1. Pay off Student Loans
When beginning residency, the first thing you should is gain a full understanding of your student loans. Use an account aggregation service similar to Mint, Quicken, Personal Capital, etc. to view all of your loans in one place throughout the debt payoff process. These tools will prove to be a great resource.
First things first, consolidate all federal loans. Consolidation of loans will give you access to certain loan repayment plans and forgiveness programs. Do not consolidate federal loans with private loans, you will lose eligibility for Public Service Loan Forgiveness (PSLF). Once consolidation is complete, confirm that you qualify for Public Service Loan Forgiveness. PSLF was established in 2007, under the College Cost Reduction and Access Act, to allow certain students to have their federal loans forgiven. The easiest way to eliminate debt is to have the loans forgiven! Eligibility for PSLF is only applicable to physicians who are employed by a public or non-profit entity. If you qualify and make 120 consecutive monthly payments, your loans will be forgiven.
Once enrolled in PSLF, you will be asked to choose a repayment program. Ensure that you are enrolled in an income driven repayment program. Income driven repayment plans calculate your monthly required payment based on your salary as a resident. When will you ever make less money than now as a resident? Because you have a relatively low income, this will allow for significantly lower payments before you earn more as an attending.
If you begin the clock on your 120 payments early in residency, you could be almost half way completed with the student loan forgiveness process by the time your salary (and payments) are increased as an attending.
If you do not qualify for PSLF, or lose eligibility due to job change, it could make sense to change your payment plan, or even refinance through a private lender. You could receive lower rates and save significant dollars in interest. By refinancing, you would permanently lose eligibility for loan forgiveness. Consider this decision wisely before taking action.
Private loans have significantly less options and are more stringent than federal loans. The best course of action is to consolidate all private loans and shop around for lower and fixed (not variable) rates. Popular companies for refinancing are SoFi, Laurel Road, and Earnest.
2. Purchase Long-Term Disability Insurance
If you are not physically or mentally able to continue practicing as a physician, how will you afford your current living expenses and monthly student loan payments? If you are not able to earn a typical physician’s salary, you could be forced to file for bankruptcy. However, student loans are one of the few types of debt that are not forgiven in the event of bankruptcy. You could find yourself in a situation where you are not able to earn a living as a physician, yet bear the financial burden of one.
Long-Term Disability Insurance will protect you in this scenario. Disability insurance is purchased in units of monthly payouts. For example, if you purchased a $4,000 per month policy and experienced a career ending disability, the insurance company would be obligated to pay you $4,000 per month until Full Retirement Age as is determined by the Social Security Administration. Usually age 66 to 67.
Long Term Disability Insurance is relatively cheap as you are most likely young and healthy. As a resident, it may make sense to only purchase a policy large enough to cover your student loans, then later increase this coverage once you become an attending physician. Once your earnings increase after residency, it is recommended that you purchase a policy that covers 60% of your monthly pre-tax earnings.
It is important to choose a policy that covers “own occupation” instead of the alternative “any occupation”. The last thing you want is to be unable to work as a physician, yet the insurance company denies coverage because you are still capable of working in an alternate line of work.
3. (Maybe) Purchase Term Life Insurance
Avoid purchasing a Whole Life Insurance policy at all costs. Whole Life Insurance is a product that mixes insurance with savings, and costs on average 25x more than a traditional Term Life Insurance Policy. As a resident, you will have many insurance salespeople contacting you with various confusing and misleading sales tactics for you to purchase one of these policies. These policies pay the insurance agent a very large commission for selling this product and are not in your best interest. Purchasing a Whole Life Insurance Policy is one of the most damaging decisions you could make as a young physician. We will discuss this in depth later but remember to never work with a Financial Advisor who collects a commission.
Term Life Insurance does not have a savings or cash value component, which is what makes the product so affordable. This type of insurance is the best option if you have children or a spouse that depend on your income. I recommend purchasing 12-16 times your attending salary, as a loss of your income could lead to years of lost salary for your dependents. A $2,000,000 term policy could cost as little as $65/month for a healthy physician.
Unless you have people depending on your income, skip this tip until a later date.
4. Do Not Buy a Home During Residency
The largest issue that comes with home ownership is the overall uncertainty. If the roof needs replaced during your tenure, will you have the funds to do so? What if your attending job is in another state, will you be able to sell your home in a timely manner? While renting may not seem ideal, you will have a much greater control and of you living situation during your 3-5 years of residency.
Renting allows you to better budget your limited funds. It is far earlier to plan for one rent check a month, then the many variable expenses that come with home ownership. If an appliance needs replaced, you may be forced to cut into your emergency fund. As a renter, you will be better able to project out your living costs during residency than by owning a home.
Upfront costs are significant when it comes to purchasing a home. Many first time home buyers forget to include closing costs and realtor commissions when purchasing a home. These fixed costs along with property taxes, and homeowner’s insurance make home ownership more expensive than once expected. The shorter you expect to stay in your home, the more beneficial it will be to rent.
The best course of action will be to find a reliable roommate or two. When you are spending most of your time either at the hospital or sleeping, there isn’t much time to enjoy your home. A better use of your money would be to purchase a quality mattress.
5. Live Within Your Means / Budget
Budgeting is the backbone of living within your means. As residency may be the first time you have received a significant paycheck, the first step to financial success is to build a monthly budget for your income and expenses. Once a budget is completed, you will gain an understanding of how much money you are able to set aside monthly to begin building an emergency fund. Once an emergency fund is fully established, you will be better suited to deal with an unexpected expense without having to resort to credit card debt.
Residency is not the time to begin saving for retirement or investing. However, it is crucial that you avoid spending beyond your means, accumulate additional debt, or take on unnecessary recurring expenses (expensive car payment, cable bill, subscription services, etc.).
