There is a common misconception amongst veterinarians that personal debt, particularly student loan debt, is a huge roadblock toward securing financing and becoming a practice owner. While debt and student loans can certainly impact your ability to be approved for a loan, the mere presence of debt and loans is not the hindrance many believe it to be.
Understanding Your Monthly Cash Flow
Lenders are very interested in your monthly cash flow as this provides the basis on your ability to repay debt obligations. Cash flow consists of two sources:
Income (What you bring in every month) & Expenses (What goes out every month)
Take the example of Kaitlyn and Mark, a married couple with 2 children. Kaitlyn is an associate veterinarian and Mark works for the government. Below is an example of their monthly cash flow:
Income
| Mark Monthly Take Home Pay | $5,000 |
| Kaitlyn Monthly Take Home Pay | $7,500 |
| Income Available for Living Expenses | $12,500 |
Savings & Donations
| Mark Roth IRA | $500 |
| Kaitlyn Roth IRA | $500 |
| Kid’s College Savings | $500 |
| Church Giving | $200 |
| Local Animal Shelter Giving | $200 |
Living Expenses
| Mortgage | $2200 |
| Childcare- 2 kids | $1600 |
| Student Loans-(standard repayment) | $1600 |
| Car Payments | $700 |
| Car Maintenance/Gas | $250 |
| Food-Groceries | $1100 |
| Food-Eating Out | $1250 |
| Utilities | $250 |
| Phone | $150 |
| Cable/Internet | $100 |
| Insurance | $85 |
| Medical/Dental | $100 |
| Pet Care | $150 |
| Clothing & Entertainment | $250 |
| Gym | $100 |
| Other | $400 |
| Total Savings/Expenditures | $12,185 |
There is a wealth of information we can derive from this information. On the personal side, we have a better understanding of where they are spending their money every month, and what adjustments could possibly be made. Could Kaitlyn and Mark decrease their ‘eating out’ budget and put more toward savings or paying off debt? What options exist for the $315 monthly excess?
For Kaitlyn, who is considering purchasing an existing practice and becoming a practice owner, this information helps lenders diagnose her ability to repay the loan. Generally, lenders like to see a debt-to-income ratio of 50% or below. What is debt-to-income ratio?
Debt to Income Ratio = Monthly Debt Payments / Monthly Salary
According to Live Oak Bank, when opening or purchasing a veterinary practice, the practice should be able to support the new veterinary owner’s salary with at least a 50% debt-to-income ratio.
EXAMPLE
Let’s look at the example of Kaitlyn and Mark again. When we read their income statement, we can see that their monthly debt obligations total $4,500 ($2200 mortgage + $1600 student loans + $700 car loans. What this means is Kaitlyn would need an estimated minimum salary of $9,000 per month to cover the 50% debt-to-income ratio.
Monthly Debt Payments $4,500 / Monthly Salary $9,000 = 50% Debt-to-Income Ratio
Ideally this figure would be lower, as 50% DTI (Debt-to-Income) is the maximum ratio lenders like to see. But interestingly this means that Kaitlyn may qualify to purchase a higher priced practice that provides a higher salary than a lower priced practice which may not provide a high enough salary to cover her current debt and lifestyle.
So while student loans and other debts are a factor during the loan approval process, lenders are generally much less concerned about the total amount of debt you carry and more concerned with your total monthly payments. This is where proactive student loan planning can prove beneficial.
Automate Your Monthly Cash Flow
In addition to automating your savings and bills, consider using one of the many apps & softwares which can help you track and categorize your monthly cash flow. Some of the more popular tools for tracking cash flow are Mint, YNAB, Personal Capital, PocketGuard. It is less important which one of these you choose, just as long as you choose one. It may require some monthly work to ensure transactions are being categorized correctly, but once you get a handle on the app it becomes a great tool, and you may be surprised to learn where your money goes every month! Below is a screenshot of how one of these tools, in this example Mint, can help you track and categorize your monthly cash flow. You can categorize your income and expenses and even create some custom categories. From there, you can develop a spending plan and create reports to keep you updated.
More than just a budget, understanding your cash flow can have a wide reaching effect on your entire financial picture. Take some time to get a handle on where you stand.
For questions on how to best utilize your cash flow when considering practice ownership, we encourage you to download our FREE e-book “The Veterinarian’s Guide to Personal Finance: 7 Actions to Take When You Want to Own Your Own Practice”.
You can also visit us at FivePoints Financial Planning or schedule a complimentary phone call to see how our services can benefit you.
Andrew Langdon, CFP®, EA, MBA is a fiduciary fee-only financial planner who specializes in serving veterinarians in their pursuit of practice ownership.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Andrew Langdon, and all rights are reserved. Read the full Disclaimer.
