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Ashley: Good evening. Thank you for joining us for the Debt Management webinar. My name is Ashley Cochrane; I’m an Early Career Specialist at the Canadian Medical Association and MD Financial Management. I connect medical students and residents with the services and benefits offered by the CMA, including delivering financial education such as this webinar. I’m here with Marc Ranger, Senior Financial Consultant at MD Financial Management. Marc is an experienced Financial Advisor who works exclusively with medical students, residents and new-in-practice physicians. It’s great to have you here, Marc.

Marc: Thanks very much, Ashley. It’s a pleasure to be here this evening and a part of our Debt Management webinar.

Ashley: Yes, and thanks again, all of you, for joining our webinar this evening. We would like this webinar to be interactive, so as we present, please feel free to enter questions in the Q-and-A box on the right-hand side of the screen. We will answer as many of your questions as possible towards the end of the presentation. If you are experiencing any technical issues, please use the Q-and-A box and submit your questions to all panelists. This will ensure our teammates behind the scenes can respond to you. If you are having issues with the Q-and-A box itself, please email us at mdwebinars@cma.ca. If you are experiencing audio issues, try exiting the meeting and rejoining. There will be a pop-up asking you to accept the audio—make sure you select “yes.” If you cannot see the Q-and-A box, you may be viewing the webinar in full-screen mode. Exit full-screen mode and the Q-and-A box should become available. I see some of you have already answered our poll. For those of you who have not, please take a look at the poll at the side of your screen and you can submit your answer now. Following today’s session we will be in touch with you via email with a link to the recording of this webinar. If we do not get a chance to answer your questions today, you can contact MD directly by going to the “Contact Us” section of the website: md.cma.ca, or you can meet with your MD Advisor.

Here is our agenda for the evening: first, I will provide a brief introduction to the CMA and CMA’s two companies, Joule and MD Financial Management; then, we’ll get into the debt management by first looking at interest rates and types of loans; next, different methods for managing your debt; then, credit management, including how to check your credit score; and, lastly, we’ll point out additional resources and answer your questions. So, first a little bit about the CMA. The CMA is the national association of physicians and physicians-in-training. The CMA is the voice of members on issues that affect the profession and the future of health care in Canada. We have over 83,000 members, including medical students, residents, practising physicians and retired physicians. Advocacy is an important part of the work that the CMA does; for example, the CMA advocates for an improved medical education system and innovation in the healthcare system. The CMA supports you in your personal, professional and practice life, and also as a member of the CMA you have access to discounts. To be a member of the CMA you must first be a member of your provincial medical association; from there you can be a member of the CMA and from there you have access to CMA-member benefits and you also have access to the CMA’s two companies, Joule and MD Financial Management. Joule is the CMA’s newest company, created to provide you with valuable leadership and clinical products and services. The CMA’s other company is MD Financial Management. The CMA owns MD and has given it one mandate: to provide physicians and physicians-in-training with objective financial advice and solutions based on your unique needs from medical school to residency into practice and beyond—MD is there for you. MD has been working closely with physicians for more than 45 years. MD has no shareholders; we’re not trying to maximize corporate profit. All employees of MD are salaried and we’re here to provide you with value. I also want to mention that MD is the exclusive financial services partner with the Canadian Federation of Medical Students. MD offers an array of services, as you can see here, and your financial plan really starts with your Advisor. Your Advisor is like a family physician: they assess your overall financial health; practice preventative financial health; and bring in a specialist as necessary—for example, an insurance specialist. Speaking of financial planning, Marc, why is financial planning important particularly for medical students, residents and new physicians?

Marc: Thanks, Ashley. Well, there are several factors that make financial planning for new physicians so important. For one, debt levels. Early career physicians will typically acquire a substantial amount of debt while completing their training, so it’s a great idea to develop a debt management strategy while completing the training, which will very likely translate into more of a debt repayment strategy upon transitioning into practice. Another factor is really the uncertain job market. Employment opportunities for new-to-practice physicians can be somewhat uncertain depending on specialty and location. Having a financial plan will help manage this uncertainty and any lag between completing residency, transitioning to practice and starting to receive your first billings. The other major factor that we see is a compressed timeline for major life and financial events. So, for a lot of early career physicians we’re seeing things like them getting engaged, married, having children, buying their first home and, of course, transitioning to residency and eventually to practice—all within a fairly short time period. Proper planning for these sorts of major life events and financial events is key to ensure you are making the best decision for you at the right time in your career. Then, another factor to look at is, of course, the higher potential income. So, it stands to reason that new-to-practice physicians will typically see a fairly significant increase in their income when transitioning to practice, so it’s a great idea to develop a cash flow analysis and really start to determine how best to allocate this increase in income…so, for example, additional debt repayment, maybe starting to do a little bit more saving and investing, or a combination of the two.

