Random question: Did you know how much debt you were going to be in when you were applying to veterinary schools?
You probably didn’t learn the steps to becoming a rich veterinarian, but you probably thought you’d have enough to live on. After all, everyone else was graduating and dealing with their loans somehow.
Most of my 100+ veterinarian clients have said that they really didn’t understand how fast their loans would grow both during and after school. Many contact me five years post-graduation and wonder how their loan statements have a $300,000+ balance on them when they only borrowed $200,000.
Others have said student loans were more theoretical until they graduated. Then their loan servicer sent them a piece of mail that said their deferment ended in November, with the first payment was due a month after. That’s when loans got real.
This might sound crazy, but no matter how high your debt, it’s possible to follow the steps to becoming a rich veterinarian within a couple decades. That’s true even if you owe the $100,000 to $500,000 that many borrow to finance their DVM education.
Step 1: Watch Out For Fancy Cars and Big Houses
Whenever I see a budget from a veterinarian, I can look at what they spend on their car and house and have an instant idea of how healthy their finances are.
Here’s a dirty secret in personal finance: you can buy as many lattes as you want from Starbucks. What will make you or break you is how much you spend on the big-ticket items in your life.
Don’t believe me? Compare driving a brand new 2018 Subaru vs a 2004 Honda Civic. Let’s say the new Subaru costs about $600 a month to drive with a car payment, insurance, gas, regular maintenance, etc. We’ll say the old Civic costs $200 (I’m including a higher budget for repairs than with the Subaru).
How much is a Starbucks latte? Maybe like five bucks. With a difference of $400 between the new car and old car, if you drove the old Honda you’d have to sip 80 lattes a month just to be even. Your bladder would give out before that.
With housing, you want to try to keep your purchase price at no more than 2 times your household income. If you want to be super conservative, then go for something between 1 and 1.5 times your household income.
A bank will approve you for up to 3.5 times income. Asking a financial institution how much house you can afford is like asking a kid how many cookies they want to eat. The answer is always MORE. The bank makes more money the more house you buy, so naturally, they’re going to be inclined to suggest something on the higher end of the range.
I’ve never seen a case out of the 100+ veterinarians I’ve consulted with where something besides housing or cars were torpedoing their budget. Be careful with these 2 categories and you’ll have an abundance of resources to use on other things that could make you wealthy.
Step 2: Credit Card Balances Are Dangerous. Protect Yourself Against Them
Another temptation for veterinarians is to let credit card companies ease the financial burden of living on a lower income, especially during the beginning of your career as an intern or resident. I often see new veterinarians burdened by credit card debt they picked up during school too.
If you have credit card debt, it’s an emergency. You want to do 2 things. The first is pay it off as aggressively as possible. The second is save up at least $10,000 in the bank to use for future emergencies so you never have to fall victim to plastic money ever again.
Why is credit card debt so bad? Besides the obscenely high interest rates, you could easily damage your credit score. Even if you’re carrying a 0 APR balance, what if you hurt your score by enough that your mortgage rate is higher than it would’ve been otherwise? Then you’ve cost yourself 30 years-worth of extra finance charges.
Credit card debt is an indication that extreme sacrifices need to be made over a short period of time. That usually means dumping an expensive car, taking on a roommate, limiting dining out, or going on a shopping fast.
The sacrifice needs to last as long as it takes to get a secure pile of cash. Once you have this, you’ll not only be insulated from personal emergencies. You’ll also have leverage in being able to take new jobs and negotiate higher salaries.
Step 3: Decide If You’re Paying Your Loans Crazy Fast or Strategically Slow
Our reason for existence around here is helping veterinarians figure out exactly how to repay their student loans.
We tell folks there are 2 ways to pay student debt. You can pay as fast as you can with a goal of getting rid of it in less than 10 years, or you can stretch it out as long as possible with a strategically passive repayment.
The right approach depends on your personal preferences, math, your family status, spousal income and more.
Here’s a simple rule to use. If you owe less than 1.5 times your household income (or will soon) and work in a private practice, then go ahead and pay down your debt. Refinance with one of the cash back bonus links at this page and you’ll get something in the 2.5% to 5% range where more of your money will go to principal instead of interest.
The other route is using Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE).
Notice I didn’t say Income-Based Repayment (IBR), Extended, Graduated, or Standard. That’s because they’re awful plans yet I constantly see veterinarians using them. If that’s you, please contact us as I’m almost sure we could save you money. I’ve seen dozens of vets throwing away thousands of dollars with extremely inefficient student loan repayment. Don’t be one of them.
With PAYE, you pay back loans over 20 years and the remaining balance gets forgiven. The catch is that you owe tax on the forgiven amount as if it was income. REPAYE is very similar, except the repayment period is 25 years instead of 20. Also, REPAYE covers a portion of the interest every year if you’re eligible.
With these programs, the total cost over a couple decades or more could be less than the total cost over a shorter 10-year period. That makes income-driven options superior to alternatives when you owe a whole lot relative to income.
Look at the cost to a vet with a $300,000 loan balance at 7%. She earns $70,000 adjusted for inflation.
