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4 Keys to Conquering Debt

Posted on 3/6/2018 by AVMA LIFE in veterinary medicine financial health debt
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Welcome to the fourth post of AVMA LIFE Trust's financial health series! If you need to catch up on post three, which covers smart retirement strategies, you can find it here. Today, we're toppling the tyrant currently enslaving 80% of the American population: debt.1

Yes—some debt is taken on legitimately. Essentials like shelter, transportation, and higher education are often only attainable after diving into the deep pockets of banks or other financial institutions.

But no matter the reason for its accrual, debt challenges our financial freedom and can get in the way of life's many opportunities.

Debt's grip is often much tighter on veterinarians than those in other fields—the average educational debt for 2016 veterinary school graduates was nearly $170,000.2

Investing your time to become a veterinarian comes with great potential for a rewarding and lucrative career—but if you aren't tactical in your approach, the high financial barrier to entry can affect you for decades to come.

If you're already struggling in debt's grip, it's time to plot your escape. Here are four keys to reclaiming the fruits of your labor.

Key 1: Take charge of your expenses

Before dreaming of freedom, you must first stop adding to your debt load. Until your current debt is firmly under control, think carefully before taking on more.

In fact, in order to use one of the two premier debt reduction strategies (detailed in the third key), you need extra funds each month to put toward your repayments. This means you must not only live within your means, you must live below them.

Fortunately, our second financial health post explored this very topic. If you need a refresher on ways to push your budget into overdrive, click here.

Credit cards are usually the first place to start cutting, because despite inner-temptations claiming otherwise, they're rarely used for actual emergencies. If you're racking up more expenses than you're paying back each month, it's time to shred the plastic.

Other categories of debt can be more justifiable. Home mortgages claim the biggest share of America's borrowed funds, with tuition in a distant (yet still formidable) second.3 Car payments may also factor in.

But before jumping in on these investments, be certain you've thought through your strategy:

  • • Is this the best time for me to buy a house? Are there other, more affordable living options I should also be considering?
  • • Should I send my children to private school, despite the extra cost? Or are public schools an acceptable alternative?
  • • Is my current form of transportation serviceable, or is it too unreliable? When shopping for a new vehicle, am I placing practicality and affordability above status and prestige?

Take yourself through these types of questions with any new debt you're considering. If, after careful and measured contemplation, you decide additional debt may be the only way to keep pushing your personal goals forward, don't feel guilty over going through another round of borrowing. Just have a plan of attack in place beforehand, so your budget isn't left bruised in the aftermath.

Key 2: Consider refinancing or forgiveness

A big reason loans can feel so suffocating is interest; if debt's only requirement was to pay back exactly what you spent, the process would be much more palatable.

Rates can vary wildly by lender, and it's possible—maybe even likely—that you didn't lock down a lean percentage. Fortunately, refinancing options are available for most markets, including mortgages and student loans.

In fact, AVMA LIFE has partnered with Credible to provide a quick and easy way for AVMA members to refinance their student loans. Requesting offers can take just minutes and costs you nothing. Plus, the average graduate saves $18,668 by refinancing through Credible!4 Check it out for yourself here.

Savings like those provided through Credible can be worth it, but there can be tradeoffs.

Federal student loans, for example, include certain protections—like the ability to temporarily defer if your income is upended through something like a layoff. These sorts of benefits rarely carry over to the refinancer, so be sure to cross-reference all of your current loan terms with what the third party lender is offering.5

While refinancing might sound good, loan forgiveness undoubtedly sounds even better. Tuition money borrowed through the government can be fully or partially pardoned—but only if you meet the right conditions. And don't forget: the amount forgiven qualifies as taxable income, so plan ahead.

Some veterinarians should be eligible for the public service loan forgiveness program. To qualify, you must have made ten years (or 120 months) of consecutive loan payments and work with a specific organization or setting for a set length of time (usually two years or more). This option isn't plausible for everyone, as it usually requires uprooting your life to serve an organization or location in need of help. But the financial payoff can be big, and the sense of purpose even bigger.