Ashley: We see here that 30% of medical students expect to graduate with over $100,000 of debt. Let’s take a look at our poll and see what answers we’ve received tonight. It looks like 45% have answered $150,000 or more in terms of how much student debt you currently have. So, it’s great that you’re all participating this evening. Marc, what would you say is the average debt load for a medical student transitioning into residency and also for a resident transitioning into practice?

Marc: That’s a question we get quite often. I’d say the average debt load for medical students when graduating from medical school is approximately $160,000; whereas the average debt load for resident physicians transitioning to practice is probably closer to about $100,000. So, essentially, resident physicians in many cases have an opportunity to start to pay back a portion of their debt during residency; and that’s of course based on receiving a resident’s salary for two, five or more years. That said, though, these figures can and do vary from one province to another, and the figures are certainly and commonly in the form of lines of credit, federal and provincial student loans, and sometimes even personal loans received from family members or friends.

Now, when it comes to effective debt management it’s very important to keep track of a couple of different things. First of all, to track your current balances and keep product details such as interest rates, whether the interest rates are fixed or variable, if and when any payments are required, and the repayment period, otherwise known as amortization. Typically, it also makes the most sense to pay the highest interest debt first, the next highest debt second, and so on and so forth. However, debt consolidation can also be an effective way to manage or repay your debt more quickly. Debt consolidation is really just a fancy way of saying taking all of your highest interest debt and consolidating it with your lowest interest debt—most commonly, for many medical professionals, consolidating your student loans when they enter into repayment with your line of credit. Debt consolidation can help reduce your overall interest expense as well as to increase some flexibility to your monthly cash flow to make your monthly debt payments more affordable. Thirdly, it’s also very important to identify your debt management goals and treat your debt payments like any other bill payments such as rent, utilities, cellphone, et cetera. So, what I mean by this is for some of our resident clients, they may come to us and say they want their goal to be paying interest only during residency or maybe even starting to pay back a portion of their principal; whereas, for practising physicians in their first few years, their goal may be to completely repay their debt in two, five or even 10 years—so it’s really all about establishing what that goal is, determining how you get there and sticking to that plan.

As mentioned on the previous slide, it’s very important to understand and track all aspects associated with your debt such as interest rates, amortization periods and the differences between different products. So, we’re going to jump right into it. So, if we look at interest rates, you know, if you even sort of asked yourself the question, “What are interest rates?”, they are essentially the amount the lender is charging you as the borrower to use their money. Interest rates can be fixed, meaning they won’t change, or interest rates can be variable, meaning that they increase or decrease throughout the repayment period. Variable interest rates directly impact the amount of interest you pay and the length of time required to repay your debt, so, for example, an increase in interest rates will increase your interest expense and repayment period, whereas the opposite would hold true. So, let’s have a look at an example to emphasize this point. Suppose you have a loan for $100.000 with a 15-year repayment period. If, on this $100,000 loan, the interest rate is 4% annually, you can see here the payments are about $740 monthly. Now, suppose that the interest rates increase to, say, 6% or even 8% annually, you’ll notice that the payments increase now to approximately $845 and $955 monthly, respectively. If you look at this in another way, alternatively you have the same $100,000 loan, but instead of repaying it over 15 years you just have now a fixed monthly payment of $1,000. If the interest rate is still 4%, you can see now the repayment period will be a little bit more than 10 years, but if we look at the same scenario we see what happens if the interest rates go up to 6% or 8%. Now you’ll notice the repayment periods increase to almost 12 and 14 years, respectively. So, by looking at this you can see how interest rates certainly dramatically influence not only what your monthly payment might be or what the amortization period might be. So, going out and negotiating the best interest rates possible is certainly advisable.

Ashley: Before we get into the effects of compound interest, what is compound interest and why is that important?

Marc: It’s a great question and I think it’s a term that you hear commonly used. Essentially what it is, is compound interest is the interest added to the principal of a loan or line of credit resulting in future interest amounts being charged on the principal and interest. So, again, another fancy way of saying essentially interest being charged on top of interest, meaning the stated annual interest rate may not always be the same as the effective annual interest rate, as it will really depend on how frequently the interest is compounded…so, for example, more than once a year such as semi-annually, quarterly or even monthly. So, I think it’s probably better looked at in another example to demonstrate how the impact of compound interest and the difference between the stated annual interest rate and the effective annual interest rates are sometimes a little bit different. So, suppose you borrowed $10,000 at a stated interest rate of 3% annually. If the compounding frequency is set to annually, then the amount owing at the end of the year—and you can see here—is about $10,300, and the effective annual interest rate is the exact same as the stated annual interest rate. However, if we look at some of the other examples below, so the second, third and fourth line, if the compounding frequency is set to semi-annually, quarterly or monthly, you’ll notice that the amounts owing at the end of the end of the year are more than $10,300, and thus the effective annual interest rates are slightly higher. Now, if we build on this example, assuming that the stated annual interest rate remains at about 3% and you borrow another $10,000 at the start of year two, you will notice the effects of compound interest continue to increase your overall interest expense as the compounding frequencies are for semi-annual, quarterly and monthly. So, again, here the key takeaway is that your stated interest rate isn’t always necessarily the actual interest rate because interest will be calculated on top of interest, which then effectively increases the effective annual interest rate.

