[Editor’s Note: Today’s guest post is written by regular reader Dr. Alexander Foster, MD, who recently started a new blog called lifeoffimd.com aimed to help physicians achieve financial independence. We have no financial relationship.]
The year in which I started my intern year was a busy one. My better half and I celebrated 6 wonderful years of marriage, I celebrated completing 8 years of higher education (I took my time in undergrad) and 4 years of medical school by finally receiving my first paycheck.
God has been incredibly faithful through this journey every single step of the way. As a 19 -year-old high school drop out with very little to offer anybody being that I was uneducated, owed lots of money to many, didn't have goals or aspirations of much, and was more a liability than an asset, for some strange reason Jesus saved me. I cannot help but acknowledge Him and remain grateful.
Writing about finance has really helped me to have a better grasp of my own finances. Subsequently, through writing, I have even been able to help others with their finances which has been a real blessing. We were able to save thousands during intern year, but more importantly, we took many steps to get on the right page with finances as best we could. Doing things right early on makes life so much easier later. It is hard work, but as a resident I recommend you learn all that you can about finance while your income is scarce, don't wait until you have an attending's paycheck to do the following!
14 Ways We Saved Thousands My Intern Year
You know I love an outline so here it is. The nitty-gritty follows in paragraph format below, please enjoy!
- We Consolidated My Student Loans With Fedloan Servicing & Enrolled Into REPAYE
- We Funded Our Roth IRA & Subsequently Our Traditional IRA
- We Achieved A 20% Savings Rate
- We Funded A Health Savings Account
- We Started Travel Hacking With Travel Credit Cards
- We Moved All Our Brokerage Accounts From Betterment, Scottrade, Fidelity, & Charles Schwab to Vanguard
- We Changed All Our Short-term Savings & Checking Accounts From Local Banks & Credit Unions To Ally Online Checking/Savings
- We Tax Gain Harvested With Our Taxable Brokerage Account
- We Scored A 12% “Raise” By Changing My W4 Form At The Hospital
- We Found A Discount Grocery In Our Local Area
- We Tithed via Pushpay App With Travel Hacking Cards
- We Bought Term Life Insurance For The Breadwinner
- We Bought Disability Insurance For The Breadwinner
- We Upped Our Auto Liability Insurance & Renters Insurance
1) We Consolidated With Fedloan Servicing & Enrolled Into REPAYE
Thanks to REPAYE we are saving thousands over the course of my training. I have written about What I Did With My Med School Debt but the gestalt follows. In the REPAYE plan, the government is subsidizing my student loan interest monthly. With a monthly payment of $0 (since I only made grades in 2016 and not dollars), the government will forgive half of my interest, which is $604 and the remaining $604 will be added to my outstanding interest balance. I have effectively taken my hefty 5.8% loans and cut them to a 2.9% loan AND by using the direct debit option with Fedloan Servicing, the interest is now at 2.875%. This amounts to a total of roughly $28,000 of interest saved over 4 years of residency if I were to keep my adjusted gross income low enough so my monthly payments remain at $0.
2) We Funded Our Roth IRA & Subsequently Our Traditional IRA
I know I speak a lot about The Roth IRA and how it is a great long-term investment strategy for high-income earners because it is such. Over the short term; however, as a resident in REPAYE we have fully funded the Traditional IRA in an effort to lower our AGI while in training. But I will still follow my own advice concerning the Roth IRA, let me explain. The Tax Cuts and Jobs Act brought about new tax brackets for 2018. We funded our Roths and were taxed at 15% in 2017. That is to say $11,000 *.15 = $1,650 of money going to the government in taxes on tax day.
By recharacterizing our Roth contributions to Traditional IRA funds prior to tax day, we saved $1650 and lowered our AGI by $11,000. In my last year of residency, we will convert our Traditional IRA funds back to a Roth with the new tax rate of 12%, meaning we keep that extra 3% of that $11,000 from 2017, which is $330, back to us. Every little bit helps, especially in residency!
[Editor's Note: Starting in 2018, you can no longer recharacterize Roth IRA contributions as described in this section.]
