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Category Archives: Cash Flow and Debt

Get the monkey off your back!

Medical School Loan Repayment

The following article is provided by Brandon Barfield, Co-Founder and Regional Director of Doctors Without Quarters, LLC. Student loan related services are provided by Doctors Without Quarters, LLC, an affiliate of Larson Financial Group, LLC.

“Cash flow and debt management are intimately linked facets of a successful financial life for doctors. Debt is incredibly powerful. It can be leveraged to provide opportunities that cash flow would never provide, such as a dream home, and it can also devastate families through the stress it causes when payments cannot be met. As such, debt is a tool that should always be used cautiously.

Physician Mortgage Loans

If not, it can easily and quickly become a monkey that is impossible to get off of your back. It is important to note that while paying off debt quickly is often a positive decision, it should be balanced with achieving your other financial goals. We would be concerned if clients devoted the next ten years of their life to paying off debt at the direct expense of setting aside any savings for the future. Because cash flow is a limited resource, it is imperative that your family makes a strategic decision when determining how much of your income to allocate toward debt reduction versus savings.

Consumer Debt

When we refer to consumer debt, we are referring to loans outside of mortgages and student loans. Of these loans, the most problematic are certainly credit cards. This is the ultimate monkey. We have encountered physicians with as many as twenty-three credit cards. People often assume that they should pay off the cards in order of the highest to lowest interest rates. Instead, we often suggest a different approach. Rather than paying down the cards with the highest interest rates first, we often recommend that our clients focus on the cards that can be paid off the quickest.

Eliminating credit cards in this manner creates what we call the “snowball effect.” You gain more and more momentum along the way, until all of your credit cards have been eliminated. This approach actually decreases the amount of interest being paid in many circumstances, and psychologically it works better because the progress is visible. A final key to success is to begin saving the funds that are no longer required for debt payments once the target debts are fully eliminated.

Often, an even better approach to credit card elimination is a consolidation loan. By reducing the debts from many to one, the debt can often become more manageable. As long as new habits are established in conjunction with this strategy, this may be the most practical route to reducing the stress surrounding debts. The United States is still suffering through the economic after effects of the “great mortgage meltdown.” Banks have tightened up lending and lines of credit, but some great resources are still available for doctors. Just remember, it is more important than ever to maintain a clean credit report.

Student Loans

Most young physicians have substantial student loans. Our record loan to date belonged to one young couple that had over $680,000 in combined student loans. Although these loans can feel like a heavy burden, if your education has led to the opportunity for substantially higher-than average income in a career that you enjoy, it was a great decision.

Medical School Loan Repayment

When we asked one young physician how he felt about his student loans (with only a 1.6% interest rate), he responded, “They scare me to death!” Because the detailed intricacies of exactly how to structure your individual student loans are beyond the scope of this article, we thought it important to point out the basics that every indebted doctor and dentist should know about medical school loan repayment.”

Student Loan Fundamentals:

  • Review how your loan portfolio is structured. If you have FFEL, Perkins, HPSL or LDS loans, consider consolidating these over to the Direct Loan Program. The latest federal repayment and forgiveness programs are only available for direct loans.
  • If you have all direct loans, determine if consolidating is the best move. Consolidating can simplify your portfolio and complement an income-driven repayment or loan forgiveness strategy. On the other hand, not consolidating gives you the ability to target which loans you want to pay off first. Paying off higher rate loans first will cost you less money than paying on everything at once over a period of time.
  • Be sure you understand how the income driven repayment plans (IDR’s) work. These programs provide substantial payment reductions during training, carry various interest subsidies / reductions, have their own loan forgiveness benefits, and qualify as accepted payment towards PSLF.
  • Be sure you understand how the Public Service Loan Forgiveness program works. Many physicians work in the public service sector and do not realize it. Others think they are working their way toward loan forgiveness, but have not properly structured their portfolio.
  • Consider refinancing private loans during training, or all loans post-training. Today’s market rates are significantly lower than the rates most physicians have on their federal loans taken out after 2006. Refinancing can significantly reduce the long-term interest costs.
  • Residents with over $100k in student loans will usually benefit from strategic utilization of IDR plans and PSLF positioning. Residents transitioning to practice, along with other practicing physicians in the for-profit sector, can often save money by refinancing.

Note: This issue is usually no longer a factor upon graduation as your income should be too high to deduct the student loan interest anyway.

