh, education or student loan money for things that are not necessary. And so in that case, maybe it's not a great investment, but baseline investing in yourself is you could argue a pretty good investment. Um, but you have to be like all that. You have to be, be careful with it as well. I think one of the biggest things that, that people maybe sometimes aren't aware of is the psychology of, of purchasing decisions. And this goes back to the low interest rates rate thing. What people maybe don't realize sometimes is by financing something, it's going to push up their tendency to spend more.
Speaker 2 00:08:36 So look at the iPhones or smartphones. For example, a lot of times they'll kind of push you to the direction of financing it. And it's typically 0%. So they're like showing you the monthly payment now. And it's like, the car companies figured this out a long time ago, the psychology, uh, that they need to sell the monthly payment to people. And they'll say, what do I need to basically say, what can you afford per month? And then they'll kind of back into the numbers, that financing aspect, it's much easier to wrap your head around paying, you know, $50 a month or $500 a month or whatever, uh, instead of paying like $30,000 for a car, um, same thing with an iPhone. That's why so many people have thousand dollar iPhones, uh, that the fact that it is finance just tends to push people's purchase price up.
Speaker 2 00:09:29 So you have to beat. If you're aware of that, I think it's helpful. A good test is if you ideally you have the money to be able to write a check for it. And so if you don't have the money to be able to write a check for whatever purchase, you're probably even more susceptible to this kind of a thing, because it's, it's, it's adding that whole, uh, ability to have immediate gratification. Uh, and you're subconsciously gonna kind of focus in on that. Whatever's going to make that happen the fastest. And so interest rate is, uh, is another, you know, sneaky little part of that whole equation. So if it's 0%, uh, I might as well finance it and get the car, but what if you can't afford the car, maybe you can afford the monthly payment today, but is that a smart move financially?
Speaker 2 00:10:25 Another way to think about it is what if companies started to, I could see a situation where companies start to pay you, uh, to finance it. Uh, that would be interesting to see then it's like from a dollars and cents standpoint, it's an absolute no-brainer to finance everything because they're paying you to finance it. But at what point does that become out of control from a monthly payment standpoint? So if I go to get an iPhone and they're like, you might as well finance it and pay us the monthly payment, cause we're actually going to give you a discount on the iPhone by like 20% or something. I could see the, the world going that direction, because that basically continues to amp up this idea of pushing people's purchase price upward and making it because the more they make it incentivize people to get debt, the more purchase price increases, the more companies making money sooner.
Speaker 2 00:11:22 And so I think just having an awareness of how this works is helpful as you go through big purchase decisions. I tell people, uh, we work with a lot of times the interest. It's not about the interstate as much a low interest rate is obviously appealing, but if that's causing you to increase your purchase price, that's, that's really, the problem is the sneaking up of the purchase price due to your subconscious locking in on the fact that a low interest rate is such a good deal. So you have to be, you have to be aware of that as well. I mentioned the, a monthly payment obligation in that getting compounded. That's. Another big thing to watch out for, with debt is one of the downsides of debt is it can really lock you into whatever given circumstance or situation. So for example, student loans are probably the, one of the biggest, uh, examples of this.
Speaker 2 00:12:18 It's like the day you started in medical school or the first, you know, semester you finance it's. I would imagine at that point onward extremely difficult to, to get out. And it's probably even subconsciously affecting you. Like maybe you're not liking it as much as you thought you would, if you have, if you're already on sitting on a a hundred thousand dollars student loans after just one year in, it's going to be really hard to convince yourself that you don't actually like it. And you're probably going to want to convince yourself the reverse that, you know, you could, you do, you can make it work. You're going to need to give it a full shot. And because you're looking at that student loan balance, and you're seeing, uh, you already owe a hundred thousand dollars and that's kind of, kind of in some way, locked you in to that need to make the solid income that comes from finishing up all the years of training, same sort of thing, little different flavor with like a house, say you're starting in practice and you, um, are moving to a new area and you're starting in a new job and you choose to buy a house and you don't have the money to pay for it outright.
Speaker 2 00:13:40 So you're financing it. And really you have none, no down payment. So you're financing a hundred percent of it. So that situation can kind of lock you in to that first job, because like subconsciously you're thinking, man, uh, it's going to be difficult to sell the house I just bought. I'm wasting a bunch of transactional costs and my, I might not even be able to. And then sometimes the market real estate prices go up and down right now, they're going up really up fast, but they can go down to like the same way they're going up now. So say real estate gives down in that situation that sort of set up you're completely upside down, which basically means you owe more than the house is worth. You've got to write a check to get out of it and you can legit be completely locked into the house.
