Young Resident with Large Debt and No Assets - Case Study
Aleandro is a proud young man who declined any financial assistance from his parents beyond the small RESP they purchased for him as a child but never fully funded as they were well intentioned, but not financially adept. In his family, it was considered uncouth to speak about money matters and hence he was even a bit embarrassed to admit he was struggling, let alone ask for advice.
Always a fine athlete and an excellent student, he got into Medical School on his first try, but by the first year of residency, his total debt exceeded 350K including credit card and vehicle loan payments. He said that his assets were zero, but this failed to acknowledge that his hard work and achievements had ensured him a safe, secure, and eventually well-paid career once he got through residency.
By the first year of residency, his debt exceeded $350,000
We discussed an approach that made sense to him. He picked a date and wrote down the complete large scary debt figure on one side of a page with zero on the other side representing current assets and booked an appointment to speak with a banker. The banker was more than happy to provide him with a line of credit allowing him to pay off the vehicle loan and credit cards in full with a commitment to never again take on such high interest rate obligations.
Next, he was able to defer some repayments on his very low interest student loans, agree to a payment schedule for interest on his line of credit, and calculate basic food and accommodation cost. This left only a very small amount he thought he could place in a savings account each month, but he made sure it would happen by setting up an automatic withdrawal from his chequing account directly into a saving account which he would not spend. After about ten months, there was enough in the saving account to open a TFSA. He chose a Canadian high dividend fund as US dividends are subject to withholding tax in a TFSA unlike in an RSP. He deferred opening an RSP until he had more income.
The plan underwent some adjustments to meet realities but he was able over the five years of residency to modestly increase monthly savings. He still had a significant debt at the end of residency and his assets were fairly small, but the concept of monthly saving as a first priority was well established. After six years of clinical practice post training, his debts are now retired and he has added an RSP to his growing TFSA. In addition, he has a partner who shares his goal of an uncomplicated life focused on financial independence rather than lavish spending.
KEY CONCEPTS:
Financial problems are best solved when fully acknowledged.
Panic and inaction can be very harmful
Time is an investors best friend; start early and be consistent