Physician Mortgage Loans

“Most physicians have four main questions regarding their mortgages:

  1. How much home can we afford?
  2. How much money should we put down?
  3. How should we structure our mortgage?
  4. Now that we have enough money, should we pay off our home, or keep our money invested instead?

An Affordable Home

To address the first issue, note that outside of divorce and lawsuits, little else can be as financially crippling to a physician as buying a home that is too expensive. Families in Phases I and II should avoid having a mortgage any larger than one to two times their annual income. However, this amount is considerably less than a lender will likely offer you for a mortgage. In other words, a bank’s pre-approval does not always equal a wise financial decision.

Down Payment

With the mortgage market in such flux over the past couple of years, physicians are asking more and more, “How much money should we have for a down payment?” Our short answer is that this is the wrong question. It goes back to the affordability issues described above. Provided your home meets the criteria suggested, it should not matter whether you put 5% or 50% down.

The only caveat is you might receive a lower interest rate by putting more money down. Going this route might make sense at times, but this issue has to be addressed on a case-by-case basis by evaluating these elements: cash flow, emergency reserves, asset protection issues, return on other investments, psychological attitude toward debt, other debts, propensity for risk, and other variables. In other words, an advisor’s advice is well warranted for this issue because it is more complex than simply acquiring a slightly lower mortgage rate.

Paying Off Your Home

At the other end of the spectrum, many of our doctors are in a position where they could liquidate their investments and pay off their homes, if they so desired. They often ask what their best course of action is in this respect. Our answer: It is a function of three elements working closely together:

  1. Client Economics
  2. Psychology
  3. Asset Protection

First, consider the economic component, as this is the easiest part. If you can earn a higher net return on your invested dollars than your mortgage is costing you (on a net-of-tax basis), why pay off the mortgage? This is especially true if you can accomplish this with the market risk involved.

However, in addition to economics, we realize that psychology is always involved with debt. No client has suggested that they love debt, and wish they had as much of it as possible. Even though the economic and protection factors may suggest that maintaining a mortgage makes the most sense, if it will cause you to lose sleep, we suggest you pay it off.

Finally, because people can become so emotionally attached to their homes, asset protection must be considered in the decision-making process. Some states, like Iowa and Florida, provide unlimited asset protection for home equity, which makes it very difficult to lose your home in a lawsuit or bankruptcy in these states.(3) Along similar lines, Texas provides unlimited asset protection, but only if the property is less than one hundred acres.(4) What a great law that only Texas would have. (5) However, other states like Missouri, Indiana, Michigan, Tennessee, Colorado, California, and Ohio provide very little protection of home equity. (5) (6) If you live in such a state, maintaining a mortgage can actually help reduce the risk of losing your property in the event of a lawsuit. Understanding how your state treats home equity, from an asset protection standpoint, is an important variable in choosing the best physician mortgage loans.”

Have Questions?

References:

(1) Bureau, U.S. Census. U.S. Census Web Site. [Online] [Cited: 2011 8-June.] http://www.census.gov.
(2) Kirwan, J.D., LL.M. Adam O. The Asset Protection Guide for Florida Physicians: The Ultimate Guide to Protecting Your Wealth in Difficult Economic Times. Orlando, FL : The Kirwan Law Firm, Updated and Revised for 2010.
(3) 10 acres for urban areas, 100 acres for rural areas.
(4) Adkisson, Jay D. and Riser, Christopher M. Creditor-Debtor State Exemption Chart. Asset Protection Book. [Online] [Cited: 2011 8-June.] http://www.creditorexemption.com.
(5) Riser, Christopher M. and Adkisson, Jay D. Asset Protection: Concepts and Strategies for Protecting Your Wealth. New York, NY : McGraw-Hill, 2004.

Advisory services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, member FINRA/SIPC.

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.

The information provided is for informational purposes only and should not be construed as a recommendation or advice. Further, this is not an offer to buy or sell securities or other products and services of Larson Financial Group or its affiliates Please consult an appropriate investment professional regarding your specific needs.

Tips and Strategies for an Ailing Credit Score

Provided By Jason DiLorenzo, President of Doctors Without Quarters, LLC

Many physicians rely on financing to purchase new equipment and expand their practice. The quality of your credit score can have major implications on several decisions regarding your business and personal financial plan. A good credit score not only makes it easier to secure favorable interest rates on loans, but it helps keep your insurance premiums affordable as well. It also makes renting a car or opening a checking account significantly easier. As your credit score improves, the potential opportunities to save money increase as well.

