Assessing Your Debt Problem
It’s amazing how frequently I cross paths with doctors who have never taken the time to actually assess where they stand financially. They tend to fall in a few categories; they never thought of it, they don’t want to know, or they feel they just don‘t have the time.
When I work one-on-one with doctors on a financial makeover to get them on track to accomplish their goals, get out of debt, and begin saving for retirement, the first step we go through is to assess their starting point. Establish their net worth. Often this is a very eye opening process for the doctors. This is frequently the first time they have ever added up all their debt, and it is usually a lot more than they thought. I’ve heard many variations of the same theme; “I had no idea I owed that much money,” “I didn’t realize I had a negative net worth,” “I knew it was a lot but I never dreamed it was that much,” “I didn’t know I was paying that much interest.”
Often this is a very motivating and freeing exercise. Getting a firm grasp on their situation gives them a starting point for their journey to financial independence. Occasionally someone discovers they are not as bad off as they thought. Most often they feel a new sense of power once they know exactly where they stand.
If you were running a marathon, you must know where the starting line is and where the finish line is before you can plot a course. For most new doctors, especially right after training, their net worth is negative. Often extremely negative as their debts far exceed their assets. Don’t despair if that is the case—you are not alone. Whatever your net worth is, use it as the starting point for tracking your progress.
If you have never done this yourself, do it now. Total up all your assets. Only count real financial assets. Those new golf clubs are quite an asset on the course, and the carbon frame bicycle is an asset to your fitness, but neither is much help in your financial portfolio. Only count cash in the bank, stocks, bonds, mutual funds, investment real estate, retirement plans, health savings accounts, investment art, cash value of insurance, and any other financial assets that are easily convertible to cash, as well as your house value and automobile values. That takes care of the plus side of your net worth calculation.
Next, you need the other side of the equation: a list of all your liabilities or debts. Don’t get a piece of scratch paper and list a best guess. That’s not how you would attack a cancer patient, so don’t do it to yourself. You would be able to tell your patient the tissue type, exact size of the tumor, whether or not the lymph nodes are involved, and the pathological characteristics of the tumor. Use this same attention to detail when totaling your outstanding debts. You need the exact remaining balance, interest rate, monthly payment, and the expected payoff date.
Now take the total of all the assets and subtract the total outstanding debts to get your net worth.
Total Assets – Total Debts = Net Worth
Are the results surprising? Better or worse than expected? Do you have any assets you don’t need, that could be sold to improve your position immediately? I know one person who had a stack of gold bars in his safe. There was enough gold to pay off several of his outstanding debts. When he looked at his assets and liabilities on paper, selling the gold to pay off some debt made sense.
Most doctors go through a predictable financial path over the course of their careers. During the learning years, they are borrowing money with almost no assets and begin their careers deep in the red—a negative net worth. Then they graduate and hopefully begin to reverse this process as they start the earning years: paying debts and accumulating assets. Some, though, will continue to go backwards. I was one of those. I got out of my training with only about $12,000 of debt. Three years later I was more than half a million in debt. My journey is spelled out in the first chapter of my book “The Doctors Guide to Eliminating Debt.” You can read how I got into and then out of the debt. Most doctors will eventually cross over into the black: a positive net worth. Many years later, they have accumulated enough to retire and live happily ever after while spending their saved money: the burning years.
Every doctor is at a different stage along this continuum. It really doesn’t matter where you start, as long as you accurately establish the starting point and begin moving in the right direction, towards your goals. Once you are moving, keep track of how your net worth progresses on a quarterly basis. You should see a larger net worth every quarter, or be able to explain what happened to decrease your net worth. The progress will be visible.
If you don’t measure it, you can’t manage it. Measure your progress and you will get excited by seeing the debt melt away. Take an active role in your financial future. If you feel you need help with the process, or just don’t have the time to figure it all out, get in touch with me and we can work together to get you on the right track financially. There is no reason to struggle with this issue.