More importantly, there is an incentive to keep our AGI as low as possible while in training to lower our REPAYE payments, so a Traditional IRA is better than a Roth IRA for the next couple of years at least. As I have stated, when I am about to graduate to an attending's salary, we will be converting our Traditional IRAs back to Roth IRAs and we will be paying taxes at that time. Trust me, we will save for this expense. It is important to do this while in a lower tax bracket as a resident, rather than later on as an attending!
3) We Achieved A 20% Savings Rate
By the act of funding our IRAs every year, we achieved a 20% savings rate on our current income. This is crucial as a resident. Do you want to know how to do it? Read this post: Separate & Automate Your Savings. Take yourself out of the equation. It really isn't that hard. The second that your check hits your account have a recurring withdrawal on those dates to be sent directly to Vanguard. You don’t have to transfer, you don’t have to buy, you don't have to sell, you don’t have to wait, you don't have to think! Let the system work for you while you do absolutely nothing. This will be your ticket to success in this area.
4) We Funded A Health Savings Account (HSA)
Emily and Alex Foster
What in the world is an HSA??? It’s a pretty sweet deal is what it is! These are all 2018 dollar amounts and these amounts typically change over time FYI. If your health insurance plan has a high deductible ($1,350 for individuals or $2,700 for families per year) then you are eligible for an HSA. What is so great about that though? Well, the money that you place in an HSA (up to $3,450 for an individual and $6,850 for a family per year) can immediately be used to pay for medical expenses (contacts, glasses, dental cleanings, prescription medications, etc.) and this money is not taxed! If you are in the 12% tax bracket (being an intern while filing MFJ) and contribute $6,850, that is an $822 you get to keep come tax time. If you are in an even higher bracket, the savings just get better! What is more, the money you place in an HSA can be invested and allowed to grow tax-free. Finally, when you remove this money for medical expenses, your gains are not taxed.
The HSA has a triple tax benefit bullet point:
- The contributions are tax deductible.
- The interest you earn on an invested HSA is tax-free.
- You can withdraw contributions & earnings tax-free at any time for medical expenses.
While we had a high deductible health insurance plan, we started and funded an HSA with www.alliantcreditunion.org.I searched around and liked them, but there are tons of other great options out there too.
5) We Started Travel Hacking With Travel Credit Cards
This is not for everyone. Some don’t want to put in the time; others will not have the credit history to do it. I have Answered The Skeptics Here and have written in depth about Travel Hacking. This technique has allowed my wife to travel free with me everywhere Southwest flies for 2 full years. I am writing a portion of this post now while on a fully funded 2-week travel-hacked vacation where we are paying only for food. This technique is for those of us who pay off their credit cards on time and in full every month and are willing to put in a little work upfront to get that incredible 20 to 33% back on their credit card purchases in the form of free travel, cash back and/or gift cards. It has to date netted us $1,200 in Amazon gift cards and over $2,000 in free travel with lots of points left to spare. Yes, this does affect Your Credit Score.
6) We Moved All Our Brokerage Accounts From Betterment, Scottrade, Fidelity, & Charles Schwab to Vanguard
Why did we move everything to Vanguard? Because they are one of the best, they are hands down the cheapest, they are non-profit, and they are owned by those who invest with them. For many years they were operated by Jack Bogle, the index fund pioneer, with the sole purpose of giving the average investor a fair shake on Wall Street. It is no wonder why last year Vanguard grew more than all other brokerage firms combined.
We have our Roth IRAs, Traditional IRAs, and Taxable accounts there all invested in mutual funds with expense ratios below 0.16%. Other mutual funds have ratios above 1%, some even above 2%! What does this mean? Do you want to do well with your investments? The costs of your funds highly correlate with how high your returns will be. The lower the cost, the better they do. Why would you keep an investment at a place where they charge you 6 times the amount that Vanguard would charge you Invest in index funds, invest at Vanguard, and you will subsequently invest in funds with low fees. Haven't opened your IRA yet? Stop reading right now and follow my step by step post on Setting Up Your Roth IRA. After that, read Funding Your Roth Painlessly.
