Financial Adjustments

Paul Philip, CFP, CLU, Nancy Philip, CFP, CLU
June 30, 2009
Written by Paul Philip, CFP, CLU, Nancy Philip, CFP, CLU
Most of us will spend a significant portion of our working lives with some kind of debt, such as chiropractic student loans, mortgages, car loans and credit card debt.

Often, debt repayment represents one of our largest ongoing expenses. The good news today is that interest rates have never been lower. (As of June 2009, the current prime interest rate is 2.25 per cent). How well we manage our debt during our working years will play a large role in determining whether we’ll be financially prepared when we enter our retirement years. Below are some tips to help you manage your debt more effectively.

Create a Household Spending Budget
The best way to manage debt is to carefully control how much debt you take on in the first place. Create a budget specific to your household income and spending needs. Then, closely track your monthly spending, for at least the first few months, until staying within your budget has become a habit. Sticking to your budget will help to ensure that you don’t incur more debt than you can manage. Certain wealth management firms may have cash flow analysis forms that you can download to help you get started. 

Consolidate at the Lowest Rate
If you have two or more loans, you’re likely paying different interest rates on each of them. One of the easiest ways to reduce your interest costs is to consolidate your debt at the lowest rate. Typically, your lowest-rate debt will be a loan that is secured by an asset, such as your home.

If you have sufficient equity built up in your home, consider a mortgage that allows you to access your home equity, such as a home equity line of credit. You can use this line of credit to repay your higher-interest loans. In this way, you’ll be bringing all your debts together into one account at a single, lower rate. Not only will this save you interest, but it will make it easier for you to keep track of what you owe and your progress in paying it down.

Pay off Credit Cards in Full Each Month
When used responsibly, credit cards can make shopping easier, allow you to collect reward points and provide protection on your purchases. However, given that many credit cards charge interest rates in the 15 to 20 per cent range, you should always repay your balance in full each month before interest charges accrue.

Get All Your Money Working for You
It’s always a good idea to set some money aside for a rainy day. But, in most cases, your rainy day savings earn less interest than you’re paying on your debt. Even worse, you pay taxes on the money you earn in a savings account, but use after-tax dollars to pay the interest on your debt.

If your consolidated loan allows you to borrow money again when you need it, use your rainy day savings to pay down that loan. This will reduce your interest costs, and you’ll still be able to access that money if you need to cover an unexpected expense.

Maximize Your Flexibility
Traditional loans have a fixed repayment schedule with little flexibility. However, for most chiropractors, financial needs are not quite so predictable, and having all your debt locked into a fixed payment product may be overly restrictive.

Consider a floating-rate loan product that allows you to accelerate your debt repayment when you have extra money and re-borrow if your financial circumstances temporarily take a turn for the worse. For example, a borrowing facility like this can work well should you become disabled and have to wait 90 days for your disability insurance to start.

If you’re not comfortable having all your debt dependent on a floating rate, some products even allow you to split your debt into fixed-rate and variable-rate portions.

Maximizing flexibility in your debts could allow you to be debt-free sooner and make it easier to adapt to any financial rough patches you encounter.

Understand the Difference between Good Debt and Bad Debt
Not all debt is created equal. “Bad debt” is often defined as debt used to purchase assets that will decline in value, such as a car or that new plasma TV. “Good debt” is debt that is used to purchase assets expected to appreciate in value, such as your home or investments. In fact, if you borrow money for the purpose of purchasing investments, you may be able to deduct the interest payments from your income on your tax return. (Tax deductibility is dependent on a number of factors. Always consult your tax and legal advisor).

When creating a debt repayment strategy, tackle the bad debt first. And, depending on your financial situation and risk tolerance, you may even choose to take on some additional “good debt” as part of your broader financial plan. (Borrowing to invest may not be appropriate for everyone. You should be fully aware of the risks and benefits associated with leveraged borrowing).

Create a Plan for Debt Elimination
By allocating some extra money to debt repayment each month, you will not only get out of debt more quickly, but you could save a lot of money in interest payments as well. Build an extra debt repayment into your budget each month, beyond the minimum that is required. Or better still; look for a lending product that allows you to have your income automatically deposited into the account. In this way, your excess cash automatically reduces your debt.

By including a specific debt repayment figure in your budget, you’ll be regularly reminded of this goal – and you may be less tempted to spend the extra money each month.

Prepare for the Unexpected

An important aspect of debt management is ensuring that you won’t leave your family with a financial burden if you pass way while the debt is outstanding. To protect your family, ensure that you have sufficient insurance to repay your debts (for example, your mortgage and any credit card balances) if you should pass away.

Ask for Advice
How you manage your debt will play a key role in determining whether you’re able to achieve your financial goals. If you work with a professional advisor who is experienced with your profession, this can help you create a sustainable budget and develop a debt-management strategy. There are currently many innovative banking and lending products available that can help you implement many of the tips mentioned in this article. The key is having someone on your side to explain these different choices and how they can impact you and your personal situation.

Your skill, at managing debt during your working years, will have a significant impact on how financially prepared you are when your retirement years arrive. By working with an advisor to implement these tips, you can more effectively manage your debt and ensure that your borrowing habits support your overall financial goals.•

Paul Philip, CFP, CLU and Nancy Philip, CFP, CLU, have been advising hundreds of chiropractors across Canada since 1992.  Their firm, Financial Wealth Builders, is located in Toronto, Ontario.  To learn more about building your wealth, visit their website at www.fwb-inc.com or contact Paul or Nancy at 416-497-0008.  

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