All right, so we take a look at amortization. I mentioned it earlier, but really what this is, is amortization is really just defined as the period of time in which you repay your debt. Longer amortization periods will help you lower your monthly payments but will also increase your overall interest. In contrast, shorter amortization periods will increase your monthly payments but will help to decrease your overall interest expense. Negotiating and choosing the right amortization period that works best for you should be based on your specific goals and what you can afford based on your monthly cash flow. So, for example, longer amortization periods are typically a good fit for many resident physicians when earnings are fairly modest, and then maybe shortening them up when you transition to practice and earnings increase substantially. So, we look at that in another example here. Say you have a $30,000 student loan at an interest rate of 6.5% annually. So, if you look at the five-year amortization period, it results in monthly payments of almost $600 monthly and total interest of a little more than $5,000; whereas, if you look at the 10-year amortization period, this results in monthly payments of only $340 month and total interest, though, just shy of $11,000. So, in summary, if you sort of compare these two, you can see that by repaying the $30,000 about five years faster, you’ll require an extra $250 per month for debt repayment, but that will translate into about $6,000 of interest savings.

Ashley: Marc, what are the different products and how are they different?

Marc: That’s a great question. Some of the different products available are, typically for early career physicians, student loans, lines of credit and I would say even credit cards to a certain extent. When it comes to Canada Student Loans particularly, the interest rate is prime, which is 2.7% at this point in time, plus 2.5% annually.

Ashley: And, in case anyone doesn’t know, what is prime?

Marc: That’s another great question. The prime rate is the lending rate set by the federal government and is not controlled by chartered banks. It’s worth mentioning that the prime rate has been historically at low levels over the past decade or so compared to the previous 40 or 50 years. So, for those of you out there that are just going into medical school now, or even in the past 10 years, you’ve picked a very good time to borrow in terms of how much the borrowing actually costs you over time. Going back to the student loans, some of the other features of student loans is that they are interest-free until you transition to residency and they enter repayment six months after completing medical school. Canada Student Loans also provide you with a bit of a tax benefit in the form of a 15% federal tax credit on the interest you pay. More specifically, it just means that 15% of the interest you’ve paid throughout the year is refunded to you when filing your annual income tax returns.

Now, when it comes to lines of credit, the interest rate should be prime only, which, again, is only 2.7% annually. It’s worth mentioning here, as well, that in our experience we do see a lot of lines of credit that all of the sudden add 1% or 2% above the prime rate, whether it be when transitioning to residency or transitioning to practice, so definitely it’s very important that you keep close attention to the interest rate on the line of credit, which should be prime. Most financial institutions offer medical students and residents credit limits of as much as $275,000 whether it be $275,000 up front as a first-year medical student or maybe in smaller increments while completing your medical training. And, the reason for that is typically purely from a debt management perspective, to essentially help you get through your training with maybe a little less debt than you otherwise would have by having the $275,000 up front. Interest accrues the instant you transfer or withdraw funds from a line of credit. Unlike student loans, lines of credit do not provide any tax benefits whatsoever. Typically interest-only payments are required; however, some lines of credit offer capitalized interest. Capitalized interest is just a fancy way of saying the monthly interest automatically gets accrued and added to the balance instead of coming directly from your bank account. You can also make principal payments at any time and as your monthly cash flow permits, so essentially it’s an open loan and you can flow money in and out as you wish.

Now, when it comes to credit cards, most of you already know that the interest rate is likely much higher, ranging from anywhere from 10% to 20% annually, and potentially even higher for retailer credit cards. Actual payment is deferred until after any purchases are made, which is typically about 30 days or so. Minimum monthly interest and principal payments are required; travel or other reward programs are available for purchase. Similar to lines of credit, credit cards also do not provide any tax benefits and most credit cards carry an annual fee in exchange for travel or reward programs associated with the card. However, some credit cards do not charge an annual fee either for reduced travel and reward programs or none at all.

