Debt and Future High Income

I just had a discussion with a colleague about the importance (or lack) of limiting one’s debt. The gist is that we’re about to finish residency, where our salaries will range from $120 - $500K/year, depending on our specialty. The conversation was sparked by a group of our colleagues who regularly (2-3 times/year) fly to Vegas for the weekend, at a cost of about $2000 or $3000/trip. All of us are well over $100K in the hole from school.

His position is that the cost of such trips is just a drop in the bucket of our vast debt. To quote him, “the way I see it, 15 years down the road when I’m grossing 3-450k, it’s pretty unlikely that I will think, ‘man I’m glad I saved my money and didn’t go to Croatia/Vegas when I was 25’. And by then I will have a family and the option of going will be either a) impossible or b) considerably more hassle than its worth.”

My position is that it’s a bit of a gamble to expect that there will be no other expenses/interruptions in work in the next several years. In addition, it seems like it’d make more sense to work toward paying it off now, and travel when we’re in our early 30s. It’s not like we’ll be decrepit or incapable of having a good time when we’re a little older. I also just don’t like the idea of being in debt without anything concrete to show for it; a mortgage or car payment isn’t the same to me as a line of credit. My problem is that I can’t really make this logical…it’s just my natural cheapness coming through.

Does anyone have thoughts to offer?

It won’t seem like a drop in the bucket in 5 years, trust me. Especially if your friend is like a lot of Doctors fresh out of residency. He’ll have a huge car payment and a big mortgage, and he’ll wonder why he isn’t getting any traction on paying down his debt.

To a certain extent, it’s a matter of risk-tolerance. If I knew with 100% certainty that I was getting a million bucks 5 years from today, I’d probably be willing to borrow some small fraction (say $50,000) right now to go on a luxury cruise around the world. I know I’ll be able to pay that back in 5 years, and I don’t particularly want to wait for that grand adventure.

I might even borrow that money up front if the probability of getting the payout was only 80%, but probably not at 50%. At that point, I probably would wait until the 5 years are over to see if I actually get the money for the trip, because I don’t want to take the risk of having the $50K in debt with no means to pay it off.

Other people would make the borrow/no-borrow decision at different risk levels.

I have very little risk-tolerance for debt. I think I’ve carried a balance on my credit card for about 2 months in the last 30 years. But I probably should’ve taken some opportunities to go in the hole a bit back in my 20s, just after I was diagnosed with a retinal degenerative disease. Traveling now, in my late 40s, when I can afford it, is great, but I can’t really see all that much anymore. Maybe I should have taken more risks 20 years ago.

It is possible to have an extremely high income and not be able to pay your bills and pay down your debts. I have a friend whose combined household income is over $250,000, and she tells me that they have trouble making ends meet. If your colleague’s idea is that right now it’s O.K. to go into debt in order to live beyond your means, but once he’s making the enormous salary, he will be frugally living within his income, and not taking his wife and children on vacations, or buying new cars, or eating at expensive restaurants, that’s one thing. But if his idea is that once he has the salary, he’ll be able to pay the mortgage, and support his family, and pay the enormous debt load, and still live an extravagant lifestyle, then he’s in for a rude awakening. A habit of only spending the money that you have (with limited exceptions, such as a mortgage and education debt), will serve you whether you make $20,000 or $200,000.

As for travel, it’s certainly possible that you could have a health issue, such as RickG’s vision problems, that would make it more difficult later. But plenty of people are tourists when they have saved the money to travel comfortably. My parents, now around 80, still love to travel and have gone on many great trips in the past 50 years.

The sense I get is that there’s no expectation of changing their lifestyles. The actual first part of the bit I quoted above is “I’m a hedonist, and fiscal responsibility has never been a particular strength of mine. I may be the wrong person to opine on this, but the way I see it…”

I think they all expect that this is going to continue, but they’ll use the extra to pay off the debt. The worry I have on their behalf is that people tend to match their spending to their income, regardless of their “habit.” So rich misers are still miserly (if still probably more extravagant than people well below their income) and rich spendthrifts are still spendthrifts. So the trips won’t just be weekend trips to Vegas, but will instead last longer, go farther, or be at more expensive resorts.

I just realised what another concern is: all it takes is one or two of this social circle to keep spending that way and it can cause ripple effects outward as people try to “keep up.”

Vegas? Uhhh… no. Vegas is gross, it’s not going anywhere, and at some point in your professional career, you can expect to be sent there for a conference on somebody else’s tab.

