[Editor's Note: Today's guest post was submitted by Hugh Baker, CFP®, a financial advisor married to a primary care physician (PCP) who blogs at Up 2 Date Finance. We have no financial relationship.]
When important life decisions are made, important financial decisions tend to tag along.
If you have plans to grow your family after residency as we did, then you can save both you and your spouse a lot of stress by taking the time to plan ahead with your finances.
When you find yourself a couple of years into your new job and financially comfortable, you won't regret taking this time to plan. Here are some high-value areas we focused on.
Home Purchase
A common financial topic at the top of a resident's list is to buy their first home. It was a topic in our Squirrel Hill apartment for the last couple of years of my wife Kerry's residency.
You want to avoid becoming house poor, but want a nice place to raise a family in. The question becomes, “How much is too much?”
If you want room in your budget for other things, then you have to take a good inventory of what those other things cost. A critical step in setting a solid financial foundation for your family is to avoid overextending yourself on housing.
Property Taxes
When you are building your purchase price budget, don't forget to include property taxes.
Look at the difference in property taxes between homes of the same price and only a short drive away from each other.
In this case, you would pay a 60% premium to live across the county line.
To put this in perspective, that extra $258/month equates to adding $57,000 to the purchase price, assuming a 30-year mortgage at 3.5% interest.
You may find it's worth it if you prefer a school district, but being aware of how much extra you would pay helps the decision process.
If you want a ballpark idea of what property taxes are for a home in a specific location, then try one of the calculators available online. Once you find a specific house, you can obtain records for that home.
Local Income Tax
Some areas within the city limits around us have a 3% local income tax rate. Most other areas have a rate of 1%.
A physician with a $180,000 salary would pay an extra $300/month to live in a 3% area over a 1% area. As a result, that equates to adding $67,000 to the purchase price, assuming a 30-year mortgage at 3.5% interest.
Home Financing
A special perk available only to recent residency grads is a physician mortgage. The appeal of a physician mortgage is it allows you to skip the fixer-upper.
It does so by not requiring a down payment and waiving the cost of private mortgage insurance in exchange for an adjustable interest rate, a higher interest rate, higher closing costs, or some combination of the three.
A conventional mortgage can require as low as a 3% down payment. Any amount under 20% will require you to pay extra for private mortgage insurance.
Saving for a home down payment on a resident salary isn't easy. If you don't have the time to spend on a fixer-upper or the savings to put down on a home big enough for a growing family, then a physician mortgage can be a good option.
If you have adequate savings available, then a conventional mortgage could make more sense in the long run.
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Child Care
Hugh Baker
If you are planning on growing your family after residency, who will care for your child while you are caring for your patients?
If you don't have help from family, then daycare is going to be a major expense for you. In our area, daycare costs about 10% of a PCP's salary for 1 child, 5 days a week.
This may sound like overkill, but do twins run in your family? It was on my mind when we were house hunting.
Don't forget to take advantage of tax-savvy ways to pay, such as a dependent care flexible spending account through your employer.
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Student Loans
Many residents have Federal student loans and are on an income-driven repayment plan. If that sounds like you, your loan payment will likely rise over the next 2 years, and often substantially.
If your income-driven repayment amount is based on your tax return, then that means your first increase in payment amount is only counting a half year of your higher paying job, since most residents graduate in the Summer.
Plan for a rise in that payment the following year as well. Generic repayment simulators are available online or you can log in to your StudentAid.gov account for a more accurate picture.
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Treat Yourself
You probably have a decent handle on your necessities (groceries, utilities, loans, etc.). What about your discretionary expenses?
Here's an interesting exercise. List your top 3 favorite things to do for fun. Then see how much you spend on them per year compared to other discretionary things you didn't list.
If you listed vacations as number one, but spend more on your car, there might be an opportunity to make your money do more for your happiness. Give yourself permission for that extra vacation by not buying the stuff that doesn't move the needle for you.
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RVU Compensation
If part of your compensation is based on RVU targets, then proceed with caution.
Often times if you miss your RVU target, your base salary can be adjusted lower or you owe money back to the employer. On the flip side, if you exceed your RVU target, then you receive a bonus.
The solution? Have a pay cut baked into your budget. You are probably already tripling your resident salary (or more), so you aren't missing out on anything.
If you continue to hit your target or exceed it, then you won't regret the financial cushion you enjoy.
Bonuses
A lot of employers offer various types of bonuses for Medicare visits, Press Ganey scores, annual retention, etc. Have a plan for it.
If you truly aren't counting on them to fund your lifestyle, then put all of it straight into savings. It's a great way to prevent lifestyle creep. Maybe every year you use a percentage for extra vacations.
Either option can work. Paying attention to when bonuses come in and having a thought process about what to do with the extra money is half the battle.
Social Security Wage Base
In 2021 the limit for how much income is subject to social security tax is $142,800. An employee physician pays a 6.2% tax on income up to that amount. That means a physician making $200,000 per year could have an extra take-home pay of $3,863 once they are beyond the threshold.
What if you pay attention to when that occurs and redirect that extra amount to investments?
I can't help but think that's a nice college savings purely from an extra amount you may not even notice you are getting.
