I could have dropped the word doctor from the title easily! However, as I meet more doctors…i am noticing more of them. The really successful doctors have nicely outsourced most of the finance related activities and their money is also doing well. Some doctors are doing it themselves..and doing a good job too.

More than 80 percent of success in personal finance is due to optimizing YOUR behavior and only THE BALANCE is due to learning the rules of the game. However, some of the simple rules like not interrupting compounding and such issues still remain.

I can afford to make the payments: 

Many doctors and even other investors struggle with the decision of whether to direct additional income toward investments or debt reduction. This becomes problematic when the debt is at low interest rate, such as some student loans and home loans. Both these loans are tax deductible too. It seems historically obvious that, the investor is likely to outperform the guaranteed return from paying off low-interest-rate debt. However, what often happens is money that would have gone toward the debt is spent rather than invested!! This is often the case when the money goes towards a new car, a bigger house or a vacation, done with a personal loan! After a while, you’re “borrowing at 12 percent” to pay for your vacation, that Europe trip, and the new Corolla in the garage. This “I can make the payments” mentality actually slows the accumulation of wealth. 

Repay Loans or Make Investments?

The best way to fight this tendency of spending is to have a written plan for debt elimination, such as paying off student loans as soon as possible or your mortgage within 10 years. Paying off even low-interest-rate debt early is a good idea, but some people are so foolish in doing this. They repay a loan before they exhaust their 80C limit of Rs. 150,000. Does that make sense? NO. You don’t want to be foolish about it. For example, it would be silly to repay a 7.3% p.a. home loan before exhausting the PPF limit of Rs. 150,000. 8% tax free is better than 7.3% loan, right? When trying to eliminate or reduce debt, the mathematically correct thing to do is to pay the minimum on all the debts in order to avoid penalties, then use any extra cash available to pay down the debt with the highest interest rate. Despite that, many people have suggested, putting the additional income toward the smallest debt regardless of interest rate. What these people have learned, which was confirmed by a study, is that people are more likely to get out of debt faster when they feel they are making progress. 

Make sure that the Investments are Sensible

One area where bad behavior hurts investors is in investment selection. The kick  that some people get from gambling can be re-created by selecting a ‘winning’ stock, an actively managed mutual fund, or even a hedge fund. However, this is not only a losing strategy (since most traders and hedge funds under perform the index over the long run), it is a poor strategy behaviorally. By focusing on choosing investments, the doctor doesn’t focus on what matters most: saving more money, using an appropriately risky asset allocation with good professional advice, minimizing fees, and deferring taxes. Investing primarily in boring old index mutual funds will help the doctor not only mathematically but also behaviorally.

Some doctors keep increasing their standard of living

When some doctors have a higher income, they feel that they should increase the size of their practice, the size of their house, etc. and then find that the income is not increasing at the same rate. Such doctors do not have a good enough corpus – which is necessary for an early retirement or to meet some of their goals. Such doctors are not the ones whose net worth is increasing at a good rate. 

 

 

 

 

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