Speaker 2 00:14:25 As in you can't sell it or you, you don't have the money to sell it. So debt can have that tendency to lock you into things, even cars, same sort of thing. You can kind of get locked into it, whether it be like financially or even subconsciously kind of making you feel locked in. That's just an important consideration to make sure you're not pushing it too much. And that I think the biggest thing with debt or one of the big, big things that is, it's just, you're using the debt to finance something now or immediate gratification in exchange for less choices in the future, because what it comes down to is your, if you're using debt for a lifestyle thing. So that's why I say early on, if you're using debt for like a business decision, that's a little different. But if, if you're using debt for lifestyle to essentially have immediate gratification, whether it be buy a car, have more house, whatever it is, if you're using debt to finance your lifestyle, essentially what you're doing is you're trading the debt for less choices in the future because you're going to have to make your own, ultimately you'll have to pay it.
Speaker 2 00:15:38 And so that is what the monthly payment ends up being. And that translates to less choices in the future because you have less money then to do stuff or put your money places or whatever you want your money to do for you. And the more that that happens. So it's kind of like think of it like a, teeter-totter like now immediate gratification versus less choices in the future. The more you pile on the immediate gratification, the less choices you have in the future to the point where if you get too high on the media gratification, you can end up in this position where you're completely squeezed and you're, you know, on the brink of like a financial blow up. Uh, and that's where people get into like house poor situations. That's basically what house poor is, is like, like, all I can do is make my mortgage payment and feed my family and that's it, uh, or even worse, like bankruptcy.
Speaker 2 00:16:26 That's what bankruptcy is. It's like, you've kind of pushed the envelope to where you can't make the monthly payments. So you definitely want to completely avoid that situation. And in reality, what I would typically encourage is that you shape your life first, like your ideal life first, like what do you want it to look like? And, um, what do you want your future to look like? Kind of carve all that out first. And then if you do choose to have debt, make sure it fits into that ideal life equation, as opposed to the reverse, just, you know, going off the cuff and picking off things and immediate gratification and financing it and then trying to make life work around that that typically does not work out well. So some just kind of general things to think about in relation to this and just kind of takeaways or ideas to, to keep in mind, uh, pay attention to your debt, to income ratio.
Speaker 2 00:17:23 That's a good kind of metric to show you how aggressive you're being with this. So lenders, as an example of lenders will often loan, uh, up to 40, 45% of debt to income. So that's your monthly debt, total debt obligation divided by your total income. That's typically too much. I think, uh, it should be considerably lower than that, but that's, that's the most or maximum a lender for like, you know, a typical say mortgage lender will loan you up to 45% debt, monthly payment as a percentage of your total income per month. So you want it to be considerably lower than that. And I would argue that the lower, the better, or at least that provides for more financial flexibility in the future, especially, or you could take a more extreme stance and just say, I'm gonna, so, so from now on, I'm gonna have less debt, uh, most, a lot of people, you know, let the debt kind of creep up.
Speaker 2 00:18:23 So you could say, draw a line in the sand right now. And from now on going forward, my debt number is going down. That's just kind of, uh, you know, one way to approach it because in that situation, it can only get better or more flexible for your children. You can save for their education expenses. Student loans have become a massive debt load. And so you can kind of get ahead of that for your kiddos and save into college savings plans or 5 29 so that they can avoid getting into this debt crunch where they're like locked into their profession. Uh, you can teach your children about debt as well. So I think where the, this ends up kind of like the worst case scenario is when you're taking out debt while also not having the knowledge around really how debt works, that's classic and, uh, you know, student loans, because you're not typically old enough.
Speaker 2 00:19:13 So you can kinda take ahead it, uh, get ahead of that and start to teach your kids about debt early on, uh, the sooner, the better. And then just talking about your finances with other people. That's an important thing to do, uh, you know, having an advisor or talk to your close contacts about managing finances, encourage your kids to talk about money. I think I grew up in a culture where it was like, you know, maybe we don't talk about money, but I think it's much better to encourage this, uh, understanding that we're going to communicate about money, that way your kids and your contacts feel comfortable bringing up their big life questions or big issues as they're coming up and you can, you can help them. Alright, well, that's all I got for today. Good. Uh, good talk. We'll uh, look forward to talking again next time and, uh, okay. You have a great rest your day as always.
Speaker 1 00:20:03 Thank you so much for joining us today. If you found this valuable, please give us a review on iTunes and share with a friend. Also check out our
[email protected] for all sorts of additional content. See you next time. Finance for physicians is not an investment tax legal or financial advisor. All content included in this podcast is for informational purposes only and should not be considered financial tax or legal advice. Material presented. It is believed to be from reliable sources and no representations are made by finance for physicians as to another party's informational accuracy or completeness, all information or ideas provided should be discussed in detail with an advisor accountant or legal counsel prior to the implementation. You don't have an advisor or would like a second opinion. Feel free to check out our website for recommended advisors.