Estate Documents
It's not fun, but it's necessary. You need a plan, in writing, for who will take care of your children and what happens with your money if something happens to you.
An estate attorney can help you understand and complete all the necessary documentation relevant to your situation.
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Life and Disability Insurance
When a family is counting on a young, high earner's income to support the family, that needs to be insured. “How much and for how long?” is the real question.
To answer “how much” requires a true needs analysis of what income and expenses remain after you are gone.
The other question is “How long do you need the insurance?”
There are different types of insurance policies. Some expire, some don't.
One way to think about it is if you plan to save enough to cover two people's living expenses in retirement, then you shouldn't need life insurance beyond your desired retirement age.
That is why in every case I've come across where life insurance was necessary, I recommended term life insurance. It is an inexpensive tool that does its job effectively.
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Umbrella Insurance
If being sued for liability concerns you, then you should consider an Umbrella policy.
Umbrella insurance is a type of personal liability insurance that covers claims in excess of regular homeowners, auto, or watercraft policy coverage.
A $1 million policy costs about as much as Netflix. If that helps protect you and keep you from worrying, then it's well worth the cost.
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Closing Thoughts
Congratulations! Graduating from residency is a huge accomplishment and growing the family has been a rewarding experience for us. Taking the time to plan and be intentional with your finances can prevent a lot of stress down the road.
What other financial aspects did you look at before starting a family? What do you wish you would have thought of? Comment below!
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Great advice!
Making that transition from trainee to attending can be so nebulous and this is a great overview of things to think of and plan ahead.
Having just made this jump, I think most important is to really think about what you want your life to look like. Too many times we get caught chasing the carrot or doing what we think others want us to do. This includes financially. Once you know your goals, craft a plan, financial and otherwise, to reach them. That’s obviously over simplistic but once you put it out there and have a plan, there’s nothing to stop you!
Thanks Dr. Frey! I tell people “Don’t should on yourself.” My wife has career interests outside of medicine and many of her friends want to be able to spend time with their kids while their young and not worry about RVU targets or being in the office/hospital 5+ days a week. There is only so much optimization of investments/insurance can do for that. It requires a lot of planning ahead and if you know that BEFORE you start making 3+ times what you do as a Resident, you’re not going to miss the luxuries you never had. I just want to prevent some of those Residents graduating in a few months from feeling trapped in the next few years.
Nice to hear from a family in the ‘Burgh. I wonder if my parents had any concept of your analysis when they first moved to Squirrel Hill. (Right across the street from Mr. Rogers actually.) As renters maybe there was no need but I suspect they were just naive. I certainly remember us kids’ dismay a few homes later when they finally purchased in what we considered Greenfield.
A point I often bring up on these posts, since it happened to us, is that a family is not done until- well I guess until you are willing to deny responsibility for providing for it! We got 15 year term when our apparently only child was 6 or so, timed to get her through college age. Then of course we got her a sibling! Aside from coverage to get the family 21 years post menopause (if you even have a sound guess on that number), what if the family opts to adopt later on, or needs to step up for a grandchild, or a child who will never be independent- something even we could suffer if a grown child had a terrible but survivable injury or otherwise became incompetent.
In any case, at a minimum consider longer term life coverage or select a policy with affordable hikes once the term period ends. (We were still able to add a new policy once I was safely past child birth.)
Great point! That’s why the process of planning is more important than “the plan.” We can only make educated guesses about we will want/need in 5-10+ years and re-evaluate regularly.
P.S. we lived between Murray and Shady right before the Greenfield bridge.
I keep hearing things like: “A $1 million policy costs about as much as Netflix.” Someone on reddit the other day posted matter-of-factly that a $1 million policy is about $150/yr.
I’ve had umbrella policies in two different states, and never has it been cheaper than $400/year. After my last move, I had a policy at almost $800/year. I decided to drop it at renewal because I figured my lower risk exposure based on a new job just didn’t justify it any longer.
It’s possible that I just happen to have lived in places where umbrella insurance is particularly expensive, or there’s something about me that is high risk. I suspect people who have low costs simply assume it’s the same everywhere for everyone. Alternatively, this $150 myth or generalization may be perpetuated by people who haven’t actually priced an umbrella policy.
Yea, I’ve never paid $150. I think the first time I bought one ($1M) it wasn’t much more though. Between $200-300 is my recollection.
Remember the Umbrella doesn’t help your job related liability at all. It’s a personal liability.
Understood. The job change was from law firm attorney to in-house. My assumption is that people will view the former as deep pockets, whereas maybe the latter not so much. Now I just tell people I work at X Company’s legal department, because everyone knows the company. Plus, moving to a cheaper area meant a cheaper house (which is still the vast majority of my assets outside of protected retirement accounts). But it still meant a doubling of insurance costs, for some reason.
Those who would sue based on your profession don’t know that big law attorneys make more than most in-house counsels anyway.
Interesting that the local variation was so much.
Could very well be an overgeneralization, but according to the Insurance Information Institute, avg cost for $1M is between $150-300/yr (maybe you had more than $1M?) My guess is it may be way more in certain states since insurance is regulated at the state level.
If you have a pitbull, a pool, a boat, and ATVs, it costs more too.
That’ll do it.