While your resident salary may not seem like much, you are earning close to the average U.S. family. If an average family can earn this amount for the entirety of their career and even save for retirement on that salary, I am confident you can find financial success in residency. Keep an eye on your spending and you will come out of this important period far ahead of your peers. If you can live within your means as a resident for the next few years, you will have what it takes find financial success in life.
6. Hire a Financial Advisor
You understand the benefits of seeing a specialist in the field of medicine. Someone who is highly specialized in their field can identify small issues in a patient’s health prior to them becoming serious conditions. The same is true when it comes to personal finance. Finding the right Financial Advisor can provide clarity in a complex field that you are not specialized in. Something as important as your financial situation should not be considered at the kitchen table after a long day of work. Find a professional you trust, whose sole job is to manage and advise on your finances, so you can focus on what you do best.
The highest designation a financial advisor can hold is the Certified Financial Planner® designation. A Certified Financial Planner® has completed the rigorous standards set by the Certified Financial Planning Board. You can ensure that these advisors have met certain educational standards, have at least three years of experience, met certain ethical standards, and passed their difficult test covering the fields of investments, taxation, estate planning, retirement planning, insurance, etc.. If an advisor has not taken the time to acquire this designation, they may not be taking their career as serious as others in the industry. A good financial advisor will provide advice and planning strategies throughout the phases of your life. Having a professional plan out your financial future and take the steps to avoid financial peril will take a large weight off of your shoulders.
How your advisor is paid is incredibly important. Most investors should use an independent, Fee-Only, Registered Investment Advisor as they are governed by a higher fiduciary standard. Advisors are either paid fees directly by their clients or a commission from the company they work for. You should avoid the latter.
Advisors who are paid by commission are not obligated to work in your best interest. Commission advisors are much like used car salesmen. Their goal is to sell as many cars as possible to gain the largest commission from their company. Regardless if the car is the right fit for you. Commission advisors may pressure you into buying unnecessary insurance products, place you into subpar investments to gain a higher commission, any may not have your best interest in mind.
Advisors who are paid only by their client’s aka Fee-Only are required to have your best interest in mind. Their compensation does not vary based on their investment or insurance recommendations, so they will recommend only what is beneficial to their clients. Most Fee-Only advisors charge either a flat-fee to work with them, or a percentage of the assets they manage.
The two common places to find Fee-Only Advisors is through the National Association of Personal Financial Advisors or the XY Planning Network.
7. Build an Emergency Fund
Expect for at least one disaster to occur during residency. Medical bills, car trouble, or family issues will deviate you from your monthly budget dramatically. This could leave you with no choice but to take on unwanted credit card debt. I recommended saving at least six months’ worth of your monthly expenses into a different account than the one you do your daily spending.
For example, after you complete your budget (Tip #5), let’s say you determine that you spend $2,000 a month. Expect to set aside $12,000 for unexpected expenses. Consider using one of the many popular online banks to see if you can find a higher interest rate for your emergency fund.
If you are working with a Financial Advisor, consider using a Roth IRA as your emergency fund. Roth IRAs allow for significant tax savings as your invested money grows tax free. Most attending physicians earn too much money to contribute to a Roth IRA, so take advantage of this perk while you are in residency. Contributions to your Roth IRA can be withdrawn without penalty if needed for an actual emergency. If you do not end up using these funds, they grow tax free toward your retirement.
8. Have your Attending Contract Professionally Examined
Once you complete your residency, consider having a contract lawyer or financial advisor examine your attending contract prior to making any decision. It may be beneficial to gain context on if your employer is presenting you with a generous, average, or subpar offer. Employers are not required to look out for your best interest when it comes to negotiating a contract, or some specific contract details. While your contract may look great at first glance, having an experienced professional assess the contract could shed light on part of the contract that could be improved upon.
The reviewer should ensure fair compensation, including guaranteed salary, signing bonus, and performance-based incentives. In addition to compensation aspects of the contract, the reviewer should confirm that no aspects of the contract are vague to interpretation. A lack of specificity could make the physician’s time under the employer more difficult.
Is your call schedule reasonable? What if the numbers of physicians are reduced and your call time is increased? Is this addressed in the contract, and are you compensated? Could you negotiate an additional week of vacation? Does the contract have a non-compete that would make finding new employment in your area more difficult in the event you leave that employer?
These are all details that could make your first attending contract more enjoyable if addressed from the start.
9. Construct an Estate Plan
Estate planning is not just for the wealthy, every individual and family needs an estate plan. Estate planning is the process of ensuring that your wishes are carried out after death. After you pass away, you do not get to decide what happens to your assets, unless they are considered in a comprehensive estate plan. Listed below are the common estate planning documents:
Your financial planner can help you work with an estate planning attorney to put together a plan that works for you. Estate plans are living documentation and are to be updated as your life changes and evolves.
Investing comes last on our list and should only be considered after all the above steps are completed. Residency is a time to begin to develop positive financial habits, contribute toward debt, and take the steps to prepare for a healthy financial life. As an attending you will have plenty of years and funds to invest sufficiently. There is one exception where it may make sense to invest your money during residency.
Your best investment opportunity in residency is to take advantage of your employer’s match on their retirement plan. If you work for a hospital, they will have a 403(b), which is like a 401(k) for nonprofit companies and government organizations. If your resident salary is $50,000 and your employer offers a dollar for dollar match on your first 5% of contributions, they would match up $2,500 into your account if you contribute $2,500. If you begin taking advantage of this at the beginning of residency, you could save $20,000 by the time you start as an attending! If your employer offers Roth 403(b) contributions, take advantage of this option as you are in the lowest tax bracket you will ever be in.
Ryan M. Bayonnet, CFP®, MSF