Ashley: So, we just looked at the different products. Now, what are the different methods for managing debt using these products?

Marc: That’s a great question. There are several ways to effectively manage your debt, of which, I would say, each provides different benefits or maybe even different drawbacks. Choosing the right method or methods should really ultimately depend on what works best for you and your particular financial situation. One very popular method is to really just use your line of credit like a chequing account. So, this essentially means to use your line of credit whenever required on a monthly basis for your living or educational expenses such as tuition or textbooks. Using a line of credit like a chequing account can help to minimize your overall interest expense, as you will only pay interest on the money required for these sorts of expenses and as they occur. That said, this method can also lead to overusing your line of credit because it really should only be implemented after developing your budget and tracking your monthly cash flow. It’s quite easy sometimes to sort of forget about how often you’re using it if you don’t have that monthly budget and cash flow established.

Another method to effectively manage your debt is to transfer funds from your line of credit to your chequing account on a semi-monthly or even monthly basis. Transferring funds from your line of credit to your chequing account, say, once or twice per month is a really good way to stay on track with your budget and maintaining that monthly cash flow I’ve been talking about. The downside to this method is that interest starts accruing as soon as the money is transferred from your line of credit to the chequing account, thereby marginally increasing your overall interest expense over time and while completing your training.

Now, finally, another method to effectively manage your debt is to use your credit card for all or the majority of your living and educational expenses. Using your credit card will allow you to take advantage of the travel or reward programs available and essentially defer any interest until you receive the statement and the payment is due. Similar to the line of credit method, this method can lead to overusing your credit card as well as can increase your overall interest expense, not to mention potentially decease your credit score if you frequently miss or don’t make your monthly payments.

Going back to consolidating your student loans—but before doing this it’s really a great idea to evaluate all of your options first in order to determine whether it’s the right solution for you or not—so for example, one of the very common programs available is for family medicine residents and practising physicians that entitles you to Canada Student Loan forgiveness in return for providing services in a designated rural community or multiple communities. We call this program the Canada Student Loans Forgiveness Program. The amount of loan forgiveness is available up to $8,000 per year, to a maximum of $40,000 in total. Now, that said, in order to be eligible for this program you cannot consolidate your student loans because the student loan forgiveness is applied directly to your Canada Student Loan balance only after providing the required service in either a designated rural community or multiple communities. Because this is a national call, I’m not going to get into some of the provincial differences, but there are a few other student loan forgiveness or interest deferral programs available at that provincial level. So, as mentioned before, it’s really a good idea to evaluate all of your options before choosing one versus the other.

Now, for many of you, your line of credit will continue to serve as a very useful resource after completing your residency training as you may choose to take some time off, may not find work right away and experience a two- to three-month delay in receiving your first billings when transitioning to practice.

Ashley: In regard to line of credit, what are some important things to ask?

Marc: Some of the questions I think that are key and instrumental in making sure you address with your financial institution are things like what happens to the interest rate, when does repayment start, will you be able to keep the line of credit or can the sum or all of it be converted into a personal loan. You know, these are all very important questions and, I think, are very key to ask before you transition to practice. I’ve seen a lot of residents sometimes shy away from asking these questions only to find out the hard way after transitioning to residency and no longer being eligible for a line of credit elsewhere in the student or resident format. So, ultimately, I guess the message is to be extremely proactive and just really determine what’s going to happen with that line of credit well before you transition to practice.

So, we come to look at another example: the reason why it’s so important, especially, when it comes to repaying the debt. Suppose you had a $100,000 line of credit balance when transitioning to practice—and now this is sort of the stage at which you now want to repay the entire balance—if your goal is to completely repay the balance in, say, three to five years, you’ll notice that all of the monthly payments only marginally increase; your overall interest expense increases substantially in the cases of higher interest rates. So, in this case 4% annually versus 6% or 8% annually—you’re talking about doubling the interest cost in the example of 4% annually versus 8% annually—and that’s probably a bit of an extreme case, but nonetheless just to prove that point.

Now we’re going to switch gears and talk a little bit about credit management. Credit management is really important and I think one of those things that sometimes falls by the wayside. It’s really important because your credit score is a tool when applying for additional credit—for example, increasing your line of credit limit, applying for a professional line of credit or even applying for a mortgage. It’s fairly straightforward as a high credit score results in good credit and a low credit score results in poor credit. So, if you look at this example, this person here has a credit score of 750. If you look at that on the scale, they are in the “very good” category, so between 725 and 759, so this person would likely have a very good chance of accessing credit and quite promptly. The other thing to mention about your credit score is it’s a really good idea to review your credit bureau—I’d say at least every one to two years¬—in order to ensure all the details are correct and there are no mistakes on file. You can simply order a copy of your credit report online at either Equifax.ca or Transunion.ca for a nominal fee, or by having it mailed to you for free.

