TLDR
- Prioritize strategically: List your financial goals (debt payoff, emergency fund, retirement savings) in order of importance to focus your efforts where they matter most.
- Review your budget: Cut non-essential expenses and review essential costs to free up money for debt repayment and savings simultaneously.
- Choose your repayment method: Pick between the debt avalanche (highest interest first), debt snowball (smallest balance first), or a hybrid approach based on what keeps you motivated.
- Consider consolidation: Combining multiple debts into a single monthly payment can lower rates and simplify management, although be sure to weigh the pros and cons.
When you graduate from medical or dental school, you have debts to repay, and giving attention to your other financial goals can be challenging. You might be putting a large chunk of your income toward student loans, credit cards or other debt, leaving you with little money to stash away in savings, you’re not alone, about one-third of Canadians feel the same. Creating a debt management plan that fits your financial situation can make it easier to strike a balance.
Having a debt management plan is key
Paying off debt and setting aside savings are at opposite ends of the spectrum financially, but it’s possible to do both at the same time. Here are some of the best ways to approach debt management without putting saving on the back burner.
1. Set your priorities
When trying to save and pay down debt, it’s important to understand your priorities, especially if there’s only so much money available in your budget right now. This is where it helps to take a personal inventory of what matters most.
For example, your priority list might look something like this:
- Pay off $20,000 in student loans
- Save $5,000 for an emergency fund
- Pay off $3,000 in credit cards
- Save $10,000 for a down payment on a home
- Contribute 10% of your income to a Registered Retirement Savings Plan (RRSP) each year
Of course, your list might look totally different, depending on what type of debts you have and your goals. This is designed to get you thinking about what you want to focus on first, second, third, and so on.
2. Fine-tune your budget
When you have competing goals that include paying down debt and saving, your budget and spending habits can hold the key to your success. The more money you can free up in your budget, the easier it can be to chip away at your debts while putting money into a savings account or retirement account.
Here’s a simple formula for reviewing your budget.
- Separate essential expenses, such as housing, utilities and food, from nonessential expenses
- Go through your nonessential spending line by line and ask yourself whether it’s really something you need to maintain your standard of living. If not, cut it out
- Do a second review of nonessential expenses to see if there’s anything else you can do without
- Revisit your essential expenses to look for any opportunities to save
You might be surprised at how much you can eliminate from your budget if you’re committed to repurposing that money for debt repayment or savings.
Need help calculating your cash flow? Try our cash flow calculator.
3. Choose a debt management approach that fits your goals
If paying off debt is your priority, there’s more than one way to pay it down, here are the most popular methods:
Debt avalanche method
Focus: Higher interest rate first.
How it works: Pay the maximum amount possible toward the debt with the highest interest rate, while making minimum payments on the rest.
Why it works: Reduces total interest paid and saves you money over time.
Who it’s best for: This method works for people who are patient and not easily discouraged by chipping away at debt more slowly.
Debt snowball method
Focus: Smallest balance first.
How it works: Pay the maximum amount possible toward your smallest debt, making minimum payments on the rest. Once it’s paid off, apply the maximum to the next-smallest debt.
Why it works: Provides quick wins and the motivation to keep going.
Who it’s best for: This strategy is ideal if you need to see immediate success to stick to your plan over the long term.
Hybrid approach
Focus: The lowest debt-to-interest ratio gets paid first while keeping all your other accounts current with minimum payments.
How it works: Calculate a debt-to-interest ratio for each of your outstanding accounts: Here’s the formula. Account balance ÷ Current interest rate = Debt-to-interest ratio.
For example, if you have an account with a balance of $10,000 and an interest rate of 12%, the debt-to-interest ratio is 833 ($10,000 / 12 = 833.33).
Once you’ve calculated the debt-to-interest ratio for each of your debts, the account with the lowest debt ratio gets paid off first, then you can move on to the next one on your list.
Why it works: It minimizes your interest payments over time while giving you regular wins to keep you motivated.
Who it’s best for: This strategy is perfect if you’re the type of person who wants to be smart with your money but also needs to see progress to stay motivation.
Tip: Be patient – that first payoff might take a while, but once you get that first debt crossed off your list, the momentum really starts to build.
The most important thing to remember when it comes to paying off debt is to choose a plan that fits your situation and needs. If something changes, you can always adjust if needed.
4. Consider debt consolidation
Tracking multiple debts with varying due dates and interest rates requires ongoing effort. You may want to consider consolidating your debts. Consolidation is a type of refinancing. It means combining balances on multiple credit cards or loans into a single line of credit or loan, usually at a lower interest rate.
By rolling everything into one line of credit or loan, it creates a single monthly payment, helping to streamline things and might even reduce your rate, particularly on credit card debt.
The pros? Consolidating debt can free up cash, lower your rates and simplify your payments by creating a centralized debt at one financial institution.
The risks? You might bite off more than you can chew in terms of repayment, create a longer repayment horizon or negatively affect your credit score.
Try our debt consolidation calculator to see when you could be debt free.
Curious to learn more about how to manage your finances with confidence during residency? Talk to one of our dedicated RBC Healthcare Specialist.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