The Vanguard Total Stock Market Fund has an expense ratio of .16% and once you have $10K in it, you can convert it to “admiral shares with an ER of .04%.
7) We Changed All Our Short-term Savings & Checking Accounts From Local Banks & Credit Unions To Ally Online Checking/Savings
I stopped working with Wells Fargo a long time ago, like 6 long years ago, but even the more reasonable banks that don’t nickel and dime you at every corner still don’t offer you that much. The money we made previously on funds stored at our local banks and credit unions was pennies. We moved everything from those banks over to Ally and this year alone they have already paid us $63 for keeping our short-term savings and checking accounts there. As The White Coat Investor says “It beats a kick in the teeth!” Current APR is 1.60% on savings accounts there – you won't find that rate at your local bank!
8) We Tax Gain Harvested With Our Taxable Brokerage Account
We considered doing this in 2017, but I chose to wait until 2018 to complete this move to lower our 2017 adjusted gross income. 2018 has brought us more opportunity for tax-sheltered accounts with my advanced training program. I have written about Tax Gain Harvesting here. It is a bit dense, but for medical residents with a taxable account not making a ton, it is a great wealth strategy.
9) We Scored A 12% “Raise” By Changing My W4 Form At The Hospital
We received a sizable check this year from Uncle Sam. For many of us that sounds like a nice thing, and sure, it is nice to receive large sums of money (don't get me wrong), but this is not a great long-term strategy. Why? Uncle Sam takes your money and uses it for a full year and then returns it to you with no interest. Consider The W4 Form Your Automatic Raise if you are a W2 employee. The IRS released the new 2018 W4 form on February 28th, I filled mine out on March 5th and received a 12% increase in take-home pay in my subsequent paychecks. This is money that you could have used throughout the year to build your wealth on a month-by-month basis! Raise your allowances and lower your withholdings, my friends.
10) We Found A Discount Grocery In Our Local Area
This is a funny little life hack, but it is a good one. A bag of ground Starbucks coffee for $3 when your other local grocer charges $8? Yep. KIND bars for $0.25 when other places charge you $1.50 for one. Yep. Packs of protein bars for super cheap. That’s right. All the gum you could want for pennies. Uh ha. The catch is that these are items that did not sell at other stores so some have expiration dates that have passed. Not for everyone, but it does lower your grocery bill considerably and all those items are crazy shelf-stable. Don't worry, I am not buying expired milk products and produce here. Don’t judge me :).
11) We Tithed Via Pushpay App With Travel Hacking Cards
If you tithe, Pushpay is a good way to go about it especially if you are using Travel Hacking Credit Cards.
12) We Bought Term Life Insurance For The Breadwinner
The incredibly wise White Coat Investor recommended this move. [Editor's note: Flattery does not increase the likelihood of guest post publication.] This was an easy thing to do and a real no-brainer. If you have dependents or a spouse you really like and want to ensure they will be financially able to recover in the event of your early departure you must purchase term life insurance. The younger and healthier you are the cheaper it is. In regards to insurance, this is some of the cheapest stuff around. Policies range from 10 to 30 years with payouts from a couple grand to a couple million.
I bought mine after comparing at Term 4 Sale. They have all the big players in the field. We chose Thrivent Financial and bought a 30 Year Term Life Insurance Policy. I was able to pay my first installment with a Travel Hacking CreditCard to stack up those travel hacking points! Shop around. Some policies were absolutely ridiculous, mine is a real steal, I would not settle for less. With all the GoFundMe accounts these days with such tragic news, please do the right thing for your loved ones and ensure they would be all right financially should you pass unexpectedly.
13) We Bought Disability Insurance For The Breadwinner
This is a tricky topic. You are 6-7 times more likely to use disability insurance in your life than you are life insurance. Since this is the case the price is also more expensive. Since I am entering a surgical specialty I knew I wanted to purchase “Own Occupation” disability insurance.