Croatia? Bumming around Europe for a month? Hiking up Machu Picchu? Getting actual pho on the street in Hanoi? I’d kill to have my early/mid 20’s back to get a chance to do those things without worrying about the crushing responsibilities of early middle age. Sometimes, financial considerations aren’t the most important ones.

Especially if you’ve got one or two of them who aren’t in the hole to the tune of six figures because they’re from wealthy families. I knew some folks like that in a law school context, and the total obliviousness to the implications personal finance place on the rest of the world was staggering sometimes.

Although one other thing I noticed is that, again with with my friends in law school, it seemed to be extremely easy to roll a bunch of extra debt into your student loans. There’s an attitude out there that you can avoid paying those off essentially forever, so I could certainly see the temptation to roll a couple of adventures into that giant chunk of debt you’ll be servicing for the rest of your life. Or alternatively, if a lot of your debt isn’t federally-secured student loan debt, you sort of figure that if something happens you’ll have to declare bankruptcy anyways and so what does it matter if you’re defaulting on another few $k’s. You’re young, so you’ll still be in your prime when that stuff disappears off your credit report!

On a personal level I definitely agree with black rabbit. There’s definitely some adventures to be had that are more time-dependent that might be worth a little bit of financial irresponsibility (although living like a bum to save money while you’re doing it is part of the adventure). Jetting down to Vegas for the weekend is definitely not one of them.

Adding, say, 10%, to your debt load is not a “drop in the bucket”. It’s a big chunk. I mean, try giving people a 10% pay cut and saying “It’s a drop in the bucket”. They’d go ballistic.

People are bad at understanding how small things accumulate. I think it’s a deep seated part of how our brains are wired.

I’m going to pick the middle option, not going to Croatia every weekend, but going at least once to blow off steam. Your friend does have a point about having some fun now.

I’m definitely not saying “don’t travel”! He lumped in “Croatia” to “weekend trips to Vegas.” My personal plan is to finish my training c. 2015 and work that year, then have some money saved up so that I can travel for 6-8 months in my late 20s, when I’ll likely be in better shape than I am now. I was kind of an idiot when I was younger (see all my posts from 2000-2013), so I think I’ll be in a mental state to enjoy them better.

Plus, I can only take a week off at a time, now, so it’d make more sense to travel when I have my own job and freedom of vacationing whenever.

2/3 times a year at $2-3k a pop, over 15 years is $60,000-$135,000.

In Vegas. :smack:

I don’t think your friend has fully thought this through.

I’d say it depends… I cashed in my 401k to go on a study abroad summer during grad school, because I didn’t have much in it anyway, and because it was pretty much the last chance I was ever going to have to go spend 7 weeks in a foreign country without having to work without being retired, old and decrepit.

I have a feeling that I won’t regret having done it, considering what an excellent experience it was.

On the other hand, putting yourself in that much debt just for the sake of doing something as mundane as having a weekend in Vegas is kind of silly; that’s the kind of thing you’re only going to remember well if something particularly crazy happens.

I think debt is kind of relative to your income; if you make $250k per year, having $150k in debt isn’t the same thing at all as having $75k in debt if you make $50k per year.

They’re right in one regard- once you get married and have kids, THINGS CHANGE. Not necessarily for the worse, but your life just isn’t and won’t ever be the same as it was when you were single, so if going and partying hard is your thing, do it before you get married and have children, because there’s too much to do to really allow it after they’re born.

My cousin married a cardiologist. They are both really really frugal people. He, between help from his family and his own frugality, managed to get through school with a relatively small amount of debt. While he was working on his fellowship - and getting paid some very small amount of money, they married and had a first year baby. She’s an RN, so she was working.

That baby is on its way to college - college is saved for. They have a couple of other kids - college is saved for. Loans are paid off. They live in a very nice house (although not the house they “could” live in - paid for. They continue to be frugal.

I was talking to her this summer and she said that a lot of the doctors he graduated from college with still have their student loan debt and can’t keep their heads above water. You see, they think making $400,000 a year entitles them to his and hers luxury cars, vacations in Europe, and really nice homes. Their kids are going off to college, too - but no money has been saved - they took out loans and so will their kids.

$400,000 a year is a lot of money - but he’s functionally self employed. Which means he carries the expenses of his practice - malpractice insurance. Taxes take a bite out at that amount of money. And most of the guys struggling are one income families.

Start justifying the trips to Vegas now as a “drop in the bucket” and when you graduate the Benz is just another drop. The 4000 sq ft house with commercial appliances, that is “expected.” Of course your wife doesn’t “have to” work, and of course if she buys expensive shoes, purses and clothes, that is to be expected. Kids will, of course, require private school. And you will wonder why you are always feeling broke - why you can’t figure out, you make good money.

