Debt is often associated with the poor when, in reality, it can affect anyone-even those who make six figures if they don't handle their finances properly.
Debt is often associated with the poor when, in reality, it can affect anyone—even those who make six figures if they don’t handle their finances properly.
There are many ways to rack up huge amounts of debt, but these are likely the most common. Too much debt can prevent even a high-income earner from building wealth and saving enough for a comfortable retirement. And if you’re not careful and don’t nip it in the bud immediately, the debt can become unmanageable to the point that you spend the rest of your life paying other people.
Unfortunately, American schools just don’t teach kids and young adults about personal finances, and by the time they make it out into the real world with a salary it might be too late. Some of it falls on parents to set good examples, but a lot of it can only rely on each individual to learn, sometimes through painful trial and error.
Do any of these look familiar?
5. Spending more than they make
One way in which the rich and the poor are very similar is that they all spend more than they make. How many times have we heard about former athletes bankrupt and actors whose homes are in foreclosure and lottery winners who spent everything? The truth is, we have a tendency to spend up to and over what we make. The more we make, the more we spend.
When you’re rich, you think that you can afford all the things you want: fly first class, eat at five-star restaurants and buy that $2.5 million mansion with the pool. Slate reported that research from 2001 revealed that the US households with more than $5.9 million in net worth actually owed $346 billion. Most of it was tied up in house mortgages. It isn’t uncommon for the rich to buy a vacation home or two on top of their regular home—they can afford it after all, right?
4. Not keeping track of expenses
The small purchases are the ones that really creep up if you’re not careful. Anyone might think really hard about dropping $4,000 for a new couch before making that purchase, but buying lunch every day, the next round at Happy Hour, every piece of clothing that catches your eye, little presents for the spouse and kids, and lending money to every who asks can all add up over the course of a month.
Everyone, no matter how much they make, should be tracking their expenses. You might find out that you’re spending a lot more than you realize. And once you cut out some of those unnecessary little costs, you’ll see you can sock away a lot more for retirement each month, maxing out multiple retirement accounts. And for physicians who have become accustomed to a certain lifestyle, they’ll want to max out all the retirement savings accounts they can so they can continue living the life they want.
Want to see just how much you’re spending, try out one of these free budgeting and expense apps (paying for an app will only continue the bad behavior of unthinkingly spending small amounts of money).
3. No budget for emergencies
Whether the house is flooded, a tree fell on the car, someone landed in the hospital for an extended stay or your spouse was laid off, a sudden disaster can wreak havoc on even the best-planned budget—and can devastate people who are unprepared.
Financial advisors always recommend that people create emergency funds or rainy day funds that can cover these unplanned catastrophes. The fund should be able to cover at least six months worth of everyday expenses: mortgage or rent, tuition, credit cards, gas and electric, etc. The finally tally for these expenses over the course of six months is likely larger than you realize.
Physicians probably have a rainy day fund in place—a Bankrate.com survey found that only 9% of those earning more than $75,000 have no emergency fund. However, that doesn’t mean those with a fund in place have enough money. Most people have enough money to cover five months or less and only 21% of Americans have enough to cover at least the recommended six months.
2. Credit cards
Physicians probably find it incredibly easy to get a credit card. The vast majority makes good money and likely has good credit. The problem is, credit cards make it incredibly easy to buy things we don’t need. Even physicians making more than $200,000 a year can find themselves in credit card debt if everything that catches their eye gets put on the card. Especially if the card has a high interest rate and they aren’t paying off the balance at the end of each month.
Credit card debt can also tie into the desire to live a luxurious lifestyle. When the long, stressful hours that physicians work and how much money they make, it seems like they should be able to indulge. However, flashy cars and watches, high-end fashion, the newest technology and expensive vacations all add up, even for someone who makes a lot of money.
See how one woman found herself $14,000 in credit card debt despite the fact that she made $100,000 a year.
1. Student loans
Whether they’re your own from medical school, or you’ve taken on your children’s loans, student loans is a huge debt burden. Medical graduates often have upwards of $160,000 at the start of their career before they’ve even earned any money—and it takes years and years to pay it all off.
Unfortunately, completely avoiding student loans is probably not possible, not if you need to get through four years of medical school after completing your undergraduate degree. Thankfully, there are ways to lower the bill after the fact, or at least help out your children so either they aren’t stuck with the same debt load or you aren’t stuck helping pay off more loans.
Physicians with federal loans after Oct. 1 2007 can be eligible for the Pay as You Earn Program, where your monthly payments are based off of your family size, poverty line per family size and income. Basically, you are required to pay $41.67 per month for every $5,000 of annual income you earn over your respective poverty line, according to financial advisor Jon Ylinen with North Star Resource Group.
Also, those who are/have done their training and still work at a non-profit, 501(C)(3) or government agencies may be eligible to have their loans forgiven after 10 years if they pay all 120 payments on time. At the very least, physicians might want to look into consolidating their student loans into a lower interest rate.
If your own student loans are already paid off and thinking about your child’s future loan burden leaves you sleepless at night, then consider saving up in a 529 plan. Investors can contribute up to $14,000 a year in after-tax money and the money grows and is withdrawn tax free (as long as it is spent on approved educational expenses. Every state has a 529 plan, but the best in the country is the Utah Educational Savings Plan and you don’t have to live in Utah to invest in it.