Six Financial Tips for Resident Physicians
As a resident physician, you’re at an exciting and challenging time in your life. You’re finally putting into practice what you spent all those years studying, yet in many ways, you still have a lot to learn. From a financial standpoint, you’re finally earning a larger income, but if you’re like most residents you’re coming out of medical school with a sizable amount of student loan debt. The following six tips can help you get through your residency without doing harm to your financial well being and can lay the groundwork for a lifetime of smart financial decisions.
1. When it comes to your finances, remember that you’re not an attending physician yet.
Of course, you’re reminded of this with every paycheck but it bears repeating. Many residents are tempted to live like they’re already earning an attending physician’s salary. That big, beautiful house you want to buy would come with a big, not-so-beautiful mortgage. That expensive car would involve a hefty monthly payment and a high insurance premium (unless it landed in your garage as a very generous gift). If you’re shouldering so much debt that you’re are barely getting by on a resident’s salary, you’ll be stressed out for the duration of your residency. Even worse, you’re shooting yourself in the foot financially because you’re not setting anything aside for the future.
Taking on additional debt for a house and/or expensive car, on top of your student loan debt, means your monthly loan payments will take a substantial bite out of your income. The interest expense alone represents a big opportunity cost – you could be using that money to help build a stable, enjoyable life for yourself. Bottom line: the true cost of living like an attending physician when you’re still a resident simply isn’t worth it.
2. Face debt head-on. Make sacrifices to pay it off as quickly as you can.
Don’t be tempted to request a forbearance on your student loans simply because you feel it is a struggle to get by on your resident’s salary. There are a number of income-based repayment programs you can use to start attacking that debt right away, so you can pay it off as soon as possible. Deferring your payments might seem attractive now, but you’re likely to regret it later. Debt is a weight around your neck. Chip away at it every chance you can – even small amounts add up if paid regularly. When you’ve paid it off and the weight is gone, it’s an incredible feeling of freedom. You’ll have more opportunities to save for your big goals and to indulge in some nice “extras” without any nagging feeling undermining your enjoyment.
Residency is not the time to take on unnecessary debt. Don't be tempted by "doctor's loans", promoted for things you don't really need now. It's not free money. Adding more debt to your plate now means you'll be repaying even more, plus interest, later. Instead, live like you’re still a student for a few more years. Pay down your student loans aggressively. When you look back on it, you’ll be glad you did.
3. Protect what matters most.
You have auto insurance for your car and renters or homeowners insurance for your home, but do you have insurance to cover what’s most important? If you are married, and especially if you have (or plan to have) children, you need to protect your family from a financial catastrophe in the event you die prematurely, or are unable to earn an income because you develop a (covered) physical or mental disability.
Purchasing life and disability insurance while during your residency can be a smart choice. These insurance premiums are based, in large part, on your age and health at the time you apply. You will never be younger than you are now, accidents can happen to anyone, and no one knows what’s in store for your health.
4. Plan for your future.
You may feel like you don’t have enough income or assets at this point to justify financial planning. Actually, this is the perfect time to begin working with a financial planner who has experience working with physicians. It’s better to map out your journey before you make a series of random turns. You might end up in the middle of somewhere you don’t really want to be, with signposts pointing in different directions.
While you may feel like you’re barely scraping by on your resident’s income, you know there is a light at the end of the tunnel. Your financial situation will improve when you finish your residency, so why not make a plan today that reflects that reality? Identifying your long-term financial goals (buying a home, funding college educations, saving for retirement), with the understanding that your income will increase after your residency, can help make an informed plan to achieve those goals. A financial planner can help you with this now, analyzing “what-if” scenarios so you can make choices that reflect your current income and your expected future earnings.
5. Start saving for retirement - now.
For most resident physicians, retirement seems too far away to even think about. The reality is, the sooner you start saving for retirement, the better (even teenagers can set up a retirement account, as soon as they start earning an income). Take advantage of any opportunity you have to participate in an employer-sponsored retirement plan. This is especially true for any retirement plans that come with an employer “match,” as that’s essentially free money to help you reach your savings goals.
There are a number of different retirement savings vehicles, with names that sound similar but are actually quite different (IRA, Roth IRA, 401(k), Roth 401(k), SEP IRA, to name some of them). It can all be quite confusing. This is an area where your financial professional can help you sort through your options and help you make sound decisions.
Start now to give your retirement savings as much time to grow, tax-deferred, as possible. When it’s finally time to retire, you’ll be so glad you did.
6. Create, and stick to, a budget.
To figure out how your resident’s income will pay for the things you truly need now, cover your student loan payments and allow you to make regular contributions to your retirement savings, you need a monthly budget.
Budgeting will give you a clear picture of your income, your mandatory expenses, your discretionary spending, and what you may need to adjust to achieve your regular investing target. If you feel like there’s too much going out and not enough coming in to cover it all, a budget will show you how to assign your income to the “work” of covering each category: living expenses, student loan payments and savings. A budget will highlight where your money goes, and can point out things that may have been in your “need to have now” category but should really be relabeled as “I can wait a while for that”. It doesn’t matter what other people are buying, or what someone told you a doctor “should” have – this is your money, your financial health, your future.
Sticking to a reasonable budget will lay the groundwork for your financial future, through your residency and beyond. For more budgeting tips for physicians, take a look at this article: 4 Tips to Help Physicians Create (and Stick to) a Budget.
Lean on Your Financial Professional
Residency is an exciting time, and also a demanding time. While finances may be tight now, remember this is a stepping-stone on your career path, a career that you can expect to offer many rewards, financially and otherwise. Making smart financial decisions during residency will position you to truly enjoy that career and meet your financial goals.
If do not already have a financial planning professional who specializes in working with doctors, we can help. By starting this process during your residency, you’ll see the value a financial advisor can bring you throughout your entire career and beyond.
Gold Medal Waters is a fee only financial planner located in Boulder, Colorado that specializes in serving the unique needs of physicians and high net worth clients. Coordinating a great financial plan isn’t easy. Learn more about what sets us apart, or talk to an advisor and get a free meeting to see if we are the right firm for you.