[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)
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
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!