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Should you start saving money or pay down debt first?

young woman sitting on living room floor and reviewing documents while working on laptop

Most medical students in Canada today will finish school and enter residency with debt. In fact, 41% of them report debt of $120,000 or more.

Residency is often the first chance for physicians-in-training to start paying down debt, rather than accumulating more. With salaries for PGY-1 in the range of $55,000 to $65,000, it is possible, depending where you live, to start paying down debt and saving.

When you meet with a financial advisor, you will likely go over these things:

  • Your financial picture (what you own and what you owe)
  • Your monthly cash flow (what you earn and what you spend)
  • Your short-, medium- and long-term goals

But before you have that discussion, there is some important preparation you should do.

1. Recognize your feelings about debt

Given the debt you’re carrying, which of the following describes your state?

  • Not worried at all (you can manage your debt now and later)
  • Slightly uncomfortable (you’re used to it)
  • Anxious (you can’t sleep at night)

Your feelings about debt are a factor in your decision. Sure, the math might suggest you’ll earn more by investing than you’ll spend on interest payments. But if being in debt makes you uncomfortable, there’s nothing wrong with paying down some of your debt first.

2. Understand the benefits of each choice

Benefits of paying down debt:

  • Pay less interest over time
  • Free up funds in the future for other goals
  • Increase your net worth
  • Avoid sleepless nights if debt makes you anxious

Benefits of starting to save and invest: 

  • Enjoy compound growth: Because physicians generally don’t have pension plans or other retirement benefits, it’s better to start saving sooner rather than later to give your money more time to grow. (Learn more about the benefits of compound growth.)
  • Form good habits now: Get in the habit of saving or investing part of each paycheque (this is known as “paying yourself first”). That way you’ll be on autopilot in the future.
  • Take advantage of a long time horizon: Starting now gives you time to ride out changes in the market.

TIP: Improve your financial literacy with the Investing 101 video series.

3. Understand the nature of your debt

Lending rates vary, so be strategic about which debt you pay off first and which you can leave until later.

  • Credit cards: Because of their high interest rates (they can be as high as 20%), it’s best to pay these off as soon as you can.
  • Line of credit: A student line of credit typically charges the prime interest rate, while some lenders will offer prime minus 0.25%. Note that the rate may increase significantly once you have finished residency.
  • Student loans: You are not charged interest on government student loans until you finish medical school.* Once you start paying interest (at the prime rate for Canada Student Loans), you can claim these amounts on your income tax return and get a tax credit.

*Note that as part of its COVID-19 recovery plan, the federal government has waived interest on Canada Student Loans until March 31, 2023.

TIP: Rank your debt from highest to lowest interest rate — so you can prioritize what to pay off first.

Having gained an understanding of the pros and cons of investing versus paying down debt, you’re now ready to meet with your financial advisor. You’ll have more confidence to make decisions about your financial plan.

Case study: How to decide on your strategy

Let’s look at this fictitious example of Nadia,1 a new physician in her first year of a surgical residency in Calgary.

When Nadia sits down with her financial advisor, one of the things they discuss is her feelings about debt.

She feels comfortable with her debt load and plans to pay it off slowly over time. For now, her main goal is to save and invest. That’s because some life transitions are on the horizon, including getting married, buying a home and having children — all within the next five years, she hopes.

Here’s her financial picture.

A side-by-side example of assets (chequing account, car) and liabilities (student line of credit, student loans), followed by net worth.

A donut chart showing breakdown of various expenses (housing, debt payment, food, transportation, phone/internet, discretionary) and what’s left over

As the circle graphic shows, Nadia is currently ending up with a surplus each month. She is advised that she’d be best to invest half of her monthly surplus and to put the other half toward her line of credit.

Nadia decides to save $200 of her monthly surplus to a tax-free savings account, using a pre-authorized contribution plan to ensure it happens regularly. She will put the other $200 toward her line of credit every month. She is already making the minimum payments on her student loans and line of credit ($600).

The combination of paying down her debt and starting to invest makes Nadia feel that she’s moving in a positive direction. Having the discipline to both save and pay down debt will also show any future lending institution that she can manage her finances.

You need your own, personalized strategy

Should you use your money to invest, to pay down debt — or both? Your answer depends on a number of individual factors, such as your goals, your debts and your approach to money. And your decision is not set in stone: your strategy can change as your circumstances change.

An MD Advisor* will help you get clear answers and a personalized strategy, help you organize your debts, and give you practical advice on how to pay them off sooner.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

1 The hypothetical case study is for illustrative purposes only and does not represent actual clients. Any resemblance to actual people or situations is purely coincidental.

Banking and credit products and services are offered by The Bank of Nova Scotia “Scotiabank”. Credit and lending products are subject to credit approval by Scotiabank.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.