Smart financial planning can help doctors manage debt & irregular income in the early years

As a rule of thumb, your total EMIs should not exceed 30-40% of your monthly take-home income.

Unlike other professionals, a doctor’s income can be irregular in the early years and peak much later. Hence, the approach to managing finances for doctors and their families needs to be different. For most medics, their professional life begins with significant debt -- years of specialised education come at a high cost, often financed through education loans.

Just when that begins to ease, the next phase of their professional life --  setting up a private practice, clinic, or diagnostic centre -- brings another wave of borrowing. Add to that personal loans, home loans, or lifestyle-related borrowings, and it’s easy to find oneself in a cycle where repayments dominate financial decision-making. Managing this debt wisely is not just about reducing EMIs; it’s about creating space for long-term wealth creation.

Distinguish between ‘good’, ‘bad’ loans

The first step in tackling debt is understanding the nature of your borrowings. Not all debt is bad. `Good loans’ can be financially advantageous if used for productive purposes. Education loans, for instance, are typically considered good debt. They enable you to acquire the skills and qualifications that significantly enhance your earning potential.

Similarly, loans taken to establish or expand a medical practice -- whether to lease equipment, renovate a clinic, or build a hospital -- can be seen as growth-oriented investments. These generally contribute to future income and carry tax advantages, making them justifiable within a well-planned financial structure.

On the other hand, ‘bad loans’ include high-interest borrowings for depreciating assets or discretionary spends -- such as credit card debt, personal loans for holidays, or luxury purchases. These erode your wealth without enhancing your income prospects and should be paid off on priority.

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Stick to disciplined borrowing, repayment

A disciplined repayment strategy begins with setting a clear debt-to-income threshold. As a rule of thumb, your total EMIs should not exceed 30-40 percent of your monthly take-home income. Crossing this means you’re likely compromising your ability to save, invest, or even deal with emergencies. If you find yourself inching above this limit, it’s time to reassess which loans are critical and which can be cleared off early.

When deciding which debt to tackle first, always focus on high-cost borrowings. Personal loans and credit cards typically come with the highest interest rates and should be closed first. After that, evaluate any short-term unsecured loans. Education and practice loans, especially those with tax deductions under section 80 E of the Income Tax Act or as business expenses, can be repaid more gradually, as long as they’re well managed.

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You may refer to this for the order in which to close your loans:

1. Credit cards: highest interest rate.
2. Personal loans: 12–18 percent interest, short tenure.
3. Education loans: depending on tenure, post-moratorium.
4. Home loans.

The repayment strategy for education loans is to begin the EMIs or part-payments during residency, even if they are small. This reduces the interest burden later. Aim to close education loans within five–seven years of stable practice.

Follow the pointers below to avoid stress:

- Keep your total EMIs under 35–40 percent of your income.
- Build a six-month emergency fund before pre-paying.
- Avoid lifestyle loans (gadgets, luxury cars, weddings).
- Pay credit card dues in full -- no rollovers.
- Check your CIBIL score quarterly.
- Don’t take loans for investing.
- Read all loan terms carefully (processing fees, prepayment penalties).
- Use windfalls to reduce debt, not inflate your lifestyle.

Another important but often overlooked element in debt management is aligning loan repayment with your overall financial goals. For example, if you have a 10-year practice loan but plan to retire in 15 years, your repayment should be accelerated to ensure you enter retirement with a higher kitty. Similarly, if you’re saving for your child’s overseas education or planning to buy a home, your EMIs should be such that you’re able to service them without unduly crimping your lifestyle.

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Consider refinancing to lower the interest burden
Refinancing or loan restructuring may also be prudent, particularly if your credit score has improved over the years or if interest rates have dropped. A doctor with a solid income stream and clean credit history can often negotiate better terms with lenders, be it lower interest, longer tenure, or a more flexible repayment schedule.

Also, before taking a loan for clinic expansion or equipment, ask yourself if the investment will improve your earnings or efficiency in the next three–five years? Calculate the ROI of your investment. Separate your personal and business finances early on. Structure your practice as an LLP or a private limited company, and take loans in the entity’s name.

Ultimately, the right approach to managing debt is rooted in clarity, discipline, and strategic planning. Loans should work for you, not the other way round. For doctors, the ability to handle debt confidently is critical for long-term financial freedom and wealth creation.

The writer is Co-Founder & CEO, Finnovate.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.