Professionals are not immune to debt problems. Education can be very costly, and despite the availability of bursaries and loans, your needs can often exceed your means. Different financing options can be used, but when starting your practice, it’s important to promptly establish a budget and a loan repayment plan to avoid falling into chronic and uncontrollable debt.
To help you better understand debt management, Benoit Chaurette, a tax specialist and financial planner with the Financial, answers some frequently asked questions on the subject.
Q. Why are some professionals occasionally faced with worrisome debt?
B.C. Professionals often earn a substantial income and some feel they can spend as they please. After a few years of living beyond their means, they hit a wall and realize they have to make some adjustments.
Q. What are the signs that debt may be getting out of hand?
B.C. When a professional finds it hard or impossible to save, that’s a sign of an emerging debt problem. And if they have difficulty paying their bills because of excessive debt, they should quickly consult a specialist.
Q. What is the debt management approach used by advisors at the Financial?
B.C. We have a comprehensive approach. Debt repayment must take into account the professional’s financial capacity, retirement savings, and stage of life. For example, a medical resident on parental leave could not be expected to repay their debt at the same pace as an established dentist who is earning a high income and who has few financial constraints.
Q. If you had one piece of advice to give future professionals during their school years, what would it be?
B.C. Don’t live today according to your future income. Many students borrow heavily to live a comfortable life now. Unexpected changes can alter a career plan and complicate the repayment of student debt: illness, career change, complex family situation, etc.
Q. Take the case of a first-year resident. Should they immediately allocate part of their income to repayment of their debt?
B.C. Not necessarily. The most important thing during residency is not to add to one’s debt. Of course, if a resident is able to pay back their debt earlier, they will be in better shape financially when they start their practice.
Q. If a person has access to cash, should they invest it or pay off their debt?
B.C. That’s a difficult question. From a mathematical standpoint, if the expected rate of return on your investments is higher than the interest rate you are paying on your loan, you’re better off investing the money; if it’s lower, you should pay off your debt. Since you can’t know in advance what the return on your investments will be, it’s generally wise to invest and pay off your debt at the same time.
Q. When a professional is able to reduce some of their debt, what should they pay off first: their student loan, their personal line of credit, or their credit card debt?
B.C. Considering the exorbitant interest rates charged by credit card issuers, it’s essential to pay off any unpaid credit card balance as quickly as possible, even if you have to use your credit line to do so. As for government student loans, since the interest paid entitles you to a tax credit, paying off these loans more quickly is not usually a priority.
Q. Is incorporating your practice at the beginning of your career beneficial in terms of debt management?
B.C. Yes and no. There are costs involved in establishing and maintaining a joint-stock company which can make it more difficult to pay off your debt. However, in some cases, incorporation offers tax advantages, like income splitting, which can generate additional funds and facilitate debt repayment.
Q. Are there measures in the 2016 federal and Quebec budgets that could have an impact on the financial situation of professionals and their business?
B.C. A number of tax increases for individuals and companies were announced which will particularly affect high-income professionals. Many will see their disposable income reduced as a result, and their financial management will have to be adjusted accordingly.
Q. Why should a professional entrust the Financial with the management of their finances?
As its name suggests, Professionals’ Financial specializes in wealth management for professionals. Our approach is to offer our clients sound financial advice with a long-term perspective. Our goal is not to sell you a product, but to help you achieve financial success.
If you would like to discuss these issues further, contact one of our Advisors today.