Ashley: A common question I’ve received is: Does checking your credit score affect your credit rating?

Marc: I get that question a lot too, Ashley. The answer is no. Checking your credit bureau does not negatively affect your credit score, in fact, as I mentioned, it’s encouraged. A useful tip when seeking credit and visiting with, say, more than one financial institution, that I recommend is ordering and providing a copy of your credit report to all the institutions you are visiting with before actually signing an application, because having multiple financial institutions check your credit bureau all at once, that can significantly reduce your credit score, so proactively checking it and providing information before you actually proceed with an application would be a good course of action. Now, if you ever find yourself in a situation with a poor credit score, you know, really the best way to improve your credit score is to rebuild your credit history by following just a straightforward process of borrowing and repaying before the due date and repeating these steps. Now, I’m going to pass it back over to you, Ashley, to discuss the MedEd Counsel and some of the other resources available to early career physicians.

Ashley: Thanks, Marc. I see a few of you have submitted questions. Please feel free, everyone, if you have some questions you can submit those now and we’ll answer as many as we can. I also want to mention some resources we have available for you if you’re looking for further information. On our website we have brief videos—we call them quick clinics—on a range of topics. I’d really encourage you to check that out. Also, within MD we have a team of dedicated Early Career Specialists and MD Advisors dedicated to working with early career physicians. Marc and I are both part of that team and we’re here for you. So, we have offices across the country, please feel free to make an appointment and get some one-on-one advice catered to your unique needs. So, I’m going to get to the first question now; this is an excellent question, I’m sure a lot of you may be thinking it. The question is: Can you hold the same line of credit as a resident and a medical student or do the terms such as rate, ability to hold the line of credit change as a resident?

Marc: That’s a great question and certainly the answer to it is yes, it should be the same. So, for most lines of credit out there they’re entitled to medical student and resident line of credit. So, essentially the amount you can borrow, the rate at which you borrow and all the repayment terms in terms of being interest-only versus capitalized interest should all remain the same. But, with that said, I would recommend, right around the time you transition to residency, just having a chat with your financial institution or even just checking your most recent statement to make sure that all of those things hold true, because we have seen instances where banks have maybe not kept the things the same, and you need to sort of contact them to do that, or maybe potentially even look at other lines of credit out there that will provide you with those benefits and what you’re entitled to during residency.

Ashley: Yeah, that’s a good point. I think it’s worth mentioning as well for people listening not to be afraid to ask those questions that we went over earlier and to remember, as well, if you’re not happy with the product you’re receiving you can change—you can go elsewhere. So, feel empowered and you can shop around for credit like you shop around for other things.

Marc: I think, too, the ease at which transferring, I mean, in many cases it’s just a few signatures and the financial institution will go to the other institution to consolidate your existing line of credit with your new one, so it’s not as though you need to run around to several different banks to do that. It’s a pretty straightforward process from end to end in terms of the paperwork.

Ashley: Now, we’ll get to another question. Switching gears, going into Canada Student Loan: How does loan forgiveness work for my Canada Student Loan? Is it automatic if I qualify or do I have to apply?

Marc: So, referring to the Canada Student Loan Forgiveness Program, it’s not automatic. So, as soon as you qualify—and as a resident physician, thankfully it’s a little bit easier to qualify, you only have to provide 50 days or 400 hours in a rural community or multiple communities, and with any 12 consecutive months, if you’ve provided that service, so 50 days or 400 hours, you’ll have to submit an application. You can find the application online at Canada Student Loans Forgiveness web page where you can download it and fill it out. You will need to have one of your folks as a resident to help sign off on it in terms of the training that you’ve provided that community, and then they will apply the $8,000 federal loan forgiveness payment directly to your student loan. Excellent question, you do need to fill out an application and submit that in a relatively timely fashion—typically two to three months after the 12-month period that you’ve provided that service.

Ashley: Great, thanks Marc. We have another question here: Is it better to pay a student loan off as soon as possible if the interest remains at prime, or is it better to incorporate and pay it off over a few years? That’s a big question.