I used three different independent disability insurance salesmen who all had appreciably different quotes from some of the same companies they contracted with! I went with the guy who answered all of my questions, took time to chat with me on the phone and had the best prices and best customer service. Here are the details of my package. There are many elements to disability insurance so grab someone you know and trust and run your quotes by them. I did this with several sages and mentors in my life, and I am glad I did. I purchased:
- Berkshire Premier Package True Own-Occupation Policy
- $4,000 monthly benefit with 90-day waiting period policy
- Future Increase Option $12,000/mo.
- Enhanced Partial Disability Benefit Rider
- Cost of Living Adjustment
- Graded Annual premium
The way to win with life and disability insurance is to get it when you are young and when you hopefully have no medical conditions. As you save your income and develop a sizable nest egg, you can then self-insure against catastrophe. If you are starting out in your career and have yet to have $1,000 to your name, I would strongly urge you to consider life and disability insurance.
14) We Upped Our Auto Liability Insurance & Renters Insurance
If you haven’t gathered this yet, we live in a highly litigious society. It is good to have quality insurance. I looked around at what other people smarter than me recommended and this is what I settled on. You might be different.
- USAA Auto
- $300,000 Body Injury
- $500,000 Total per Accident
- $100,000 Others Property
- $75,000 Medical Per Person Coverage
- $500 deductible
- USAA Renter’s
- $30,000 Personal Belongings
- $100,000 Liability
- $3,000 Computer coverage
Are you an intern who has chosen savings over spending? Did you feel deprived? What sacrifices did you have to make? Were the sacrifices worth it? Comment below!
Solid advice for any trainee. Way to put it all down! You are well on your way to success and have a huge start on where I was in training.
I usually sum up the above for my residents as the following
1) Enter REPAYE unless you have a really good reason not to!
2) Certify for PSLF every year until you have a contract in hand in your last year. Determine if PSLF is an option going forward. If not, then refinance at an attending physician rate once you have a contract in hand.
3) Max out your IRA in training.
4) Protect your assets (life, disability, car, home) in training. Umbrella can probably wait until you are an attending. Up your coverage when you finish.
Good stuff, though! Very thorough. Between you and POF, I am starting to get the travel hack bug. I’m gonna get one of these travel cards eventually.
TPP
Thanks TPP!
Yes, maxing out your IRA is an absolute must do. I did consider umbrella insurance, but after looking into it I agree that it is better to acquire it post training. Travel hacking has brought a lot of value to our lives! $1,200 of Amazon gift card for spending $4,000 on two cards over 3 months is nothing to shake a stick at, especially as a trainee when every extra dollar counts! I look forward to your 10X10X10 post on my blog TPP, but no rush!
Wow. You have no idea (or maybe you do) how far ahead of the financial game you are versus a typical fresh out of medical school intern.
The steps you are doing now are going to allow you to crush it financially in future. Plus if you can continue on this course you can essentially practice medicine on your terms as you will be financially independent in no time.
I hope other interns follow your blueprint. This advice would been game changing for me way back in time
Congrats on discovering financial literacy so early on (some physicians never do and are forced to work forever paycheck to paycheck)
Thanks so much. I really geeked out between finishing medical school and starting internship. I read a couple good books, spent hours upon hours on this site, and tried to plan ahead for that first intern paycheck. We talk a lot about the financial transition from being a resident to becoming an attending, but there is a huge transition that takes place from making $0 to making $50-55K a year and not needed to pay tuition (finally!)
As a current intern, I have to say that these things sound great on paper but there are lots of financial obstacles that make realizing a path like this somewhat impractical.
