By Dr. James M. Dahle, WCI Founder
I had a speaking gig not long ago, mostly to a group of residents and fellows. After the presentation and group Q&A, I had a few people come up afterward to ask a few questions in a more private setting. One of those questions came from the spouse of a resident.
As usual, the talk included a section about living like a resident. That means to live a lifestyle similar to what you had as a resident for 2-5 years after you finish training in order to redirect the vast majority of your newfound attending income toward building wealth. That means predominantly paying off your student loans for most, but also saving up a real emergency fund, maxing out retirement accounts, and maybe even saving up a down payment for a home. However, living like a resident also means to learn how to live within your means during residency, and that's what this spouse wanted to talk about.
She noted they had started their family relatively early in her husband's career, and now had four children. She was a stay at home mom, and he was earning a typical resident salary, with almost two years left in residency. Her question was this:
“We're having to borrow money to fund our lifestyle during residency. Are we going to be okay?”
Essentially, she was wanting the answer to this question:
Is It OK to Live Beyond Your Means in the Short-Term If You'll Be Earning a Lot of Money in the Long-Term?
What do you say to her question? It's not an uncommon question. I've certainly had it before. Clearly, this couple has not yet acquired the X Factor. In my mind, I'm trying to think, “How can I give this couple The X Factor without offending them or making them think this personal finance stuff is so hard that they just give up and don't even try?” My goal was to inspire, perhaps lead by example, and provide some practical information. I did the best I could on the spot, but after a little more time to think about it, I'd like to flush out my answer a bit.
It's Good for High Earners to Be Average for a While
The average American household income is in the $50-55K range. That's exactly what a resident physician makes. So when a resident (or their spouse) tells me they just can't live on a resident salary, I can't help but feel that they're out of touch with the Americans around them. You will soon be at least in the top 5%, if not 1%, in terms of income and likely stay there the rest of your career and maybe even the rest of your life. It would probably be a good idea for you to have some idea what it is like for the rest of your fellow Americans. Residency is a great time to figure that out. Can you imagine bringing a group of average Americans into a room and telling them, “I just can't make ends meet on what you guys make.” They'd laugh you out of the room. Not only do they have to pay for their expenses, pay off their debts, and support their kids, but that $55K also has to provide their retirement and college savings. Don't be so entitled that you can't live like them for a few short years. Even if you're in a high cost of living area. Even if one of you is a stay at home parent. Even if you have four kids. Figure it out. Half of America makes less than you and seems to survive. You can do it too. Hint- You're probably going to need a written budget.
But We Want Our Kids to Be Able to Have Piano Lessons
She said, “But we really want our kids to be able to take piano lessons.” She was a smart lady, and quickly realized what she had said and how silly it sounded out loud. Then she pointed out the real problem- they had committed themselves to too high of a housing cost. It was a nice place to live, in a safe neighborhood with good schools. But once again, it's the big rocks that sink you. You can have a lot of little rocks like piano lessons and still be okay, but if you blow your housing, transportation, and schooling budgeting amounts, it's going to be pretty tough to stay afloat.
Unfortunately, having already screwed up on the housing front, this family is left with three unsavory choices. The first is to move. This is a really lousy choice if they also made the bad choice to buy a home during residency, but even if they're renting, it's still an expensive proposition to move. With less than two years left in residency, it's hard to really advocate for that. The second is to cut everything else in their lives to allow them to afford the house. There go the piano lessons, the restaurants, the vacations, the school clothes etc. We all get to spend our money on what we value, but you can trade a little nicer house for a lot of other fun stuff. The final choice is the one they will probably take- go into more debt to fund their lifestyle for two years and hope they can change their habits that first attending year.
Your Net Worth Is Already Dropping as a Resident
Even if you're not borrowing more money to fund your lifestyle as a resident, your net worth is likely already dropping like a rock due to your student loans. Most residents are making student loan payments that aren't even covering their interest. Add in lifestyle debt and it really starts going negative in a hurry.
Can You Dig Out as an Attending?
Of course, the mathematical fact is that it doesn't matter all that much what you do financially as a resident. What really matters is what you do during that most critical of years in your financial life- that first year as an attending. Even if this family borrows an extra $10K a year during residency, they probably can still manage that as a new attending. (Thankfully their student loan burden was only slightly above average.) There's enough income there to dig out of their hole if they can, by some miracle, not increase their lifestyle any more upon residency completion.
It's the Habits That Matter
But the issue is that one of the most important things you can do in residency is form good financial habits. The most important of those is learning to live within your means, preferably below your means. I think it is likely that most residents who can't live within their means as residents also won't be able to do it as attendings. They're the ones who have two car payments and a $5K mortgage before they ever leave residency. They are likely to be the docs who hit age 58 and realize they still have student loans, have a net worth under $500K, and will be looking at a very different late career and retirement than the other docs in their social circle.
The other issue, of course, is that you can't get very good terms on your debt as a resident. Most relocation loans, interview loans, doctor loans, and signature loans start around 8%. They're not quite credit cards (although about 25% of docs carry balances on those) but they're definitely worse than student loans. Maybe if you're savvy you can bounce around a 0% credit card balance for a couple of years or get good terms on an auto loan, but for the most part, these new loans aren't at a good rate and aren't deductible.
The Bottom Line
So what did I tell this resident's wife? I told her that they need to sit down and make a written plan for what they are going to do with their first 12 months of attending paychecks. They still have their most important financial decision ahead of them and can make up for all the mistakes they've made in the past by making that one decision right. I also suggested maybe they couldn't afford to hire someone else to do the piano lessons and that maybe she could teach them herself.
What do you think? How can residents live like a resident while in residency? What is the secret? What advice would you give this couple? Comment below!