Marc: That’s a great question and this is one we get a lot of times from practising physicians. If you are comfortable with debt, a lot of times it may make sense to incorporate and pay the debt off over five or 10 years because it means maybe that you’ll be able to retain some money inside the corporation. But, that really does come back to cash flow. Even if are going to, say, pay the debt off over, say, five or six years we have to make sure there’s enough money that’s being retained in that corporation to be able to benefit from doing so; otherwise, it may be better to sort of hold off a couple of years and figure out that maybe incorporating is better down the road. The other thing I’ll mention is that sometimes if we’re dealing with a physician that has someone in their family that they can split income with, even if they have debt, it may make sense for them to incorporate to be able to split some of the income with their, say, in this case spouse or maybe parents, because they are still going to get everything out of the corporation, but the money coming out of the corporation would basically attract less tax by going from the physician and to, say, the family member. So, it’s a loaded question; I think there’s a lot to discuss there, but I think the answer to that is it really does depend on what cash flow looks like, if there’s anyone to split income with in your household and if you’re going to be able to retain any money inside the corporation.

Ashley: Yeah, that’s an excellent question. Lots to talk about when it comes to incorporation. I should mention, for those of you listening, we do have an incorporation webinar and also a quick clinic on incorporation on our website, so I’d encourage you to take a look at that and find out more about incorporation. Now, moving on to our next question: Does changing a credit card to a different credit card (i.e., a rewards one to a travel one) within the same institution (i.e., MasterCard to Visa) mean that there will be a repeated credit check?

Marc: In many cases, yes, because if you’re moving from one credit card to another there might be sort of an eligibility threshold that they need to look against with your application. So, again, if you are going to be doing this or looking at sort of different credit cards solutions, before going ahead and submitting an application for several at once, I think really decide on which card you want and then be able to go forward with an application from there because in many cases you will be signing a credit check and they will be looking at your credit bureau.

Ashley: Great, thanks Marc. We have a lot of questions coming in now. Thanks everybody—keep them coming. Our next question: Any advice on contributing to TFSA, RRSP versus debt repayment, especially early in practice? This is a very common question. What are your thoughts on that?

Marc: Absolutely. This one really comes down to the goals and objectives of really what the money is for. So, if we’re talking about money that you’re planning to contribute to, say, a TFSA or RRSP that might be needed in the next couple of years, we’ve really got to pay attention to can you access that money without triggering tax consequences, for example, in the RRSP, what’s the rate of return that you’re going to be earning on the investments in the TFSA or the RRSP versus what’s the interest rate that you actually owe on the debt that you’d be otherwise paying down. So, I think a common theme—and it isn’t always the case—but if you’re looking at goals and objectives that are relatively short term in nature—I would say one, two or maybe almost three years—that’s where in a lot of cases it’s going to make sense to focus more on debt repayment. For goals that are three, five, 10 or beyond years, really mixing a combination of debt repayment, saving and investing can make a lot of sense. That said, though, if we’re looking at another sort of part of your financial plan which again goes back to tax planning, especially if you’re new to practice, RRSP contributions are really going to provide you with a lot of value in terms of being able to deduct those from your income and drive down taxes. So, maybe not all that valuable as a resident when you’re earning a somewhat modest income, but all of a sudden it becomes a lot more attractive as a practising physician. So, sometimes trying to find room for both debt repayment and saving/investing, in this case in the form of RRSPs for new-to-practice physician, would make a lot of sense to not only pay down debt, but also to drive their tax down as well.

Ashley: That’s a great point, a blended strategy works for a lot of people. It’s worth mentioning, too, that it really depends on your individual circumstance in terms of the blended strategy they’re going to use or if you’re going to use one. So, it’s really important to speak to a Financial Advisor like Marc or another Financial Advisor in your area when you’re talking about repaying debt or investing. Speaking of paying off debt, are there any tax advantages to paying off debt faster?

Marc: There’s not necessarily any tax advantages to paying down debt any faster. I’d say, actually, the contrary holds true. Going back to my previous response, in many cases by paying down debt a little more slowly if we’re talking about somebody that’s going to be reporting a fairly large taxable income, it can make more sense to divert some of that surplus cash flow towards saving and investing and really trying to drive down their taxable income, thereby saving tax. So, there isn’t necessarily a huge tax advantage to repaying debt more quickly. If anything, for a lot of our new-to-practice physicians, the opposite would hold true.

Ashley: That’s a great point. Going back to incorporation, someone here says: I was informed from a financial advisor that there are substantial costs to becoming incorporated with legal fees, et cetera. Do you know roughly how much this costs?

Marc: Yeah, that’s going to depend on the accountant and the lawyer that you choose. I think what I would recommend is visiting with an accountant first—and maybe I say first after meeting with an advisor, because a lot of times you can probably eliminate or avoid these fees altogether if maybe it doesn’t yet make sense to incorporate. So, once you’ve met with your Financial Advisor, he or she is really going to be able to kind of help you determine does it make sense right now, and if it does, now you go off to an accountant and a lot of times the accountant will then give you the green light whether or not it makes sense or not. They have in-house legal counsel and if you are going to proceed with incorporation, you are typically looking at anywhere from $3,000 to $5,000, depending on the firm that you’re dealing with. Then, you’re going to be looking at an ongoing accounting and legal fee of filing tax returns for your corporation of anywhere from $2,000 to $3,000 annually thereafter.

