By Albert (Ace) Goerig, DDS, MS
For most endodontic graduates, student debt is a dominant factor controlling what you do after completing your residency. A staggering amount of debt is an immediate financial burden, which comes with an emotional burden. The temptation is to rush toward the easiest and quickest way to start earning an income. Many endodontic graduates take on corporate or associate positions to address their debt obligations without fully vetting the offer and evaluating the long-term impact.
The truth is that a lot of the most expedient employment options are only going to give you an “adequate” income, but they aren’t structured to provide you a great income. Compared to life as a resident or student, an adequate income can seem like a big improvement. However, after payments on your educational debt and higher living expenses, little if any is left over to make progress toward your long-term goals. The result is that you can end up prolonging your debt and delaying your goals for years while working in a position with limited growth potential.
The best thing you can do for your short-term and long-term future is to eliminate your student debt as soon as possible. Debt comes with an extremely high cost, and that cost is largely avoidable for endodontists following the right strategy.
Loan Payments and Interest
Most people stay in debt because they don’t truly understand the huge expense that they are inflicting on themselves by just making the minimum scheduled payments.
Let’s look at an example of a student loan balance of $300,000 with the payment schedule set at 8% interest for 30 years. Under those terms, the monthly payment is $2201.29. After the first year of payments (12 payments x $2201.29 = $26,415.48 total), the balance still owing is $297,493.91. That means $23.909.39 went to interest and only $2506.09 went to the balance. So, over 95% of the payments made went to interest, and less than 5% went to the principal. Another way to look at it is if you paid an extra $2506 toward the principal you will have eliminated or made $23,909. This is a 950 percent return on your money guaranteed without tax consequence.
The interest rate of a loan (8%) hides the fact that you’re paying almost everything to interest at the beginning. In fact, it takes until Month 258 (21 and a half years) until less than 50% of your payment is paying interest. By that time, you still owe more than half the loan ($162,524.22) but your payments so far ($557,933.78) are nearly double your original loan amount.
In your case, the interest rate, loan amount and duration may be different, but no matter how you slice it, the true cost of any debt is huge. When that debt has the potential to hang over you forever and remain so high that you can’t pursue other options like practice ownership, prioritizing debt repayment as early as possible is vital. This is why you need to start practicing in a position that has the potential to grow and provide you much more than just an “adequate” income.
Accelerating Debt Payments
Suppose you start in a great practice and after working there for a year, you have made enough income that you could make an extra year-end payment to the principal of your debt that is equal to a year of payments. In our example, that would be an extra $26,415.48 paid at the end of Month 12. What is the impact of that extra payment to the principal balance?
At the end of Month 12, the outstanding balance is $297,493.91. After the extra payment, the principal balance is reduced to $271,078.43. That’s less than the loan balance would normally be after 101 monthly payments. That means you have saved yourself 89 future payments and the massive amount of interest you would have paid. It’s like a 750% return rate, plus your timeline to repay the loan is shortened by over 6.5 years.
Paying off your debt is the best investment you can make in yourself. With this strategy, a 30-year loan can be paid off in 5 to 7 years, or less. Why would you consider investing in the stock market at only 5% or 6% return when investing in yourself to eliminate your debt gives you multiples more value? Even if you can only afford to make an extra principal payment equivalent to 1 monthly payment, that will give you over 1000% return because you are making that payment early in your loan when nearly 95% of payments are going to interest anyway. Everything here equally applies to other loans such as practice purchase loans in your future.
But How? Your Income Is Key
The first step to financial freedom is to stop paying avoidable interest to banks on debt. One way to reduce interest is to refinance your loan at lower interest rates. That’s a no-brainer. Do it as soon as possible. However, the real secret is making extra principal payments, which means that you need extra cash for debt reduction. Here’s typical “good advice” to maximize available cash for extra payments regardless of your income:
- Continue to live like a student (low living expenses) until your student loans are paid off.
- Don’t take on other debt or financial stresses such as for expensive cars or homes.
- Avoid any other investment scheme except debt repayment.
Income is the big question mark in this entire equation, which is why the income potential of any position or opportunity you take immediately after your residency (when your student debt is the highest) should be your #1 focus. In any position you take corporately or in an associateship, you’re going to primarily be paid based on your productivity (completed cases). It may be by salary and bonus, or a straight percentage of collections. Either way, what is the actual potential productivity and income you can achieve in the position you are considering?
If you only have the potential in the practice of completing 2 or 3 cases per day, you are going to end up in that “adequate” zone for your income with limited amounts to spare, and you will need to control lifestyle costs to fund debt reduction. Even at 4 or 5 cases per day, you’re not going to earn a great income if the practice is deeply into highly discounted insurance plans as their primary way to generate patient flow. There’s a huge difference in your income in practice where the average collections per case is $800 vs. a practice where average collections per case are $1200.
Every opportunity should be evaluated based on income potential, driven by the number of cases and the fees for those cases. In great practices with proper fees, every daily case you do as an associate can potentially earn you $100,000 per year. In those practices, you’re not going to be stuck doing 2 or 3 cases per day you will take home only $200,000 to $300,000 a year. If you are in a practice that allows you to do 5 to 8 cases a day you have the ability to take home $500,000 to $900,000 a year as an associate. At that level of income, paying off your debt in just a few years is possible, even while living an incredible lifestyle.
As a new endodontist, you have an abundance of options and there are many available positions, but not all positions are created equal. Do your due diligence and find practices that are motivated for you to succeed at a high level and have a track record of above average productivity. These will be highly efficient, team-driven practices with great marketing and leadership from owner endodontist. Once you are debt free, you have a springboard to every possibility for incredible success in endodontics.
Dr. Ace Goerig is an ABE Diplomate and owner of Endo Mastery. For more information, visit www.endomastery.com.