Typical day-to-day business activities that doctors face are capable of negatively impacting their credit score. For example, when you submit an application requesting credit, your score will be checked by the financial institution that would act as the lender. These hard inquiries (requested by someone other than yourself) can deduct from your credit score, some by as many as 10 or 15 points. Multiple applications in a short period of time can dramatically drop your score as well. If you’ve had an application turned down, it’s important that you raise your score and check with management about specific requirements and criteria before re-applying.

Medical School Loan Repayment

The good news is if your credit score is less than ideal, it’s possible to improve this relatively quickly. By wielding credit in a responsible manner, you can start to see improvements to your credit score within 30 to 60 days. Developing certain personal finance habits can really pay off by boosting your credit score which in turn lowers the cost of borrowing.

Getting the Complete Picture

Your credit score is a measure of your creditworthiness that lenders use to judge whether you’ll be able to pay back debts. First and foremost, you’ll want to obtain a recent copy of your credit report so you can gain a complete picture of your credit history and standing. The three major credit bureaus (Equifax, Experian and TransUnion) are required to provide you with one free copy per year, so it’s entirely possible to receive a complimentary copy every four months so that you can check up on your credit throughout the year. You can request a copy of your credit report from annualcreditreport.com

A 2013 Federal Trade Commission study found that one in four consumers had errors on their credit reports that could affect their credit score. Mistakes happen, so if you see any errors when reviewing your credit report, dispute them immediately. Check for correct information regarding your identity such as the spelling of your name and your current address. Also, make sure that your proper credit limits are listed and that there are no fraudulent accounts that you do not recognize.

If you spot a mistake like a paid-off medical school debt appearing as unpaid, contact the lender or creditor that reported the inaccurate information and ask them to update your account. The three major credit bureaus all have forms on their websites for submitting disputes as well. If neither of these options resolves the dispute, you can contact the Consumer Finance Protection Bureau (CFPB) and ask them to intervene on your behalf. A proactive approach to fixing errors on your report can give your credit score an immediate boost.

Factors to Be Aware Of

It’s nearly impossible to over-emphasize the importance of paying your bills on time. Your payment history, including the ones you pay late or skip altogether, is the single largest factor that influences your credit score. This component accounts for 35% of your FICO score. Accounts 90 days past due have a more negative impact on your credit score, so if you have multiple outstanding bills, prioritize them by paying off the most past-due accounts first and then gradually catch up on the rest. Using automated payments where possible can also help clean up your payment history.

The second most important factor to consider is your credit utilization ratio. This is the percent of available credit you’re using and accounts for 30% of your FICO score. The lower your utilization rate, the better your credit score will be. To calculate your rate, just divide your total credit balances by your total credit limits. Consumers with a credit utilization ratio of 10% or less will generally have a higher credit score than consumers with a rate over 20%. According to FICO, consumers with the best credit scores use just 7% of their revolving credit lines.

One simple way to lower your utilization rate is to request higher credit limits from your card issuers. Sometimes this happens automatically, but you can also make the request online or by phone. It never hurts to ask, right? You can even transfer a portion of one card’s spending limit to another card, provided that both cards are under the same issuer. However, this method is only effective if you don’t increase your spending habits in accordance with your credit limit.

Other Helpful Tips

Although it can be tempting to trim down a cluttered wallet, you should refrain from closing old cards when possible. This will cause your available credit to drop, which can set off a red flag with the bureaus. Approximately 15% of your credit score is determined by the length of your credit history. Closed accounts in good standing will remain on your report for about 10 years, but once removed will lower the average age of all your accounts and your score as well. One easy way to keep a card active is to use it for a recurring charge such as a utility bill.

Keeping your medical school loan repayment on schedule can give your score a boost and demonstrate to future lenders that you can be trusted to handle money responsibly. Having a variety of different kinds of credit can be helpful as well. For example, you could buy an appliance for your break room or piece of furniture for the waiting room and pay it off with an installment plan. The important thing is to avoid any derogatory marks that could substantially hurt your score. Bankruptcy, foreclosure, accounts in collections, tax liens and other civil judgments could all have lasting consequences for your credit.