Ashley: Thanks, Marc. Next question: Will credit scores change the amount of mortgage we qualify for?

Marc: Absolutely. So, going back to the slide I showed earlier, a high credit score really means a good credit score and good credit scores is really what will allow you to access credit—either a lot of it, but also at a low rate. So, having a negative credit score can either mean you’re not going to be qualified for the credit or that you may qualify but the rates are going to be substantially higher.

Ashley: Thanks, Marc. Do you have any advice on whole life insurance as an investment tool especially if paid for via corporation? Is it worth it?

Marc: Yeah, I think this question here is referring to when you purchase life insurance and it’s owned by the corporation. Basically more of your after-tax dollars are purchasing more of the insurance, so a lot of times it does make a lot of sense, if it makes sense to have permanent life insurance for this particular person, to own it corporately because, again, more of the money that you’re earning is generating larger after-tax dollars that are paying for those premiums versus if you owned it personally you’d have less after-tax money to pay for those premiums and therefore would be buying less insurance. So, I think the first thing you want to look at here is, first of all, does it make sense to have permanent life insurance and then, if it does, should it be corporately owned if you are incorporated or should it be personally owned if you are incorporated or not.

Ashley: Great, thanks Marc. Going back to student debt, what is a realistic timeline for paying off my student debt after residency? That relates to the poll we had at the beginning.

Marc: Yeah, there’s a range, I would say, in timeframe here as well, but three to five years is probably a good general rule of thumb. There are a lot of new-to-practice physicians that we see in many cases where they’ve had circumstances where maybe parents have helped with their medical school debt or maybe they have a spouse that has brought an income to the table while they completed their training, so they’ve really allowed them to graduate with far less debt than the average. Or, on the opposite end of the spectrum, there are a lot of students that maybe have completed their training outside of Canada and tuition and living expenses were, of course, enhanced in those cases. So, you know, three to five years is probably a general rule of thumb, but I have certainly worked with some clients where a couple of years made more sense and they accomplished that, or, in some cases, maybe five-plus, maybe even closer to 10 years. But, three to five years is probably a good medium point.

Ashley: Great, thank you. Another question about incorporation: Is it possible to incorporate without hiring the services of an accountant or a lawyer?

Marc: It is possible to do this. I would certainly not recommend doing that, because really unintended consequences could come out of that by filing your own sort of corporate structure and submitting the documentation and then it not being done correctly. What I mean by “correctly” is not being able to allow you to get that CRA business number, but also for you not being able to really minimize your taxes to the full extent. So, I know $3,000 to $5,000 seems like a lot of money, but it’s well worth it in the grand scheme of things, not to mention those costs are also tax deductible because there are costs to doing business as well. So, it’s possible, but certainly not advisable.

Ashley: Great, good point. Going back to line of credit now: What is the impact of having a co-signer on a line of credit?

Marc: The impact of having a co-signer really means that the person that’s co-signing for you is now responsible for that debt. So, if, for whatever reason, there’s, say, a premature death and the physician passes away or if they refuse to repay the debt, the bank would have the ability to go back to the co-signer to be able to collect against the debt obligation.

Ashley: Great, thank you. Is it worth it to ask to pay off the debt, student or bank line of credit more frequently, for example, every week instead of every month?

Marc: So, I think this question is referring to when they are repaying it does it make more sense to repay it weekly versus monthly. Certainly the more money that is applied against the line of credit more frequently will mean that you will reduce your overall interest expense. It’s marginally in many cases, but absolutely, the more money that flows into the line of credit more quickly, whether it be weekly versus monthly, will certainly mean over time you would marginally reduce your overall interest expense. So, in many cases, especially during medical school, if you’re not at the stage yet where you are repaying the line of credit but you’re receiving student loans and scholarships and bursaries and all sorts of things, when that money comes in and there’s a balance owing on the line of credit, a lot of times it makes a lot of sense to take all that money that’s just otherwise in your bank account and apply it to the line of credit so that you’re minimizing the balance and bringing down the interest costs. The same logic would apply for those who are starting to pay back the line of credit, whether it be during residency or practice—if there’s any idle surplus cash flow sitting around that isn’t being saved or invested and is just sitting in liquid cash in a bank account, it’s much more useful to have that apply against the line of credit to be able to drive down interest as opposed to earning a nominal amount of interest in a bank account.