Notice that the total cost even after summing the payments and the taxes is less than the repayment on the 10 Year Standard Plan. Even if those numbers were the same, you’d much rather pay over 20 years than 10 years because of inflation.
Of course, if you have a “good debt to income ratio,” then you won’t receive forgiveness and refinancing is best.
It’s really important to get the student loan part of the equation right. If you’re not the kind of person that would use our student loan calculator to figure out the math for yourself, we can do it for you.
Step 4: You and Your 401k / IRA Should Be Best Friends
Many veterinarians do not have access to a 401k at work. Mom and pop type practices typically don’t offer them. If you do have access to a 401k, consider yourself lucky.
While most people just put in around 4% of their paycheck, I’d challenge you to consider putting away the maximum allowed by law. That is currently $18,500 for 2018.
It’s easier than you think because you can deduct the contributions on your taxes. Saving that much might only cost you $10,000 to $13,000 in take-home pay.
What’s the difference between saving the max and putting in whatever your employer will match?
Consider this illustration. We’re assuming you put in about $3,000 per year versus $18,500 a year with a 5% rate of return over a 30-year period.
|30 Year Period w 5% Returns||Ending Retirement Savings|
|Small ~4% contribution||$212,282|
|Max 401k contribution||$1,309,075|
If you earned higher returns than 5%, this difference would be even more pronounced. I just wanted to show you how much money you could have at even a modest rate of return.
What if you don’t have access to a 401k at work? You would then be able to contribute to a Traditional IRA and deduct the contribution. The only downside is that the limit on IRA contributions is low at $5,500.
You must up an IRA on your own at a place like Vanguard. The 401k you just use whatever your employer offers. For those of you without 401k plans, first, encourage your employer to offer one. Second, be ready to save in regular investment accounts that aren’t specifically earmarked for retirement.
Any investment company like Schwab, Vanguard, Fidelity, etc. will be able to explain this to you if you call their number you’ll find online.
Step 5: Consider Being Your Own Boss by Running Your Own Practice
What if you had over $1 million in retirement savings AND a business that you owned outright near the end of your career?
Long -term, you have two choices as a veterinarian. You can work for somebody else or you can work for yourself. Option 2 can be scary because you will likely have to take out a practice loan from a bank and run a small business.
You’ll have to do the hiring and firing, make sure you’re earning enough revenue to pay your business loan and will have business decisions on top of existing clinical decisions.
That said, veterinary medicine is a relatively stable industry. As long as you don’t lose your ability to practice, you are more likely than not to be very successful. Business loans don’t last forever. Eventually, you will pay off what you owe and own an asset that could be worth hundreds of thousands of dollars.
When you become your own boss instead of work for a company like VCA or Banfield, you have control. For some, the added stress isn’t worth it because not everyone has a business mindset or personality. I totally get it when some clients tell me they just want to help their patients, turn the lights off, and go home.
However, I believe far more veterinarians are capable of being owners than they realize. Aside from the financial benefits, you could create your own lifestyle. Few things are as fun as being your own boss. The extra wealth you’d create is just icing on the cake.
Step 6: Don’t Give Your Savings Away for Free, Invest Them
I’ve found that a lot of DVMs haven’t heard about a brokerage account. They don’t teach you many financial concepts in vet school, so I get it.
A lot of frugal people are savers, but they could be investors. If you put $100,000 in a savings account, you might earn 1% interest. After taxes, that’ll be more like 0.75%. In 10 years, that $100,000 might be worth about $107,700.
What if you could earn 7% instead? That’s below the long-term return of stock index mutual funds. Also, remember that stock earnings are taxed at a lower rate than your savings account.
|Year||Wealth in the Bank at 0.75%||Wealth in Stock Mutual Fund at 7%|
After 10 years, the person who earned a higher return and invested instead of saved has twice as much money.
Of course, investments are subject to loss, but that’s mostly over the short term. Over 10 years or more, you’re almost certainly going to have more money from investing that saving it in the bank.
If you’re interested in learning more about these concepts, check out my book.
What Does the Rich Veterinarian Look Like?
If you follow the steps to becoming a rich veterinarian in this article, you’ll have the option to live whatever life you desire by your late 40s (including retiring early if you so desire).
If you decided to work until your mid-50s, here’s what your life could look like. You’d have around $1.5 million in your retirement plan. On top of that, you’d have about $500,000 of equity from owning your business. Your modest house wouldn’t really be a huge asset, but let’s say you paid it off with a 15-year mortgage and thus you have $200,000 in worth from that.
On top of these sources of wealth, you also put away about $500 a month in a brokerage account and invested it since you didn’t need the money with your plentiful emergency savings. You hold about $500,000 in this account.
In total, your net worth would be about $2.7 million. If you met with a financial planner, she would tell you that you could live on $108,000 a year for the rest of your life. If your expenses are less than that, you could afford retirement.
Not everyone will want to incorporate all these tips into their lives, and that’s okay. Take what you like and leave the rest. If you use some of it, I bet you’ll be in the top 10% most financially secure veterinarians in the country.
If you have a bunch of student debt and just want help figuring out how to take action on these steps, contact us and we can get you set up with an appointment with one of our student loan planners.