to pay off your debt. Should you deposit every pay cheque you receive against your outstanding debt? What should you do with amounts set aside for in- stalment payments? How much should you set aside for living expenses? While some would recommend strictly following the rule that all incoming money should be deposited into your line of credit account in order to mini- mize the applicable interest on your daily balance, others find it becomes extremely complicated, or even impos- sible, to keep track of every line of credit payment. The result is unequal and irregular amounts of cash going in and out, which prolongs the period you previously identified to repay your debt. It is therefore important to choose either a method that mini- mizes interest on your line of credit, or a slightly more expensive strategy that makes it easier to organize repay- ments by creating new accounts and establishing regular transactions.
Keep it simple
Since applying and monitoring a debt repayment strategy can be a consider- able challenge, you may be drawn to a structure that makes it easy to track your financial situation.
On January 1st, after estimating your
billed revenues, you will know how much you can contribute to your RRSP based on last year’s earned income, and approximately how much you will need to pay in tax instalments in the current year based on last year’s tax owing. Making a provisional budget will also tell you the approximate amount you need to cover your cost of living ex- penses. The tried-and-true advice for doctors at the start of practice is to set up a direct debit system that transfers designated amounts to specific ac- counts (RRSP, TFSA, investment ac- count, chequing account, etc.). This is the time for you to consider carefully the pros and cons of using your line of credit as your main account.
It is also a good idea to set money aside in a daily interest account or money fund that has high interest rates between tax instalment due dates. This way, you’ll generate inter- est on the amounts due. If every ac- count has its own purpose, it will be easier to track your financial situation at any time. You’ll see your finances improve surprisingly fast.
Residents and new doctors have many debt repayment options. The most im- portant thing is to prioritize this aspect of your life, talk to an expert and get or- ganized as soon as possible. ⌧
Remember…
As a resident, take ad- vantage of preferential rates on your line of credit.
You may be able to withdraw money from your RRSP tax free through the Home Buyers’ Plan for a down payment on your first home.
It is very important to establish and strictly follow a debt repayment plan. Consider using separate accounts to facilitate payments.
Do not underestimate tax instalment payments, as interest and penalties could be charged. Tax instalment pay- ments form the foundation of your plan. Maximize your tax strategy with a tax accountant you can trust. Take advantage of opening a TFSA, the new investment option made avail- able this year.
Living within your means on a resi- dent salary will ensure you are not sad- dled with overwhelming debt in your first few years of practice.
The cost of your education has likely accumulated to a debt that exceeds the value of a starter home. Make sure you have insurance in place to safeguard your finances while you’re living (in- cluding making loan payments if you become disabled or critically ill) and to pay your final expenses, loans and pos- sibly provide replacement family in- come at your death.
Financial planning and insurance 39
Sample account organization structure
Daily high inte- rest account for
tax instalments RRSP Tax-Free Sav- ings Account Non-registered investment account Chequing ac-
count for deposits and transactions
Billing
Line of
40
Fast track:
Family planning timing should be considered very carefully.
Parental benefits vary greatly from province to province.
P
hysicians who decide to start a family do not have the same benefits as salaried workers in large companies, many of whom enjoy insurance plans that allow them to take an extended period of time off work without serious financial stress. In the field of medicine, there are major differences in the bene- fits granted to residents, general practi- tioners and specialists who wish to become parents. The birth of a child therefore requires meticulous financial planning, because the disruption of work that precedes or follows the birth can lead to a major decrease in income. Most provincial medical associations have negotiated with their respective Ministries of Health parental leave in- surance to help physicians financially when they stop practising to have a child. The following table shows howmuch you are eligible to receive during that time. The most generous programs are in Manitoba and Prince Edward Is- land, where physicians can receive up to $1,200 per week (this must repre- sent at least 60 per cent of your gross billing) for 17 weeks; in addition, during parental leave, physicians in these two provinces are permitted to practise part-time and earn an additional $1,000 per week.
Financial family planning tip
Physicians starting a family should review their financial plan and ensure they have a solid foundation of financial security in place. Will you be able to manage your debt, cash flow and sav- ings? Will you have sufficient emer- gency funds set aside? Have you reviewed your income and asset protec- tion in the event of death, disability or illness? Have you sought expert incor- poration advice if applicable? Have you reviewed your tax deferral strategies? ⌧
New in Practice 2009: What medical residents need to know before entering practice