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Financial Makeover: Could you climb out of this financial hole?


A debt counselor helps a cash-strapped couple break old money habits and start new ones.



Could you climb out of this financial hole?

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Choose article section... When early repayment doesn't pay Replace old habits with new ones

A debt counselor helps a cash-strapped couple break old money habits and start new ones.

By Doreen Mangan

New doctors and their families often find themselves plagued by the double whammy of a big debt load and uneven cash flow. Paul Bartoni and his wife, Lisa (not their real names), provide a perfect example.

Paul's solo internal medicine practice is in its third year, but blocking the Bartonis' path to financial independence is $40,000 in credit card debt, mostly accumulated during the lean years of med school and residency.

At one point, the Bartonis were using a dozen credit cards and owed a total of $70,000 on them, but in the past five years, they've closed all but one account, whittled down the balance, and now pay for everything with cash, checks, or a debit card.

But Paul also has about $38,000 in medical school debt and owes the IRS about $40,000 in back taxes. The couple has set up a repayment plan with the IRS, and the Bartonis also pay $2,725 a month toward debt.

Adding to their woes has been the practice's uneven cash flow, which ranged from $3,500 to $19,000 a month during 2001. In January, for instance, cash inflow was $21,000 and practice expense outflow $17,475, leaving only $3,525 for living costs. In the good months, though, they pay down as much debt as they can—one month they repaid a $4,000 loan from a friend, another $6,000 in credit card debt, and $2,700 on a line of credit.

The Bartonis have no savings for retirement or college for their two children, and no emergency fund. They have two major problems:
• How to manage the feast-or-famine cash flow.
• How to squeeze out savings for college and retirement, while paying off the debt.

Medical Economics presented the Bartonis' problems to financial counselor Carol Park, who specializes in cash flow and also handles budgeting and debt issues. Park is accredited by the Association of Financial Counseling and Planning Education; her company, MoneyLife, is in Cupertino, CA.

When early repayment doesn't pay

"The Bartonis had never prepared a formal spending plan," says Park, who started by analyzing the family's expenses. She asked Lisa to track every dollar for a month. Then she divided the expenses into two categories: monthly costs, which include mortgage ($1,735), a car payment ($300), and groceries ($850); and nonmonthly expenses, including property tax ($1,700 annually), vacations ($3,000), charitable contributions ($2,000), and home maintenance ($1,500).

This family's heftiest cost, after mortgage and debt, is $11,850 a year in private school tuition for their two girls, ages 7 and 10. Otherwise, their needs are simple—no expensive cars, clothes, or hobbies. The family doesn't have extras such as a housekeeper or a landscape service; meals at restaurants are limited to two or three a month.

Park determined that the Bartonis' regular monthly expenses, including debt repayments, amount to $6,800, and periodic expenses average about $1,200 a month—a total of $8,000. "Clearly," Park says, "they were spending very conscientiously, and there wasn't much fat to trim."

The root of the problem was the Bartonis' desire to pay down their debt: They were using all their excess cash to repay amounts owed.

"It's admirable to pay down debt," Park says, "but you can't overlook ongoing cash flow needs and nonmonthly expenses."

Replace old habits with new ones

Here are Park's recommendations for the Bartonis—and other doctors in their position:

• Instead of drawing money from the practice account as needed, transfer $3,400 into a separate checking account on the first and 15th of each month, to cover the $6,800 of predictable monthly expenses. (The dollar amounts are based on the Bartonis' situation; doctors with similar problems can plug in numbers that make sense for them.) Put $1,200 more into a third account monthly, so you'll have money to pay the property tax and other nonmonthly bills when they're due.

Having the funds in separate accounts will help you stay in control and manage expenses consistently. The money you leave in the practice account will build up as a reserve, to even out the dips in the slower months so bills don't go unpaid.

• Transfer credit card balances to lower-rate cards—stick with those on which you pay 8 percent; lose those that charge 22.

• Pay only the minimum due on all debts, except for the highest-rate one—send that creditor the balance of the $2,725 you're currently putting toward debt monthly. Continue this until you're able to make the required quarterly tax payments and you've saved the equivalent of at least three months' living expenses. You may feel as if you're making no progress, but your principal will go down.

• As the practice income increases and evens out, resume paying off debts ahead of schedule. You could retire low-balance debts first; that will provide the psychological benefit of watching your debts disappear. But it's wiser to attack the highest-interest accounts first. Also, start saving for your goals, putting college funds in a separate account.

The author is a former Senior Editor of Medical Economics.


Doreen Mangan. Financial Makeover: Could you climb out of this financial hole?. Medical Economics 2002;4:61.

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