Informed Perspectives

Should I Pay Down Debt or Invest?

This is one of the top five initial and most important questions we receive from physicians, especially residents and those in the early years of their practices.

Should I Pay Down Debt or Invest?

This is one of the top five initial and most important questions we receive from physicians, especially residents and those in the early years of their practices.


This is one of the top five initial and most important questions we receive from physicians, especially residents and those in the early years of their practices.

If you’re feeling behind the curve, don’t worry. You’re not alone.

It’s common to leave medical school and begin your practice facing a mortgage-sized debt load, not owning a home, and not quite knowing the best financial path forward. 

And, it’s completely normal to experience tensions and concern when figuring out what you should do with your hard earned cash.

Before we go further, it’s important for you to know that both the decision to pay down your debts and make solid investments can have a positive impact on your net worth.

Begin By Asking Yourself This Question

“Am I most anxious about my debt, or do I feel more anxious about my lack of investment assets?”

Your answer will reveal your true motivation and help you decide if you should pay down your debts, carefully invest, or do a bit of both.

The Truth About Compound Interest

Interest is completely disinterested in your best interest.  It works the same whether it’s interest you are paying a creditor or you are earning as an investor.  Its impact is the important factor.  Because interest seems small in the beginning, it is often underestimated as either a partner or foe.  If you doubt this, take a peek at the Grand Canyon which is a fantastic physical expression of the power of compounding. Slow and steady wins the race (for more on this, check out The Rule of 72 and In for a Penny).

To make the very best decision for your future, you need to carefully evaluate the impact of the compound interest when paying down a debt or investing over a specific time period - which leads us to the next important question.

Which Is Greater – Loan Interest or Investment Return?

The mathematical answer to this question is easy to determine if the variables in question behave consistently and similarly. 

As you probably already know, loan interest rates vary depending on the terms and conditions of the loan.

For example, your medical school loans are usually fixed rates that are relatively modest and don’t vary over time. However, if you have credit card debt, you may be facing exorbitant variable rates that can be much higher and much more volatile.

Where investment returns are concerned, total return can vary over wide ranges depending on your investment mix, time horizon, and willingness to accept risk.

With this in mind, when you do the math and find out that your investment returns consistently exceed your loan interest rates, you know you’re on the right track.

But there’s more to consider, so please keep reading.

Tax Consequences of Either Interest Paid or Investment Earnings

Thankfully, some loans such as medical school or undergraduate student loans are deductible up to $2,500 per return (subject to limitations) – and you don’t have to itemize other deductions to receive it. 

With mortgage interest, you can deduct interest paid in that year, but only as part of your overall itemized deductions. If you don’t itemize, you don’t get to deduct it.

And of course, the “dollars in your pocket” value of deductibility is lower if you’re in a lower tax bracket and more valuable if you’re in a higher tax bracket. Regardless, it’s still amazingly valuable and influences the math on whether it’s better for you to pay down debt or invest. 

Other Important Factors That Should Influence Your Decision

As mentioned in our Intro to Managing Medical School Debt and when evaluating strategies for paying down, refinancing, or consolidating your student loans, you should consider their impact against others to manage your debt – such as refinancing or consolidating your student loans.

For example, if you’re utilizing one of the over 80 repayment assistance programs, many of them are sponsored by individual states. The more you can educate yourself on your particular state and the terms of your loan the better, as perhaps it will influence the order in which you pay down your loans. 

This can free up funds that you can use for investing in your future. 

10 Steps You Should Take Now

#1 - Build Your Emergency Fund First
One of the annoying realities in life is that you can 100% expect unexpected financial setbacks. 

Whether it’s a car that needs to be repaired or a roof leak that needs to be patched, if you don’t have an emergency fund, you may find yourself creating payment plans that can be costly.

A rule of thumb is to start with a simple $1,000 emergency fund that you keep in a bank account with ready access. In this case you aren’t aiming for high rates of return, but focusing on flexibility and resilience. 

For practicing physicians, we recommend growing your emergency fund to equal 3 to 6 months of committed expenses (the stuff you have to pay for each month, not the optional expenses). If the unknown spooks you, you should lean more towards 6 months and if you’re more adverse to risk 3 may work just fine. 

#2 - Track Your Spending and Set Targets
As mentioned in our intro to the resident series, simply tracking your spending and setting and adjusting targets as you learn more can help you identify funds to either pay down debt or invest.