1. Unexpected expenses: things like USMLE step 3 ($1250 after paying for the test and the Qbank to study) and buying loupes ($1000, essentially required by the residency program with no funding available) come to mind as big expenses that I can name off the top of my head that are not immediately obvious to budget for
2. Lots of “first time”, upfront costs: first time paying auto insurance (never had or needed a car before residency), paying a personal cell phone bill for the first time, relocation costs, professional dues to AMA/specialty organization, etc
3. The learning curve of adjusting to life as an intern means that everything at work takes longer. Rotating services every month means learning the ins and outs of taking care of a different type of patient, getting used to a new rounding routine, adjusting to the level of prep needed for a given attending, etc. Personal finances are unfortunately often put to the back burner as they seem less pressing. The WCI isn’t going to pimp me mercilessly in front of the entire division if I’m behind on the most recent post or haven’t made my most recent transfer into my Roth IRA. The intern experience is uniquely challenging and more difficult to establish that work life balance, at least in my experience and that of my close friends doing it with me.
4. For many interns, this is the first time earning an income so there can be some paralysis by analysis. Do I build up an emergency fund as advised on here? Can I get over the emotional shock of seeing my bank account drop by 20% by virtue of making a (relatively speaking) modest transfer into a retirement account? Most interns probably aren’t used to having any cash whatsoever so the idea of doing anything riskier than squirreling away in a savings account can be intimidating.
I expect to be more actively engaged in this as I get into PGY2. There’s a slight raise, many of these one time, upfront costs will not be present, and, most importantly, I’ll finally feel like there’s time to really take control of my finances. I’ll sure be using this as a guide for doing it. Thanks for posting.
I guess I need to start pimping a little harder around here…
It’s fair that there are some upfront costs that suck, but they shouldn’t be a surprise. Some programs let you use book fund money to pay for some of those.
Also, I wouldn’t bother with the professional societies as an intern or even a resident. I can usually find better ways to spend that $25 resident membership fee.
A few critiques. It doesn’t take much time to be financially savvy as an intern.
Just have X percentage of your paycheck go into your 401k/403b and IRA.
Commit to a budget. Everything else is just excuses.
Also, most people pay their own cell phone bill before the age of 26…at least in my world.
You mean Roth 401(k)/403b and Roth IRA, right? 🙂
Word. I have paid for my car and insurance since I was 16. Phone too.
I wouldn’t say “obstacles,” but I would agree that there is no shortage of financial “obligations” in life (my list added 4 of them: life insurance, disability insurance, funding an HSA, funding IRAs). I also agree that analysis paralysis is a real thing especially as an intern with a first-time paycheck. But these points you bring up are always present, intern year or any year really. You overcome analysis paralysis by educating yourself on the topics and time is the major issue in intern year so I think the best thing one can do is read up on these things prior to starting your intern year.
A lot of my posts relate to someone just starting down this road towards Financial Independence so I hope you take a look in PGY-2. I wouldn’t say my thoughts are unrealistic, they can be obtained, but it won’t be without effort. In order to save, we had to cut areas of spending (eating out, 5-star vacations, buying cheap aftermarket products, substituting S’well bottles for cheap S/M bottles and the like,) but it was actually really nice to have a financial cushion finally and see that cushion grow over the year. The thought of having it grow over the next four years feels really good as well. Finances aren’t as stressful when you have a workable plan. In our plan, money hits the bank and goes right to Vanguard monthly without me thinking about it. It is really pretty sweet.
As far as USMLE Step 3 and loops (as one pursuing a surgical specialty,) these are not unexpected expenses. They factor in with relocation costs, professional dues, and other expenses that we are obligated to throw big coin as medical professionals. They are expected so they should be planned for. I am glad you are jumping into these things as a PGY-2 and you are lucky- I am moving to my advanced PGY-2 program and taking a pay cut!!! But I don’t have to pay state income tax where I am going so there is a silver lining.
Overall, good advice (particularly #1), but I have a few critiques. #9 really bugs me for what I hope are obvious reasons. Tax withheld does not equal tax paid. I could give myself a 23% raise tomorrow, but I’d still be paying that money in the end (plus penalties). Trying to invest that money in the short term to build wealth does not make sense.
Doing trad IRA contributions instead of roth in residency to lower your student loan payments seems penny wise, pound foolish.
While 20% savings rate as a resident is doable, it’s also dependent on variables outside of one’s control, particularly cost of living and state income tax. Additionally, student loan burden and family situation play a big part. Income taxes also change quite dramatically between that first 6 months of intern year and the remainder of residency. Going from 10% effective tax rate to 17% tax rate (rough guesses, $25k to $50k income increase, back of the envelope calculations) will alter your ability to save with 7% of 1/2 your intern income automatically gone.
