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Managing and Paying Off Your Debt

Welcome! This article is part of a Medscape Physician Business Academy course, . Visit the Course Page to take the full course and receive a certificate.

Even if you're comfortably able to cover all your debt payments, having a plan to manage your debt as efficiently as possible is a smart financial move. That's because the decisions you make when it comes to paying down your debt can make a huge impact on your financial security.

For high-interest or large-balance loans, reducing your interest by seemingly small amounts can save you tens of thousands, or even hundreds of thousands, of dollars over the life of the loan. Managing your debt efficiently is essentially like creating a new revenue stream without having to do all of the work of running a side hustle. Plus, it can improve your credit score, making it easier for you to qualify for new credit at the best possible rate, should you need it in the future.

The first step to managing your debt is knowing exactly how much you owe, to whom, and the terms of that debt, including the interest rate. Having that information can help you determine the best plan going forward. Once you understand your debt, you can plan the best strategy for management.

Avalanche vs Snowball

If you have significant debt spread across multiple accounts, there are two strategies for paying it down. In both cases, you'll pay the minimum on every account and focus any additional income on one account at a time.

The Snowball Method

In the snowball method, you'll start by paying off the loan with the smallest balance first. Once you've finished paying off that loan, you take the money you were paying toward that loan and put that toward the next-smallest debt.

Pros : Because you'll be able to pay off the smallest debt relatively quickly, you get to experience a "win" early on, making it easier to stick with the plan. Plus, we get a dopamine hit with each debt cleared out!

Cons : This method does not take interest rates into account, so you may end up paying more in interest over all while you're paying down the small-balance accounts.

The Avalanche Method

This method is like the snowball method, but instead of paying down loans in order of their size, you'll focus on the interest rate. You'll start with the loan that has the highest interest rate. Once you've paid off that loan, you take that money and put it toward the debt with the next-highest rate.

Pros : This method will save you the most in interest overall.

Cons : It may take you a long time to knock out the loan with the highest interest rate. Because you may not see as much progress right away, it requires a bit more discipline to stay the course.

Paying Less on Existing Debt

In addition to having a plan for paying down your debt overall, you may also be able to pay less for the debt that you have. Here are a few strategies to consider:

Negotiate with your creditors. If you have a good history of paying your credit cards on time, try calling your card issuers and asking for a lower rate. A LendingTree survey found that more than 80% of card holders who asked for a lower rate got one.

Refinance your mortgage. If you believe you can lower your interest rate by 1% or more and you're planning to stay in your home for at least three years, it may make sense to refinance your mortgage to a lower rate.

Consolidate debt. Debt consolidation can be a way to streamline your debt, but it can come with high fees. Do the math to make sure that the consolidation will result in a lower payment, and have a plan to pay it off as quickly as possible.

Prepay when you can. If your loan does not have any prepayment penalties (check the terms), you can make additional payments or pay extra at any time to lower your balance. Just make sure your lender knows to direct the extra cash toward the principal of the loan.

Take advantage of student loan programs. As discussed in Chapter 1, there are several income-driven repayment programs that may help you both manage your debt now and pay less for it overall.

Considering New Debt

Once you've got a handle on your existing debt, opportunities will probably arise to take on more debt, whether it's opening a new credit card or buying a vacation home. As such opportunities arise, ask yourself these questions:

  • What will be the total cost of this purchase, after factoring in the debt? Is that worth it to me?

  • How will this affect my cash flow now?

  • How will this affect my long-term financial security?

Investing vs Paying Off Debt

Many physicians struggle to decide whether it makes more sense to invest their extra cash or pay off their debt. In most cases, it's not an either-or decision. You can both pay off debt and invest for retirement or other goals. Keep in mind that the same dollar cost averaging and compounding that can hurt you when paying down debt is a tailwind when it comes to investing. Here are some strategies to build a good financial foundation while eyeing investments.

Always get the employer match for retirement savings. If your employer offers a match on the money you invest in a workplace retirement plan, you should put at least enough into the account to get that match. That's essentially free money that's part of your compensation, and it's important to make sure you claim it.

Pay down high-interest debt before boosting investments. If you have credit cards or other loans with interest rates of 5% or more, the sooner you can pay it off the better. It's difficult to beat that guaranteed return with investments. Plus, eliminating that debt can improve your cash flow, making it easier to invest later.

Build an emergency fund. Before you start investing in the markets, you'll want to have at least 3-6 months' worth of expenses in a liquid savings account. That way, if an emergency hits, you'll be able to handle it without dipping into your retirement savings or having to run up your credit card debt again. Look for a high-yield savings account so your money continues to earn; although the national average is a paltry 0.05%, some banks are offering up to 0.6% with no minimum balance.

You don't have to eliminate your debt to invest. If you have the cash flow to comfortably manage low-interest, tax-advantaged debt, such as a mortgage and federal student loans, there's no reason not to get started investing as well. That's because your long-term investment returns may be higher than the interest you're paying on those loans.

Throughout this course, you've learned about the importance of debt as a tool for financial security. By carefully evaluating both your current debt and future loans, you'll be able to make smarter decisions that can put you on a better path for financial success.

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Welcome! This article is part of a Medscape Physician Business Academy course, . Visit the Course Page to take the full course and receive a certificate.


Ned Palmer, MD, MPH; Michael Jerkins, MD; Beth Braverman

| Disclosures | January 01, 2022

Authors and Disclosures


Ned Palmer, MD, MPH

Part-Time Instructor, Department of Pediatrics, Harvard Medical School; Staff Physician, Department of Medical Critical Care, Boston Children's Hospital, Boston, Massachusetts

Disclosure: Ned Palmer, MD, MPH, has disclosed the following relevant financial relationships:
Serve(d) as a director, officer, partner, employee, advisor, consultant, or trustee for: Panacea Financial, LLC

Michael Jerkins, MD

Physician, Department of Internal Medicine and Pediatrics, Baptist Health, Little Rock, Arkansas

Disclosure: Michael Jerkins, MD, MEd, has disclosed the following relevant financial relationships:
Serve(d) as a director, officer, partner, employee, advisor, consultant, or trustee for: Panacea Financial, LLC
Serve(d) as a speaker or a member of a speaker's bureau for: Panacea Financial, LLC
Have a 5% or greater equity interest in: Panacea Financial, LLC

Beth Braverman

Freelance writer, New York, NY

Disclosure: Beth Braverman has disclosed no relevant financial relationships.