If you have a rating below 700, many of the aforementioned tips can be helpful in getting you back in good standing with creditors. You don’t need a perfect score of 850 to enjoy the best rates as a consumer. In fact, the Fair Isaac Corporation that calculates FICO scores estimates that only 0.5% of consumers achieve a score of 850. A score in the 720 range is usually sufficient for securing reasonable interest rates on loans. These strategies won’t instantly cure what ails your credit history, but if adopted by lenders they can certainly be effective in getting your report back on the right track.

Have Questions?

Not all Related Services are offered directly from Larson Financial Group or Larson Financial Securities but may be available through the Doctors Only network of companies. Also this: The information provided is for informational purposes only and should not be construed as a recommendation or advice.”

The information provided is for informational purposes only and should not be construed as a recommendation or advice.

Applying the Time Value of Money Principle

Imagine a friend owes you $1,000. If you had the choice, would you rather have this money repaid to you right away in one payment or spread out over a year in four installment payments? The vast majority would prefer the former, and rightly so. This goes far beyond the instant gratification of receiving the money sooner rather than later. The simple truth is that money has greater earning capacity now than in the future, and $1,000 today is more valuable than $1,000 a year from now.

This concept is called time value of money, and is a fundamental principle in business and finance. This philosophy that states the earlier you receive money, the more earning potential it has. You can invest a dollar today with the potential to earn a return on that investment in the form of interest or dividend payments. Compound interest is always assumed in time value of money applications.

Physician Mortgage Loans

Compound interest measures the impact of the time value of money over multiple periods into the future, where the interest is added to the original amount. Therefore, you are not only earning interest on the principal amount invested, but you’re also earning interest on the interest. For example, if you invest $1,000 at 10% for 20 years, its value after 20 years will be $6,727, assuming you don’t withdraw the interest amount earned each year with the investment.

The opposite of compounding is discounting, meaning that it is essentially the inverse of growth. This determines the present value of money to be received in the future (as a lump sum and/or as periodic payments). The present value is determined by applying a discount rate to the sums of money to be received in the future. This methodology can be used to analyze any investment that has an annual cash payment and a terminal or salvage value at the end of the time period.

CEOs, investors and entrepreneurs use this theory frequently when dealing with loans, valuing companies and budgeting capital. However, there are several ways this concept can be applicable to the life of a physician as well, such as comparing investment alternatives and making decisions regarding your physician mortgage loans and medical school loan repayment.

Practical Applications

Let’s use purchasing a home as an example. One of the first decisions in this process is determining how large of a down payment to make and how much will be financed. Since there are several factors at play, there’s no one-size-fits-all answer.

In some cases, you can obtain a more favorable interest rate by putting more money down. However, you need to assess the economic component of this decision. Is the potential savings from a favorable interest rate more than the potential earnings if invested? Would you have adequate money for emergency expenses? Once this cash goes into a down payment, that money would have to be “loaned against” for future use.

This concept can also be useful to those who already have physician mortgage loans. You might find yourself in a position where you can liquidate your investments and pay off your home. But, is that the smart thing to do? Economic and asset protection factors may suggest that maintaining a mortgage makes the most sense, but the emotional toll of debt needs to also be assessed. Debt impacts us on a psychological level, and if you’ll sleep better at night with a house that is paid off in full, then that may be the approach that makes the most sense for your individual situation.

Time value of money could also influence your strategy for medical school loan repayment. It may be tempting to pay off these loans in full, however, if the interest rates on your student loans are favorable it may not be a priority. You could save this money for investment opportunities or pay off other debts with higher interest rates.

Time is Money

Since money has time value, the present value of a promised future amount is worth less the longer you have to wait to receive it. Real estate investors frequently calculate present value to estimate their profits on a deal. Future value is the amount that is obtained by forecasting the value of a present payment or a series of payments at the given rate of interest. We naturally expect the future value to be greater than the present value due to the time value of money. The difference between the two depends on the number of compounding periods involved and the interest rate. Suppose you invest $1,000 in a savings account that pays 10% interest per year. The future value of that investment would be $1,100 one year after the money was deposited.

The value of the money you have now is not the same as it will be in the future. There are several reasons why this is commonly accepted besides the accrual of interest or dividends. Inflation, for one, exacerbates this trend by decreasing the purchasing value of an amount of money. Receiving the money immediately also reduces the risk of default. As you can see, “time is money” is true in the literal sense.

Have Questions?

This article if for informational purposes only and should not be construed as tax advice. Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.

Larson Financial Group, Larson Financial Securities, and their representatives do not provide legal or tax advice. Please consult the appropriate professional regarding your legal or tax planning needs.