#6 does very little to save money as an intern (although still good advice, just not tailored to the point of the article). Same with #7.
#8 seems like it’d affect very few interns.
I agree somewhat on the raise (and in the editing process put quotation marks around the raise to emphasize that point). But there is a time value of money there. It’s not a true raise, but getting your money a year in advance is worth something, even if it is only 4-5% of the “raise.”
As far as the tax deferred contributions during residency, it can make sense if you are going for PSLF because it decreases payments and thus increases the amount forgiven. In this case, the writer was arbitraging tax rates between 2017 and 2018 (well, really in the year he leaves residency for some reason, but he ought to just make the conversion now if not going for PSLF.)
17% effective seems high to me for a resident, but I guess it’s possible. I wasn’t paying that much making $200K as a pre-partner.
6 and 7 wouldn’t save much on a small account, but it would likely save something. Plus time and hassle.
I agree that most interns don’t have taxable accounts. If they do, tax gain harvesting isn’t a bad idea.
You’re correct with the 17%. That’s way off, and I lazily was using an online tax calculator to get to effective marginal rate and didn’t double-check the math. Using IRS withholding, for a single intern with no kids and no real deductions, $25k of income in 2018 gives you an anticipated tax of $1373 (5.5%) vs $50 k of income and $4373 (8.7%), so still a difference there of $3k in savings prorated for the first half of intern year.
I still don’t like altering the W-4 for most folks. If you’re collecting an extra $100-200 per biweekly paycheck, are interns really going to invest that money? How much can you possibly make on a short-term investment for 12 months? I’d guess people are more likely to spend that little extra money.
Effective isn’t marginal. Effective marginal has no meaning.
The other thing you’re not considering with your argument that this isn’t significant is the cash flow. In your intern year (and as a new attending too) you’ve got all these uses of money and a limited amount of money. Getting the money now is worth a lot compared to getting it in a year. You can use it for Roth contributions and Roth conversions and emergency funds and paying for Step 3 etc etc.
With an effective Federal Tax Rate of 5.5% in 2017 and projected taxable income estimates as mostly the same in 2018, it only made sense for me to change my W4 form. No reason to let Uncle Sam hold onto my money for me. Several people have stated my outlook on the Traditional vs Roth IRA to be penny wise pound foolish before, but as WCI says, it makes absolute sense if I am pursuing PSLF, which I am. It comes down to having an understanding of the PSLF loan repayment system and there is clear incentive to lower my AGI as much as possible while in training to minimize my monthly loan payments as outlined in the article.
I would say a savings rate is more dependent on the individual than their circumstances (Take Dr. McFrugal’s example below! He CRUSHED a savings rate while being a resident living in one of the most expensive cities in the country). Everyone can save money, and everyone should, but not everyone does.
I certainly don’t advocate for a 20-50% savings rate as a resident, but I sure do as a new attending! I think our best savings rate during residency was around 10%, and we turned out okay. The point is to get into the habit of savings something and then really, really focus on that first few years as an attending.
One of the best things I did that allowed me to save substantially through both med school and residency was avoiding upgrading my car. I drove a ’95 Toyota Tercel that I bought from a private owner prior to med school and it only had 70K miles. The car was in great shape, great on gas and required little maintenance other than the usual oil changes. My auto insurance was less than $400 a year. Not having to make car payments during those seven years was huge. I may not have had the shiniest car in the hospital parking lot, but as a med school student and as a resident, my priority wasn’t to impress others with a car I knew was going to cost me an arm and a leg. It’s not how much you make, it’s how much you save!
I haven’t crunched the numbers since I never thought it would be a valid option to do an HSA if your hospital gives you a cadillac health insurance plan with 0 deductible in residency.
Would it ever be good idea to fund an HSA by DECLINING a 0 deductible cadillac plan offered for free by hospital?
No.
