Interest rates have been at historic lows for a number of years now and it often leads physicians to ask what they should do with their surplus cash-flow to create the most wealth. Should you accelerate the payoff of student loans and mortgage debt or should you invest the surplus because borrowed dollars are so cheap that, in some cases, the return on the invested dollars could be higher than the interest costs?

Looking at recent history, you could certainly make the case for investing free cash flow over paying off debt. For instance, the S&P 500 has annualized returns of 9.33% over the three years ending May 31, according to Morningstar. According to the Federal Home Loan Mortgage Corporation (Freddie Mac), the highest national average 30-year mortgage rate in that three-year time has been 4.43% back in January of 2014. That was easy, keep the mortgage and invest the difference, right? Not so fast, there’s a lot more to it than that. We have a required disclaimer in our industry, “Past Performance Does Not Guarantee Future Results,” so while the S&P 500 may have returned 9.33% annualized over the past three years, it returned -0.73% in 2015. Also, don’t forget reducing or eliminating your mortgage or other debt offers guaranteed return equal to the interest rate you pay. While mortgage rates may be historically low, many of them are still higher than high-quality corporate and government bonds available to investors, and many investors have bonds in their investment portfolio.

More importantly, decisions like these should be run through each person’s comprehensive financial plan and, like fingerprints, every person’s financial plan is unique. When you base the decision on an individual’s personal financial plan, which includes their long-term goals, you often find this is not an either/or decision.

Goals and a comprehensive plan can work somewhat like an algorithm for deciding where to put extra cash-flow. Your goals will likely create a schedule for eliminating debt that may not utilize all of your free cash-flow. If you want the freedom to work part-time in ten years, that may require a payment schedule for your mortgage to be eliminated by then. Any free cash-flow after you’ve made the monthly payment could then be invested. Likewise, if you have kids that will be heading to college, one consideration is to determine a payment schedule that eliminates the mortgage by the time your first child goes to college, freeing up cash flow to help cover education costs, if necessary.

If you are an early-career physician expecting to have the opportunity to invest or buy into a practice in the next few years, it may be better to direct extra cash to a conservative investment so you have the capital, when needed, to buy in. Once that’s happened, you might start paying off your mortgage more aggressively or consider investing additional dollars, depending on what goals exist at that point.

What you do with surplus cash-flow is the right question to ask, and the best way to answer the question is to sit down and create a long-term comprehensive financial plan with a financial advisor that accounts for all of your goals. If that’s done, then you will have a clearer answer for where surplus cash-flow should go each month to best achieve your goals.

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