#3 - Set a Budget for Debt Payments
This is usually the sum of your minimum payments plus an amount you’re adding to paying down debt faster than scheduled. Select a strategy for allocating that extra payment, such as the Debt Snowball or Debt Avalanche. 

#4 - Max Out Your Free Money
If you have a 401(k), 403(b), or other retirement plan that offers matching contributions, max out those matching contributions – don’t walk away from free money.

#5 - Manage Your Lifestyle’s Waistline
Decide in advance what portion of every raise, new contract or locums you will allocate to debt, savings, or lifestyle.  Be aggressive with the amounts to debt and savings and stingy with the amount to lifestyle expansion.

#6 - Set a Budget for Investing
Early in your career, this is likely limited (that’s ok) and highly dependent on factors outside your influence, but as you enter your higher earning years, be aggressive in making this number as large as you can.  

The number one factor in making compounding work for you is always time – make it work for you as soon as possible.

#7 - Set a Goal and Time Frame for Your Investments
If your primary goal is shorter term, this is likely a non-qualified (doesn’t reduce your taxes) account such as a bank or investment account.  If your goals are longer term in nature, consider qualified (reduces your taxes) accounts such as Roth IRAs for tax diversification or SEP-IRAs if you have self-employment income.

#8 - Set the “How” and Your Investment Strategy
These are things like your attitude on how much risk to take, your mix of investments (asset allocation), and strategies such as indexing, low cost and tax smart investing.  Learn more about Forme’s Investment Philosophy here.

#9 - Gather Your Team
Just like in your practice, surrounding yourself with competent professionals that get you, understand your unique challenges as a physician, and are co-committed to your definition of “True North” can be the difference maker for you and your family.

This team of wealth management, legal, and accounting professionals will be able to help you ensure this plan is complementary to your overall financial wellness plan and help you make sure it stays on track as your situation changes.  

Don’t have one?  Consider us here.

#10 - Track Your Progress and Make Sure You’re on the Right Path 
Performance reporting can be confusing in the financial services space. For our physician clients, we find the best way forward is to increase focus on what matters most. It helps to establish your own measures of success. 

This means creating a personal scorecard that measures your unique goals and progress as you move forward in your life and career. In this scenario, there’s no place for arbitrary numbers that have no bearing on whether or not you achieve the outcomes you want and deserve. 

Why Not Do Both Invest and Pay Down Debts?

Most of the physicians we work with are attracted to a balanced approach of paying down debt and investing in their futures. Once their emergency funds are in place, we dive into creating a customized strategy that reaps multiple benefits. 

If you’ve gotten this far, it’s important for you to know you’re asking all the right questions and taking powerful steps to creating amazing outcomes for your future. Please reach out to our team if you have any questions or would like to set up a 1-on-1 with one of our strategists.

We’re here to help!

General Disclaimer

The information provided herein was prepared for educational purposes only and is not a solicitation to buy or sell any security or insurance product, nor an offer to provide investment advice. All examples are hypothetical and for illustrative purposes only. Nothing contained herein should be construed as legal or tax advice and is not intended to replace the advice of a qualified tax advisor or legal professional. The information contained herein may have been compiled from third-party sources we believe to be reliable but cannot guarantee its accuracy or completeness.

Forme Financial is an SEC-registered investment adviser. Additional information about Forme Financial, including its services and fees, is available online at

Past Specific Recommendations

This communication contains past specific securities recommendations for illustrative purpose only.  Forme Financial makes no assurances, nor should it be assumed, that recommendations made in the future will be profitable or will equal the performance of the securities included in this presentation. Due to various factors including changing market conditions, such recommendations may no longer be appropriate; nor should any past recommendation be taken as personalized investment advice. You may request from us free of charge a list of all securities recommendation made within the immediately preceding period of at least one year accompanied by the following disclosures: (1) the name of each security recommended; (2) the date and nature of each recommendation; (3) the market price of the security recommended at the time; (4) the price at which the recommendation was to be acted upon; (5) the market price of each such security as of the most recent practicable date. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Any presentation of the performance of such past specific securities recommendation does not reflect the deduction of an investment management fee, or any transaction costs or custodial charges, the incurrence of which would have the effect of decreasing indicated historical performance results.  It should not be assumed that your account performance of the volatility of securities held in your account will of will correspond directly to the referenced past securities recommendations.

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