One issue with medical school - you are relatively “old” when you get done - seems most doctors - especially the ones who specialized (and therefore spent even more time in school) are ready to get married (if they haven’t) and have kids. For women - and men who marry women their own age - the biological clock is ticking by the time you are done. Another issue with doctors - and again, particularly some specialties - it can be difficult, emotionally draining, stressful work, they requires a lot of energy to stay current on top of the job - it isn’t necessarily a job you want to be doing when you are 65.

OK, 'fess up time: I mis-portrayed the situation a little so that it would seem like he and I are on common ground. I actually just finished paying off my debt–“just” as in last Monday–because I was lucky enough to a great family that let me live at home till I finished Med school (summer 2012).

That puts me in a different situation. Now that I’m in that giddy state of debt-freeness, I kind of don’t want to let it go just yet. And I think it reflects the extremes of his and my attitudes. I’m a pretty cheap person on the whole, except for my small handful of luxuries: a good computer, a nice bicycle, and the freedom to go out once or twice a week. But my concern is that I took it TOO far. I can’t expect reassurance from strangers, but I’m looking for thoughts in general.

I appreciate the contributions so far!

$3000 for just a weekend in Vegas sounds like a lot. Do they do a ton of high-roller type gambling? A person (especially a single person) can have a great weekend in Vegas and not spend a lot of money. I know that if I was willing to take a weekend in Vegas with my co-workers, I would probably arrange it so that we split rooms/suites and pitch in together on meals. That would save some money and still allow for a 2-night stay in a nice hotel, maybe see a show, gamble, drink, etc.

The mindset you mention reminds me of my friend. Him and his wife got a windfall in the form of a trust through his father in law to the tune of $3 million. While the whole thing was being set up/determined how it was going to work out, he went ahead and replaced all the windows and flooring in his house (which was also given to him by his father-in-law). He was very, very fortunate to marry into a family that could do this, and I guess he felt like he had it so easy, with no mortgage, and a mountain of money headed his way, that he just charged all the expenses on his credit card “for the rewards points”. :smack:

See, he fully expected the money to come through. His wife doesn’t work (must be nice :rolleyes: ) and they ran up all this debt on home improvements. He had a decent paying job and it wouldn’t have been that hard for him to simply save up the money and make improvements as he had the cash to do it. But I guess he’d rather waste money on interest so he gets some frequent flyer miles out of it while waiting for his big paycheck to come through.

Just don’t get Doc-itis. Resist the urge to finance a new car. Keep saving, paying for things in cash, and being frugal, and you’ll be way ahead of the game.

Congratulations.

I’m a lawyer, and many of my friends in this business have financial troubles … because no matter what you earn, at the end of the day you can always spend more.

Myself, I relish the thought of being debt-free and having a little something put away for a rainy day and for retirement. That requires living below my means. There is nothing to be ashamed of in that, it is just a question of priorities. What matters to you more - living for the moment, but with constant worry about money, or living less high off the hog, but with greater safety?

The bottom line is “Don’t spend money that you don’t have.” (As I mentioned before, loans for housing or education, or to start a business such as a medical practice can be a good investment). As long as you are saving for emergencies and retirement, you should feel free to spend the money that you earn for things that you enjoy, even if they are luxuries. It’s when you start spending money that you don’t have for luxuries that you run into trouble. If you are paying off your credit cards in full every month, you’re doing fine.

Because I have been known to overspend, I now have a budget that includes what a coworker calls my allowance. It’s a monthly amount that I can spend on things that matter to me, entirely guilt-free. If you’re not sure about your level of “fun” spending, you might want to set up an allowance for yourself, based on your current income and expenses, and see if that makes it feel more comfortable to spend more. Think about how much allowance you’ll have when you reach that really high income level. You might be able to purchase the car of your dreams for cash, or take that trip to Croatia, knowing that you’re doing it with money already designated for your enjoyment.

Way I do it, is first I take out of every paycheque a certain amount for savings right off the top every month.

Then, I pay my bills.

What’s left, my wife and I spend on whatever we want. :smiley:

I think it really depends. I lived slightly above my means in grad school and graduated with enormous debt, but the payments are manageable (will never be more than 15% of my income, will be forgiven in 10 years) and I am on stable footing now and living slightly below my means. I can’t really see the value in being ultra-frugal and miserable through grad school, with all that considered.

Above my means, though, meant the occasional happy hour, a decent wardrobe and backpacker style travel. 3k Vegas trips seem pretty wasteful to me no matter how much you are making.