Today is a departure from MSK medicine and a delve into finance. Particular that of personal finance. I'm a newly minted doctor in residency. I have an average loan debt. Today is a calculation into how much I need to contribute to prevent the principal balance exploding before making an attending salary. I graduated with $220,000 in debt. I attended a state allopathic school as an in-state student. I lived moderately conservative: no new car, small apartment, and no vacations. I did eat out more than I'd recommend in hindsight. I had a family gift of $20,000.
$220,000 is a lot of money. But I regularly hear about doctors that defer payment with a final balance of $350,000 to $500,000. A strange ratio game I always play is "is my annual salary greater than my debt?" I'm sure there's a formal and recommended income-to-debt ratio number, but 1:1 is my comfort level. So the question today is:
What annual payments are required to keep my debt at the same level?
Here's my balance
To protect my privacy, I blanked out my savings / checking accounts. They amount to around $15,000. I have one credit car that I'd like to tear up shortly. More on that later. But for the meantime it has a $5 balance.
So here's my balance:
$222,322
My interest rate is:
5.625%
This means every year 5.625% of my balance is then added to my balance. The next year then 5.625% of the new balanced is added to my balance.
As you can see, things get out of hand quickly with the magic of compound interest.
I decided to figure out how much I can contribute every year to keep the number around $222,322. I'm not in the place to eliminate my debt, but I'm not able to prevent it from exploding. I'm a medical resident, so you know my salary is around $45,000 to $55,000.
The way I can prevent this is pay $12,505 every year
before it capitalizes (capitalization means it gets added into the principal. Capitalization is what happens at the end of each arrow in the picture above.
My current required payments under my income plan is $331 per month. Of note, there is a 6 month deference available for new graduates.
What a joke. I understand one month to allow for moving, but anything beyond that is just a chance for interest accumulation. I didn't take this deal and started paying the day I had a paycheck
So how close does the required $331 get me to preventing my balance from exploding?
$331 x 12 months = $3,972.
This is nowhere close to $12,505 (8,533 short).
How much should I contribute?
$12,505 / 12 = $1,042 per month.
On a resident's salary that is around 30% of my take home pay.
Can I do it?
Stay tuned :)
