Financial Planning For Resident Physicians, Overview
As Match Day fast approaches, many a graduating doctor will “match” with the hospital where they will complete their residency.
If this is you, or if you’re only a year or two into residency, you might be wondering where to begin your financial journey. You’ve put a remarkable amount of time and energy into becoming very knowledgeable in one specific area of life: medicine. Your residency is going to take you even deeper into a medical specialty. Depending on your career goals, there may be a fellowship, or more training or research after that.
You carry a heavy burden and time is precious. On the few days you have off, it can be difficult to muster up the energy to learn how to put your financial life together—especially if you have a family. And if you have a family, you probably feel like you’ve been neglecting them for a few years now already.
With the busy resident in mind, over the course of the next few weeks I’ll be writing articles about some of the things that I believe all residents should know as they begin what I truly hope is a fulfilling and rewarding career in medicine.
This first article in the series will broadly cover the topics that I will write about in greater detail in articles to come. Think of this as a table of contents, or a checklist, to familiarize yourself with what is to come, and what you should work towards. If it feels overwhelming, don’t worry. As you begin taking steps forward, even small ones, you’ll see over time that you’ve covered a great deal of territory.
Item #1 - Dream.
Create a vision for your life and what you want it to be like. Yes, include goals, but get to the heart of what you really value. If you’re married, discuss with your spouse how you’re going to balance the time that you must commit to work with how you’re going to live a full life along the way. Will you do things differently than others have before you? How will your values translate into daily life?
Item #2 - Tell your money where to go.
Congratulations! You’re making money now. With $200,000 in medical school debt, the $57,000 or so that you make might feel a little discouraging. Don’t despair though, you’re making more than what the average working American makes. If you’re married and your spouse works, you’re actually doing quite well, at least in comparison to Americans in general.
In Dave Ramsey’s book The Total Money Makeover, Dave describes a budget as a tool to tell your money where to go, instead of wondering where it went. Anyone who’s making an income knows that when you get to the end of the month, it’s remarkable how fast the money evaporates. Where does it go? Without a good budget, it’s hard to say.
Building the budgeting skill from the very beginning is key to your long term financial success. Don’t expect it to get easier once you complete residency and are making quadruple what you’re making now. It seems absurd to write that, but many a high income earner has struggled with allowing their spending to keep pace, or outpace, their income. There’s a lot of poor high income earners out there—at least in terms of overall net worth.
Item #3 - High interest debt is not your friend.
If you’ve amassed some credit card debt in medical school, this has got to go. I’ve been disappointed lately with some of the physician-turned-financial bloggers who’ve written about credit card churning, and sneaky tricks to amass cash back and travel rewards. Sure, these benefits can be nice, but only if the card is being responsibly used. Bottom line: If you’re using a credit card to buy things you can’t afford and are carrying a balance month over month, you need to pull a Dave Ramsey and cut those cards up.
Item #4 - Prepare for the flood.
Many of us are familiar with the story of Noah’s ark. While everyone partied, Noah worked hard to build a ship for the “rainy day” that eventually came.
Some day you’re going to have a “flood” in your life. It is going to happen. Are you going to prepare for it?
An emergency fund is a first step in preparing for unpredictable life events.
Item #5 - Carefully consider your dwelling.
Are you thinking about buying? Think again. I know it can be frustrating to rent. You feel like you’re throwing money away. But before you decide that you want to embrace home ownership, consider how long you’re going to be in that area. Is it likely that you’ll be staying after residency for a fellowship or to work as an attending? If that’s unlikely, you should seriously consider renting. Don’t treat your home like an investment. Maybe you’ll get lucky and will end up earning money on the sale of your home. But maybe you won’t. As William Bernstein wrote in The Four Pillars of Investing, “[i]deally, a fine painting, like a house, is neither a speculation nor an investment; it is a purchase. Its value consists solely of the pleasure and utility it provides now and in the future” (45). And there’s a lot more to a home than building equity and not “throwing away money” in rent. Trust me, I just installed a french drain because we were getting hammered by water coming into our basement during heavy rain storms. It would have been nice to call a landlord and let them handle the cost and burden of fixing the problem.
Item #6 - If you’re going to get help, choose wisely.
There’s nothing wrong with outsourcing things in life that you either don’t like to do or don’t have the time to do. Some of you will choose to handle your financial affairs completely on your own. I salute you. Others will choose to find some help. For those who do, I have some bad news: Good advice for a fair price can be hard to come by.
You should definitely avoid financial salespeople. These are individuals that are sold on commission for selling you a product. Don’t be surprised if you get a phone call (or a lot of phone calls/emails) from people who identify themselves as financial advisors. Don’t be surprised if they tell you that one of your friends, co-residents, or someone else, recommended that they call you. They’ve been trained in these tactics because you are more likely to say “yes” to a meeting if you feel like they know someone that you know. I know this because I started my career as a “financial advisor” with one of these companies.
Don’t do business with people who provide “free” advice. That should be a red flag. They provide free advice because it leads to a product sale. And they will be incentivized to sell you expensive and likely inappropriate products for your situation.
You’ll want to work with a “fee only” financial advisor (not commission, or even “fee based”) who adheres to a fiduciary standard of care and has some industry-leading credentials like the CFP®️ or ChFC®️, or both. A Master’s degree in financial planning is a big plus too.
