If you’ve just finished residency and started working as a sole practitioner, you’re probably facing one of the most common financial questions new physicians ask:
Should I invest my extra money or focus on paying down debt?
It’s a fair question — and one that doesn’t have a one-size-fits-all answer. Let’s walk through a real-world example that many new doctors can relate to and unpack what makes the most sense financially and practically.
1. The Situation
You’re 33 years old, newly practicing on your own, earning between $300,000 and $400,000 a year. After expenses and deductions, your taxable income is about $260,000.
You have $150,000 remaining on your student line of credit, with an interest rate of prime minus 0.25%, or roughly 3.75% based on today’s rates. Your living expenses are around $4,000 per month, leaving you with a meaningful monthly surplus.
You’d like to buy a home within the next 3 to 5 years, but you’re also thinking ahead to retirement and wondering whether you’d be better off investing surplus cash to grow your down payment or paying down debt first.
You’re also aware that the global economy has been unpredictable, and you’d like to make decisions that balance risk with stability.
2. The Trade-Off: Guaranteed Return vs. Potential Growth
When you decide between paying down debt and investing, you’re really weighing a guaranteed return against a potential one.
Paying Down Debt
Each dollar you put toward your student line of credit gives you a guaranteed, risk-free return equal to your interest rate — in this case, 3.75% after tax.
As a sole practitioner, you pay your debt using after-tax dollars, meaning that to “beat” that 3.75% return through investing, you’d need an investment that earns more than 7% before tax, since your marginal tax rate in Ontario at this income level is roughly 48%.
(3.75% ÷ (1 – 0.48) ≈ 7.2%)
That’s not impossible — but it’s not guaranteed either, and short-term investments rarely deliver that kind of consistent return without risk.
Investing
Investing, on the other hand, can offer higher long-term returns — but at the cost of volatility. Over time, a diversified portfolio might average 5% to 7% per year before taxes. But if you’ll need the funds in the next few years for a home purchase, that volatility matters.
Stock markets can swing 10–20% in a single year, up or down. If you’re planning to buy a home soon, that risk could work against you just when you need your cash most.
3. The Home Goal: Timing Is Key
Your goal of buying a home within 3 to 5 years is a major factor in this decision. Money you plan to use for a down payment should be kept safe, accessible, and low-risk.
That means prioritizing liquidity over returns. A high-interest savings account or a short-term GIC (inside a TFSA, if contribution room is available) is ideal. It earns a modest return but protects your principal.
In contrast, paying down debt gives you certainty and guaranteed savings, but it doesn’t directly grow your down payment fund. The right solution often involves a combination of both.
4. The Balanced Approach
Here’s a practical strategy that aligns with your goals, income, and debt level as a sole practitioner:
-
Pay yourself first.
Keep personal and business finances separate. Transfer a consistent amount from your practice account to your personal account each month — enough to cover your living expenses and savings goals. -
Tackle high-interest, non-deductible debt first.
If you have any credit card or personal loan debt, pay that off immediately. Those rates far exceed anything you can earn from investing. -
Make steady progress on your student line of credit.
Treat it as a priority but not an emergency. Making regular, meaningful payments will steadily reduce your balance without straining your cash flow. -
Build your home fund safely.
Set aside monthly savings toward your down payment in a TFSA or high-interest account. This keeps the funds tax-free (in a TFSA) and liquid for when you’re ready to buy. -
Delay aggressive investing for now.
Once your student debt is paid off and your home purchase is complete, you can begin to invest more strategically through RRSPs or other vehicles. At that stage, you’ll also have the option of incorporating your medical practice, which opens up new tax planning opportunities — including lower tax rates on retained earnings and the ability to invest within your corporation.
5. Thinking About Tax Efficiency
Because you’re currently a sole practitioner, your business income is taxed in your personal hands at full marginal rates. That means any income you invest personally (outside a TFSA or RRSP) will also be taxed personally — reducing your net return.
By paying down debt first, you’re effectively earning a tax-free, guaranteed return equivalent to your loan’s interest rate. It’s one of the few times in personal finance where “boring” is also “brilliant.”
Once you incorporate, you’ll have more flexibility to leave income in your corporation at lower tax rates, invest more efficiently, and even deduct interest on money borrowed within the business for income-producing purposes — but that’s a later-stage consideration.
For a deeper explanation of how different types of investment income are taxed — including interest, dividends, rental income, and capital gains — see our companion article:
[How Investment Income Is Taxed — What Every Medical Resident Should Know.]
That piece breaks down the impact of income tax on each type of income and shows how even small differences in tax treatment can affect your long-term returns.
6. The Emotional Factor
Numbers matter, but peace of mind counts too. Many physicians describe paying off their line of credit as a turning point — a sense of financial relief and ownership over their money.
If you feel anxious carrying debt, paying it down is not only smart financially — it can also reduce stress and increase confidence in your long-term plan.
7. Putting It All Together
Here’s the simple summary:
-
Paying down debt gives you a guaranteed after-tax return of 3.75% — equivalent to roughly 7% pre-tax.
-
Investing could offer higher returns, but it carries risk, especially over a short 3–5 year period.
-
With a home purchase in sight, your surplus should be split between steady debt reduction and safe down payment savings.
-
Once you’ve paid off the student line and purchased your home, you’ll be ready to pivot toward long-term investing and incorporation strategies.
8. Next Step: Speak with Someone Who Understands Physicians
If you’re a sole-practitioner physician trying to decide between paying down debt, investing, or saving for a home, we can help you look at the full picture — including taxes, interest costs, and future incorporation planning.
We offer a complimentary 30-minute consultation for physicians at all career stages. There’s no pressure, no sales pitch — just a clear conversation about what makes the most sense for you right now.
You’ll leave with a better understanding of your options and the confidence to move forward.
Disclaimer:
This blog post is for general informational purposes only and should not be relied upon as tax, investment, or financial advice. Every person’s situation is unique. You should seek advice from a qualified accountant or financial advisor before acting on any information contained here.