Ashley: Great, thanks Marc. We have more questions here about incorporation. I should mention it’s probably worth it for you to check out the incorporation webinar and also our quick clinics and also to speak to a Financial Advisor or perhaps attend a session on incorporation. We often do speaker panels on that topic because it is such a large topic with a lot of information that falls under the incorporation topic. So, I definitely encourage you to check out that, but another question we’ll answer here about incorporation: At what income level should you incorporate?

Marc: So, it’s actually not an income level that would allow you to incorporate. I’ve seen some physicians that earn almost half million dollars a year and it doesn’t make sense for them to incorporate because there’s really no benefit for them, potentially, because they can’t leave a substantial amount of money in the corporation maybe because of lifestyle or maybe there’s no one in their family that they can split income with. So, it really has nothing to do with income level. It’s got everything to do with, is there going to be an ability to leave a good chuck of what you earn inside the corporation based on what you’re pulling out of it and second of all, is there someone in your family—so for example, in Ontario you can split income with a spouse, parents and adult children—so if there are none of those people in your life that it makes sense to split income with, then it also might not make sense to incorporate. So, I kind of defer from thinking about it from an income level, but more from an income and also what do I need from the corporation and is there anyone around me that I’m able to split some of that income with to be able to generate lower taxes as well.

Ashley: Right. Next question: How is compound interest calculated?

Marc: So, compound interest is calculated based on interest on top of interest, so depending on how often the compound interest frequency kicks in: semi-annually versus quarterly versus monthly. Let’s just say for this example monthly, every month interest would be calculated and accrued on top of that balance. Then, the following month, there would now be a new slightly larger balance based on the interest being applied to the balance that now interest is also being calculated on. So, it’s essentially interest being calculated on top of interest, plus, of course, whatever the balance was to begin with. And, depending on the product you’re dealing with it can be compounded monthly, quarterly and semi-annually or even just annually. In many cases, though, when we’re talking about lines of credit for medical students and residents, interest is compounded on a monthly basis.

Ashley: Great, thanks Marc. It’s probably valuable, too, for medical students or even residents to do debt projections and take a look and really understand how much, if you’re borrowing a set amount a month or looking at the cost of tuition and your lifestyle expenses, how much debt you’re going to end up with at the end. Is that something you do with medical students?

Marc: Absolutely. There is really a lot of value in sitting down to figure out, OK, now you’ve been accepted to medical school or now you’re starting residency, you know, what do the next three, four or even five years look like in terms of income, expenses and, of course, what the debt is going to look like. We don’t always get it right because a lot of times it’s just projections and estimations with assumptions of what we’re making, but I can promise you that a lot of the clients I’ve worked with, where we’ve done these sorts of exercises year in and year out, they are getting out of their medical training with a lot less debt than those that aren’t going through those exercises or at least thinking about the debt on an annual basis or even more frequent than that.

Ashley: Right. I would imagine it would be very valuable to look at your debt and then also have the plan to pay it back. Next question: When should I consider consolidating my debt?

Marc: So, I think the first trigger point for a medical professional would be right before finishing medical school and transitioning to residency because this is where typically the student loans will enter repayment. Again, it’s going to be a little bit different if you’re looking at provincial student loans from one province to another, but if we’re just talking about federal student loans in this case, this is where federal loans will enter repayment. So, I’d say the first trigger point to sit down to say, does it make sense to consolidate that federal loan with a line of credit and reduce your overall interest expense, or does it make more sense to maybe keep the student loan because you’re going to benefit from loan forgiveness. If you’re going to benefit from the loan forgiveness program I talked about earlier, that’s going to far outweigh any interest reduction by consolidating, and if you consolidate, like I said, you have now just missed the boat on eligibility and you’re no longer eligible for that program. So that would be the first trigger point. But, then even for those that maybe don’t consolidate then and there and maybe leverage the Canada Student Loan Forgiveness Program in the next couple of years, you maybe want to take a look at potentially consolidating the remainder of the student loans maybe after benefiting from the program in one or two years if there isn’t going to be any intention of benefiting from the program again.

Ashley: Great, thanks Marc. I think we need to wrap it up there. I see we just had a few more questions come in; we will get back to you with answers to your questions. A Financial Advisor at your local office will be in contact with you to provide you with the information that you need and answer any further questions that you have. For anybody else who still has some questions or if you come up with some questions going forward, please feel free to go to the MD website and click “Contact Us.” Give us your questions and we will be more than happy to give you answers. I also encourage you to sit down one-on-one with a Financial Advisor in your area and really go through your debt management plan and further financial planning topics. So, we’ll be in touch with you with a link to this webinar and please don’t hesitate to contact us if you have any more questions. We really appreciate you joining us this evening and thank you very much. I hope you found it helpful. Have a great night.

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