Doctors’ Biggest Money Mistakes—and How to Avoid Them!

As a doctor, managing debt is a crucial part of achieving financial freedom. For some, debt can be a powerful tool to build wealth, while for others, it leads to stress and financial strain. The good news? You don’t have to let debt control you.  Here  you’ll uncover practical strategies to manage and leverage your debt effectively, giving you the confidence and security to focus on what matters most—your career and your future.

Take Bill, for example. He's a GP who’s always been passionate about property. Over time, he’s managed to acquire four residential properties. Although Bill didn’t have the full capital upfront to buy these properties, he borrowed from the bank and took advantage of negative gearing. This helped him build a valuable land bank that’s appreciated significantly over the years that now provides him with a positive cashflow. 

While many of his colleagues at the time suggested he should just buy a nicer house, Bill's strategic use of debt over the last 10-15 years has now put him in a position to create a passive income stream for his retirement which will provide him with long-term income.

On the other hand, Peter and Sue are still managing a significant mortgage on their luxury home. They’ve used their mortgage to finance their lifestyle and cover shortfalls in their cash flow. Unfortunately, they didn’t invest when they were younger and now face the challenge of paying off both their mortgage and car loans for at least another 15 years.  

Their mortgage was not tax-deductible, and because they were paying the top marginal tax rate of 47%, their 6% loan was actually costing them almost 12% before tax. This is VERY expensive debt and holds them back from creating wealth. It is common for many doctors to buy an expensive home that eats up all their cash flow and prevents them from investing early. 

Good Debt vs. Bad Debt

Borrowing money essentially allows you to purchase assets like property, which you wouldn’t be able to afford outright due to a lack of savings. When used wisely, debt can be a powerful tool for building wealth. But if used carelessly, it can quickly spiral out of control and lead to financial difficulties.

So, what exactly makes debt “good” or “bad”?

Good Debt is typically associated with borrowing to acquire assets that are expected to appreciate in value. For example, buying a home or an investment property. In some cases, people even narrow it down further, only considering debt “good” if you can claim a tax deduction on the interest costs, such as when you borrow to purchase an investment property or shares.

Example
Imagine you buy an investment property for $500,000, borrowing $400,000 at an interest rate of 6% per year. Your annual interest cost would be $24,000. If you’re renting out the property or making it available for rent, you can usually claim that interest cost as a tax deduction.

Bad Debt, on the other hand, refers to borrowing for things that don’t appreciate in value, like consumer goods such as cars, furniture, or vacations. This type of debt typically comes from credit cards or personal loans and often has high-interest rates. While a personal home loan might seem like “bad debt” because it doesn’t offer tax deductions, it’s still essential to evaluate its long-term cost.

Example
If you have a car loan with a 9% interest rate and a taxable income over $180,000 per year (which places you in the 47% marginal tax bracket), your “real” interest rate after tax would be about 16.98%. This is much higher than the nominal interest rate, and it’s essential to consider this “opportunity cost” when making financial decisions. In general, repaying high-interest debt should be a priority, especially when you’re younger.

The Burden of Debt: Why It Matters

Debt can be like a heavy anchor pulling you down. When you’re bogged down by credit card bills, or personal loans, it’s not just about the monthly payments; it’s about the stress, the limits on what you can do, and the missed opportunities.

Think about it: what if instead of making monthly payments on debt, you could use that money to save for a vacation, invest for retirement, or start a new business? That’s the kind of freedom debt can take away.

The Solution: The Debt Snowball Method

Now, I know what you’re thinking: “That sounds great, but how do I even start tackling my debt?” That’s where the Debt Snowball Method comes into play.

Here's how it Works:

1. List Your Debts: (except your home loan and student debt). Start by listing all your debts from smallest to largest. Don’t worry about interest rates—this method focuses on tackling the smallest debts first.
2. Make Minimum Payments: Continue to make the minimum payments on all your debts except for the smallest one.
3. Focus on the Smallest Debt: Put any extra money you can find towards the smallest debt.
4. Celebrate and Move On: Once you’ve paid off the smallest debt, celebrate your victory! Then, take the amount you were putting towards that debt and apply it to the next smallest debt on your list.
5. Repeat the Process: Continue this process, moving from one debt to the next as you go. Each time you pay off a debt, you’re gaining momentum and confidence. It’s like a snowball rolling downhill, gathering speed and size as it goes!

 Why It Works:

The Debt Snowball Method is powerful for a few reasons:

• Psychological Boost: Paying off smaller debts quickly provides a sense of accomplishment and keeps you motivated to tackle the next one.
• Simple and Focused: This method keeps your strategy straightforward. Instead of juggling multiple strategies or getting bogged down by interest rates, you’re simply focusing on one debt at a time.
• Momentum Building: As you pay off debts and the amounts you’re applying to each one grow, you build momentum. This can turn a daunting task into a series of manageable steps.

Opportunity Cost of Debt

It’s crucial to understand the long-term cost of taking on non-deductible debt, as it could affect your ability to achieve other financial goals.

Types of Home Loans

There are many types of home loans, each with their own features. Let's break down some common options. 