Yes, I agree. If you have a zero deductible cadillac plan with the hospital keep it. No reason to grab a lower quality plan to have access to an HSA. My hospital offers an FSA next year and I plan to fund it by $1K increments, as $500 is eligible for rollover every year. Anything else beyond that goes to the insurance company… If you have access to a great plan, keep it!
#12-14 seem like super smart things to do, but a little out of place on a list of smart ways to save money during residency. Sleep better? yes! Mitigate risk? yes! Save Money? Not yet, and hopefully you never need to use the insurance you bought.
With that aside, thanks for an awesome article. My neck hurts from nodding so vigorously while I read it. It’s particularly awesome that you’ve been able to max out so much post-tax advantage accounts while your earnings are relatively small (compared to an attending’s).
I might add a tip that has saved us a lot of money: Track your expenses.
I’d venture you’re already rocking a pretty robust budget, so the tip is aimed at other readers. But most people I’ve talked to who start writing down where every single dollar goes see some dramatic savings as a result.
Cheers,
Mouse
Personal Capital for the win when it comes to budgeting! We aren’t the best at budgeting, I still spend way too much on Amazon, but we do have an idea where our money goes every month for sure. You are right, points 12-14 subract money every month from the balance sheet, but they are good things and essential for a young doc in the early stages of their career.
If my savings rate was 20% as an intern, things would be pretty tight, unless I lived in a tiny apartment. I don’t think interns should aim for 20%, that’s a huge chunk of such a small income. Alot of interns make 50,000. Pretty tough to live comfortably on 40,000 in any major city. I was saving about 10% as an intern, and tacked on a few percentage points each year.
I didn’t save 20% as an intern either. I don’t even know if there was a 401(k) or 403(b) available to me.
Median household income in the US is somewhere around 56-60k. Residents can definitely live on that, even in a major metropolitan area. “Comfortable” is pretty subjective and avoiding the hedonic treadmill pays dividends, especially early on. I lived in one of the most expensive areas in the country as a resident and managed to save 20% of gross without too much difficulty- it has made FI(re) a legit possibility/probability within 10 years of finishing training (in one of the lower earning specialties and within academics). That being said, made a little easier without kids at the time or health scares etc.
Fyi this post must be pretty old. I moved my hsa from Alliant credit union in October or November last year because Alliant stopped offering a hsa themselves. They moved everyone’s money to a private provider with at the time significantly lower interest rates. I only keep a smallish $20,000 or so in cash in my hsa. My investments are still at hsabank td ameritrade.
There are usually a few months between submission and publication of guest posts these days. But also bear in mind the poster is writing about things done over a year time period, so it’s possible the writer did all that before Alliant changed.
Yes, my HSA with Alliant was funded in April of 2017 right when I was starting to learn about all these topics and still had access to a high deductible plan. I knew those funds were to be spent on healthcare within the coming year regardless and they have since been liquidated. I can’ wait for the day when I too can’t keep a smallish $20,000 or so in cash in my HSA!!! That is practically 1/2 my years salary! Congrats!
Awesome guest post, Life of FI MD! Nice outline and subsequent detailed explanations. You are on the fast track to living a life of FI!
I lived really frugally during my residency years. And like you, I did a bulk of my savings through my 403b and Roth IRA and was able to save ~50% of my gross salary. (I know you read my post, so I won’t go on… 😀 ).
I wish I knew about travel hacking when I was a resident though! It’s a tool that can bring a lot of value. Of course with only 4 weeks of vacation during residency, I would have a hard time to find use for all of those points and miles!
Glad to hear that it is possible to save so much during residency. My wife and I are both starting residency and are hoping to save ~ 50% of our combined income. If a dual-income couple lives in a relatively inexpensive city, why would it not be possible to max out 403(b) + Roth IRAs (x2) + HSA while making minimal loan payments on the REPAYE program? (For a dual resident salary, that would leave about $35,000 left to live off of.) Luckily we have learned to be happy with free/cheap activities. Thank you for this encouraging post, Life of FI MD!