Key 3: Roll a snowball or cause an avalanche

It's time to choose your battle plan.

Oddly enough, this is where simplicity finally gets a chance to shine in the complicated world of finance. Over the years, two competing approaches to debt management have emerged as the only options warranting consideration: the snowball and avalanche methods.

Here's a breakdown of each:

Snowball Method

Rank your debts by money owed (without factoring in interest rates), and make the minimum monthly payment on all but the smallest. Then, carve out an additional section of your budget to put toward your smallest loan each month. After the first loan is fully paid, begin taking that same extra money and applying it to the loan with the second smallest balance. Repeat until you are debt-free.

Avalanche Method

Rank your debts by interest rate, and make the minimum monthly payment on all but the highest. Then, carve out an additional section of your budget to put toward your loan with the highest rate each month. After the first loan is fully paid, begin taking that same extra money and applying it to the loan with the second highest rate. Repeat until you are debt-free.

There are plenty of online resources that walk through specific mathematical examples of each strategy in action, but there's one big question to answer when deciding which method is best for you: are you more motivated by logic or emotion?

Logically, the avalanche method saves both money and time. Granted, it may only be a couple months and a couple grand (both relatively minor numbers in debt's daunting timeline), but you're still coming out slightly ahead.

Emotionally, the snowball method has better pacing for moral victories. Loans with high interest rates often have higher balances; it may take half a decade to conquer your first loan under the avalanche method, whereas the snowball method might eliminate a loan in a year or less.

If you want to see how the numbers for each method break down for you specifically, use the supremely helpful online debt repayment calculator at unbury.us.

Remember: the only wrong approach here is the one you won't follow through on. So, just pick one and go.

Key 4: Commit

Even with a dedicated strategy in place, fully paying off large debts can take a decade or two—sometimes even more. When confronting a chronology of that magnitude, the path of least resistance is giving in to a sense of overwhelmed helplessness.

But look at it this way: if you're capable of succeeding in something as challenging as veterinary school, you are just as capable of achieving financial freedom. You already know how to stand firm and not give in when times are tough, so draw from your own strength and refuse to let debt rule the rest of your life.

The final post of our financial health series will tackle one of our favorite topics here at AVMA LIFE Trust: insurance. Don't miss it!

CITATIONS

1"The Complex Story of American Debt." The Pew Charitable Trusts. N.p., July 2015. Web. 5 August 2016.

2“Financing Your Veterinary Medical Education.” AVMA, American Veterinary Medical Association, 2017. Web. 28 December 2017.

3Jasthi, Sreekar. "Credit Card, Student Loans and Mortgage Debt in the U.S."NerdWallet. N.p., 2015. Web. 5 August 2016.

4Credible Staff. “Refinancing Student Loan Debt Through Credible Saves $19,000.” Credible, Credible, 14 Dec. 2017.

5Wong, Kristin. "The Complete Guide to Refinancing Your Student Loans." Two Cents. Lifehacker, 2 September 2015. Web. 5 August 2016.

The purpose of this article is to provide information, rather than advice or opinion. It is accurate to the best of the author’s knowledge as of the publication date. Accordingly, this article should not be viewed as a substitute for the guidance and recommendations of a retained professional. Any references to external websites are provided solely for convenience. AVMA LIFE Trust disclaims any responsibility with respect to such websites.

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Recorded: November 13, 2018
Speaker: Terence M. O’Neil, CPA, CVA

How to Buy a Veterinary Hospital

This webinar will cover the basic information needed to evaluate a possible veterinary hospital acquisition, including discussion on the following topics:

  • Information that needs to be reviewed
  • How to review and normalize financial information
  • How to value a veterinary hospital
  • How to obtain financing for a veterinary hospital acquisition
  • Whether the acquisition includes real estate and other related items to consider
  • Other factors to be considered.

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