You might find that a lot of financial advisors will have a meeting with you, ask you how much you have to invest, after which they’ll smile at you, give you a few tips, and then show you the door with the invitation to come back once you have investments to roll over. For this reason, I have big problems with traditional AUM (assets under management) compensation models where advisors get paid on what you choose to invest with them.
I suggest you seek out advisors who get paid based on their time and service, not based on product sales or investments under management.
If you’ve been working with a financial advisor and all they want to talk about are investments or insurance, but not your student loans, it’s probably a sign that their compensation is derived from one or both of those sources.
Item #7 - Protect your income.
No one knows better than you how much you’ve sacrificed or how hard you’ve worked to get to where you are now. Because life is uncertain, the opportunity that you’ve created for yourself can be ripped away in the blink of an eye. You’ll know people in your career who will die too young, or get disabled and not be able to perform their job duties for a certain amount of time, or indefinitely. I’ve played on a resident physician soccer team for the past few years and I’ve seen my fair share of scary moments. One doctor came out of goalie with the bone protruding at an odd angle from the little joint of his pinky finger. Good thing he wasn’t a surgeon. Another resident smashed his knee and was in crutches for some time thereafter. So far, fortunately these haven’t affected anyone’s career.
You will want to get the right type of disability insurance. You probably have something through your employer, but the definition of disability likely isn’t very favorable. “Own occupation” definitions of disability are most favorable and are the ones you want to look for in an individual policy. Lock this in while you’re young and healthy, and consider paying for an “additional purchase benefit” so that you can increase coverage limits when your income increases without having to undergo a future health screening.
You’ll want to get your disability insurance from an independent agent who does not have sales quotas with any particular company. Some advisors can sell you “any company’s product,” but may still have quotas with their parent company.
Financial advisors who are paid hourly, per project, or by flat fee can also advise you on which products might be suitable, but they won’t sell them to you (due to the conflict of interest from insurance commissions). Often they’ve partnered with independent insurance consulting companies to help their clients obtain suitable coverage.
Item #8 - Protect those you love.
None of us know when our time is up. Because of this uncertainty, make sure that you purchase life insurance to protect your loved ones in the event that you die prematurely.
There’s some controversy between different types of life insurance. In my experience, the vast majority of individuals want, and need, term life insurance coverage. Whole (or permanent) life insurance can provide benefit if you want a guaranteed death benefit whether you go at 35 or 95. You pay a pretty penny for that guarantee.
Note: Please be prudent when working with “advisors” who sell life insurance. If they earn commissions, they will have powerful incentives to sell you expensive products. If your advisor is often listing off the virtues of whole life insurance, this should be a red flag.
Item #9 - Create your plan to dig yourself out from underneath the mountain.
You know what I mean, don’t you? It’s been rare that I’ve met with a young doctor that I don’t hear about how crushing the student loan debt feels. It might (or might not) surprise you that most financial advisors don’t know very much about student loan planning. (See my point about compensation to come to your own conclusion about why.)
You probably have a lot of debt. If you don’t, consider yourself exceptionally blessed among your MD and DO peers. The good news is that you’re going to be making a great deal of money to wipe out that debt in the future. The other good news is that the government has devised some favorable income driven repayment plans to help you during the lean years. The problem is that many of these plans aren’t intuitive and it can be difficult to know which plan is correct for given your unique situation. And perhaps a government plan isn’t the right one for you anyway. Your income, marital situation, post-residency job prospects, and other factors will need to be considered as you carefully plan out this part of your financial journey.
Item #10 - Save so you work because you want to and not because you have to.
You’ve spent the bulk of your life studying, and now it’s time to start giving back to society. Thankfully, society holds you in pretty high regard and is willing to pay for your expertise. On the downside, you’re starting a little late. Your buddy who started working in HVAC right out of high school has been making and saving money for 8-10 years longer than you.
The beauty of investing is that if you do it right, some day you will be able to decide that you will go into work because you want to, and not because you have to. Your financial independence will give you freedom to say “yes” or “no” to employment-related demands.
Find out if your employer has a 401(k) matching program. Take advantage of that so that you’re not leaving money on the table. Do you think that you can invest more than that? If so, should you invest in the traditional 401(k), or Roth option? Do you have a Roth option at work, or do you need to open an IRA? And what about costs associated with investments? If you work with an advisor, will they charge you an up front 5.75% commission, or 1% annually? Or will they charge you a flat fee for servicing the account?
Considering your comfort level with market fluctuations, how should you invest? Do the ups and downs of the market make you a little carsick?
It’s worth mentioning here that you shouldn’t neglect your most important investment: your family. Especially your spouse if you’re married, but also your kids. What’s all the income and training worth if you end up having shallow or destroyed relationships? What’s financial independence if you don’t have loved ones by your side to share it with?
Relationships take a lot of time and effort, but many of life’s most enriching experiences come from them, and not from stock appreciation.
Enjoy the journey.
I’m excited for the journey that you’re embarking on. Medicine is a noble profession, and many of you are going to make a huge difference in your patients’ lives, and in the lives of those in your community. Don’t forget to enjoy each step—even when you work two weeks of nights in a row.
I hope that these ideas will help reduce stress in at least one important area of your life.
These are my opinions, unless I’ve specifically cited other material. The information and ideas I’ve presented are for information purposes only. Before you implement anything, make sure you have a thorough discussion with a qualified professional who understands your situation.