Hey Joshua,
You would be absolutely crushing it if you were able to save 50% in residency! I would say it is possible, but don’t make yourself miserable to obtain your goal. Consider some travel hacking to offset the cost of travel and be sure to do something fun during intern year! But I hear you, my wife and I are quite continent chilling out without spending much money at all. Maxing out your 403(b)s and HSA are great ways to lower your AGI and subsequently your REPAYE payments! You might also consider funding a Traditional IRA while in residency, this would also lower your AGI by $11,000 annually and subsequently your REPAYE payments. At the end of residency right before you become an attending convert your Traditional IRAs to Roth IRAs to allow for future Backdoor Roth conversions. Best of luck and glad you enjoyed the post. Are you jumping into REPAYE ASAP? Don’t wait until your grace period is finished, start now. I just wrote a post on this over at Life of FI MD. http://lifeoffimd.com/2018/06/17/grace-period-vs-early-consolidation-a-tale-of-two-half-bloods/
Followed your advice and applied for consolidation right after graduation. I did not realize that the consolidation process took a couple months, but will start REPAYE (with shortened grace period) on July 1. I have thought about doing all tax-deferred accounts, but I have been cautioned by my accountant parents about the potential of backdoor Roth conversions evaporating away in the near future. Have you heard anything like this? (I would love to lower my REPAYE payments and focus on lowering my AGI.) Thanks for sharing your wisdom!
When did your parents hear this? I know there was a lot of speculation about what would be cut vs. spared prior to the Tax Cuts and Jobs Act of 2017, but the bill is out now and a lot of hear say has settled out. From the WCI himself on one of his more recent podcasts: congress is aware of the backdoor Roth, has blessed the backdoor Roth, and the backdoor Roth is not going away. What has gone away is Recharacterizations (https://www.irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions),
But Conversions of IRA contributions remain (https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-rollovers-and-roth-conversions).
We are still able to convert Traditional IRAs to Roth IRAs without issue (though it is a taxable event) and I don’t foresee this changing at all. Congrats! You guys scored $11,000 more dollars off your AGI!!!
Backdoor Roth IRAs could go away in the near future. They exist only at the whims of Congress. But they are perfectly legal under current law and, as far as I know, nobody in Congress is talking about doing anything about them. And even if they did, it seems just as likely that they’d let high earners contribute directly to Roth IRAs as close the indirect contribution route.
Life of FI MD, my parent’s lack of trust in the backdoor Roth conversion is rooted in belief of an upcoming market correction and subsequent economic downturn. I have learned it is not wise to time the market but also want my family to avoid missing out on the Roth option if the backdoor approach is truly closing.
The possible expansion of Roth availability to higher-earners would certainly negate any savings-based loss of the backdoor conversion closing.
Thank you both for your help!
Well, it sounds like they are more informed than I am (which is not hard to do) so I think you are wise to stay with your original plan. Best of luck in the future and crush those loans out!
Thanks Dr. McFrugal! It was fun to piece together. I dont have a prayer in the world of reaching your 50% savings rate in residency, but I am super content at 20%. I will keep the “live on half” PoF challenge for my years as an attending! For now 20% savings, travel hacking, and discount grocery stores keeps me uber frugal if grading on a curve! I really look forward to your 10X10X10 on my blog soon too Doc! You will have a lot to share I am sure, as your “living like a resident” story is the best I have heard yet!
Re: #9, are you speaking ONLY to interns for this point? I’m a couple years into private practice and If I change my withholding I’m pretty sure I will incur penalties next tax season, which would negate any potential profits from holding onto the money myself..
Just found this article before staring residency. I like a lot of the content but i question the actual benefits of the w4. Even if 5500 were deposited into a HYSA over the course of the year I calculate that interest earned would be $38 (my HYSA is currently at 1.3% APY). Am i missing something? That hardly seems worth all the effort. I know this is two years old so forgive me if the answer has been given elsewhere.
You know HSAs can be invested in mutual funds, right?
Too bad . . . his blog is gone. I clicked his link on travel hacking, and it is gone . . .