According to a recent study1, personal finances are the greatest source of stress for 22% of Canadians. However, the odds of successfully managing debt, and your stress are better when you create a clear plan of action to pay it down. It also helps when you reframe how you perceive debt.
Some people want to pay off debt as soon as possible but are conflicted by the fact that investing for the future is also important. Which takes priority? Dentists don’t usually have pension plans or other employee savings plans unless they start one themselves. Therefore, the responsibility falls on you personally—you’ll need to save for your post-practice life on your own and the sooner you start, the more you can save and earn on your investments—the benefits of compounding growth shouldn’t be ignored!
If you're planning to buy a home or practice in the next few years paying down your debt will help free up your cash flow to carry a mortgage, start a family or buy a practice. However, you cannot put your life on hold for 10, 15 or 20 years while paying off your education.
It’s important to understand how interest rates can impact the overall cost of borrowing and should be taken into consideration when prioritizing a payment plan. Lending rates vary, so you need to be strategic about which debt you pay off first and which you can leave until later.
A student loan might have an interest rate of prime minus a quarter and new debt might have higher rates. Debt to buy a practice might have interest that is tax deductible. It is recommended to consult a professional to assess your financial situation and your long-term plans.
Types of Debt
Many people mistakenly think all debt is bad, but there are certain types of debt that can be advantageous when it comes to your credit. Debt that you're able to repay responsibly and has a financial reward can be considered "good debt," and a favorable repayment history may be reflected in higher credit scores. Examples of good debt may include:
Student loans.
Taking on student loans or a line of credit to pay for your education and training is an investment in your higher lifetime earnings.
Effective April 1, 2023, the government of Canada has permanently eliminated the accumulation of interest on all Canada Student Loans. If you have a Canada Student Loan you will be responsible to pay any interest that may have accrued on your loan before April 1, 2023.*
Your mortgage.
You borrow money to pay for a home or a practice in the hope that by the time your mortgage is paid off, both will have increased in value and when retirement rolls around you will be debt free. Home equity loans and lines of credit—may also be considered a form of good debt and the interest payments on these are tax-deductible in certain situations.
It’s no surprise that credit card debt is considered "bad" debt because of its high interest rates and low minimum payments, and the fact that it is not typically used to buy appreciating assets. Use your credit cards for the rewards and other benefits available—but pay the balance in full each month.
Your Credit Score
One of the biggest benefits of taking on debt is that it can help build your credit score. Your credit score is a measure of your creditworthiness, and it’s a key factor that financial institutions consider when deciding to lend you money. By taking on debt and making regular payments on time, you can demonstrate to lenders that you are a responsible borrower, which can improve your credit score. Then, when it’s time to buy a practice or a home, you qualify for the loan and get preferred interest rates.
Debt Stress
For some, debt is an emotional issue versus a financial tactic. However, it’s no secret that everyone is feeling a higher level of financial and personal stress because of rising inflation and affordability challenges. Often, simply talking to someone and coming up with a plan to deal with it can be a real source of stress relief.
Talk to Someone You Trust
Should you use your money to invest, to pay down debt — or both? Your answer depends on individual factors, such as your goals, your debts, and your approach to money. Over time, as your needs, priorities, and life change—your strategy can adapt with you.
Talking to someone you trust can help you develop a plan to move forward without being bogged down with worry. The Investment Planning Advisors at CDSPI Advisory Services Inc. have collaborated with dentists like you for over 60 years and they understand the challenges and the stresses you’re experiencing.
By managing your debt in a responsible manner, you can reap the benefits of debt without the negative effects of stress and anxiety.
If you have any questions about managing your debt, setting up a Financial Plan or investment strategy contact CDSPI at investment@cdspi.com or 1.800.561.9401 or book a meeting online.
1 Source: Leger/The Canadian Press survey September 9-11, 2022.
*This program only includes the federal Canadian student loans. Provincial loans are not part of this program and remain subject to interest charges.
The information contained in this article is of a general nature only and should not be considered as personal investment or financial advice. For specific advice about your situation, please consult with your financial advisor.