Standard Variable Home Loans
This is the most common loan in Australia. They are flexible, often offering features like offset accounts or redraw facilities. Your interest rate can change over time, which will also affect your repayments. However, you can make extra repayments, allowing you to pay off the loan faster if you have the capacity. Check out this hack on how you can save $160,000 on a $600,000 home loan by simply making fortnightly payments.  

Fixed Rate Home Loans
If you prefer stability, you might choose a fixed-rate loan, which locks in your interest rate for a set period (usually 1-5 years). While this can help with budgeting, it comes with less flexibility—like limited extra repayments—and you may face exit fees if you refinance or pay off the loan early.

Split Loans
A split loan gives you the option to combine both fixed and variable rates. This can be a good compromise if you want the security of a fixed rate but still want to maintain some flexibility with the variable portion.

Equity Loans or Lines of Credit
This type of loan is like a credit card with a set credit limit, allowing you to borrow money for a variety of purposes—whether that’s buying a new car, going on vacation, or funding renovations. While you can draw funds as needed, the interest rate might be higher than a standard variable rate loan. These loans often come with no minimum repayment requirements, but it's not advisable to let the interest capitalize.

Offset vs. Redraw Accounts

Both offset and redraw accounts can help you pay off your mortgage faster, but they function differently.

• Redraw accounts let you take back any extra repayments you’ve made to your loan. For example, if you repay $30,000 in a year when your minimum repayment is $24,000, you can access that extra $6,000. However, you may face fees for using the redraw and might not be able to withdraw funds instantly.
• Offset accounts work by reducing the amount of interest you pay on your mortgage. If you have a $300,000 loan and $50,000 in an offset account, you’ll only be charged interest on $250,000.

Interest Only vs. Principal and Interest

With a principal and interest loan, you pay back both the loan principal and the interest over time. In contrast, an interest-only loan only requires you to pay the interest, with the loan balance remaining unchanged.

Interest-only loans can provide more flexibility and tax benefits, especially if the loan is for investment purposes. However, it's important to have a plan for repaying the principal eventually.

Repaying Your Home Loan in 10 Years

One of the most effective ways to save on interest is to repay your mortgage faster. Ideally, you should aim to pay off your home loan in 10 years, especially if it’s non-deductible debt like a personal loan or credit card. The quicker you pay it off, the less interest you’ll pay overall.

Example
If you have a $1 million loan at a 5% interest rate, you’d pay around $272,800 in interest over 10 years. Stretch that to 15 years, and you’ll pay over $420,000 in interest—an extra $150,000!

Gearing

Gearing refers to borrowing money to invest. It’s a common strategy to increase your investment balance, especially when you’re just starting out and haven’t accumulated much savings yet.

There are three types of gearing:

• Negative Gearing: Your investment costs exceed the income it generates. The tax benefit here is that the loss can be deducted from your taxable income.
• Positive Gearing: Your investment income exceeds your costs, and you pay tax on the profit.
• Neutral Gearing: Your investment income equals your costs.

Benefits and Risks of Gearing

Benefits
Gearing can really boost your returns. If the investment increases in value, you'll see a greater return than if you had only used your own money. Plus, it lets you invest sooner without needing to save up the full amount first. There's also the potential to take advantage of tax benefits since the interest on the loan might be tax-deductible.

Risks
On the flip side, gearing can also amplify your losses. If your investment loses value, your loss could be much greater than if you had just invested your own money. Additionally, gearing isn’t free – the returns on your investment need to exceed the interest and other costs of the loan, or you risk losing capital rather than growing it.

Gearing in Property, Shares, and Managed Funds

Investors can borrow to purchase property, shares, or managed funds. Property is typically easier to finance, as banks offer loans for up to 80% of a property’s value. When borrowing for shares or managed funds, you typically need to contribute a portion of your own funds.  

Margin Lending allows you to borrow against investments like shares or managed funds, but this comes with high risks. If the value of your investments drops, you might face a margin call, meaning you need to repay part of the loan or provide more collateral.

Finance Brokers

Mortgage brokers can help you secure a home loan or other credit arrangements by researching the market and finding the best deals for your situation. They also guide you through the application process, saving you time and effort.

Benefits of Using a Broker

• They have access to a range of lenders, which increases your chances of finding a good deal.
• They provide advice on loan features that could be beneficial to you.
• They manage much of the paperwork and application process for you.

What to be Aware Of

• Brokers work with a panel of lenders, meaning they can only recommend loans from certain providers.
• Brokers are paid commissions from the lenders, which could affect the recommendations they make.
• Look for brokers accredited with the MFAA (Mortgage and Finance Association of Australia) to ensure ethical and professional service.

Nick Tolevsky is a Specialist Medical Accountant. He provides expert guidance on tax strategies, building and protecting wealth . If you’re interested in discussing how we can help you,  please book a complimentary consultation by clicking here.

Disclaimer: This article contains general information only . It is not designed to be a substitute for professional advice and does not take into account your individual circumstances, so please check with us before implementing this strategy to make sure it is suitable.