[Editor's Note: Today's guest post was submitted by Joshua White, DO, a PGY-2 in an Emergency Medicine Residency in Corpus Christi, TX. We have no financial relationship.]As I finish up my intern year in emergency medicine, I’ve reflected on how I’m now just starting my journey to financial independence. The principles I’ve learned and begun to put into practice will likely help anybody just starting their own journey. I believe that they are simple and straightforward for anyone.
10 Simple Steps to Financial Success
Step 1: Establish a Financial Plan – Think Long Term
You cannot afford to simply go with the current and follow popular culture if you want a different outcome than the masses. In order to become financially independent, you need a plan. So wherever you are in your career or educational path, if you don’t already have one, develop one today. An old Chinese proverb states, “The best time to plant a tree is 20 years ago, the second best time is now.” It’s important to set a financial plan that addresses the categories of debt, investing, insurance, and eventual retirement goals. Several questions to ask yourself include the following:
- When do you want to become financially independent?
- What are your financial goals before you retire?
- How much do you need to save/invest each year to accomplish your financial goals?
It all starts with a plan, and your plan will change, but the first step is to start a plan and to have your current long term goals written down. [I've harped on the importance of a personal written financial plan for years. If you don't have a written investment plan, get a written investment plan! Either read the books and write your own, take the course that will help you quickly and easily create it, or go hire a good financial planner to get it done. — ed] My financial plan is shown below to give a simple example of where you can start:
Using the White Coat Investor suggested book list, I compiled a list of books I wanted to read. I highly recommend starting with the books The White Coat Investor and The White Coat Investor’s Financial Boot Camp, and then diversifying into different categories like investing, financial behavior, and paying off debt, based on personal interests and needs. Current goal: 2 books/year
Currently in REPAYE, with approximately $ 375,000 of student loan debt with an effective 3.4% interest rate. My goal is to have this paid off within 2 years after residency.
I recently started a Roth IRA with Vanguard, and started automatic investing every month. My goal is to max out my Roth IRA my 2nd year of residency, and then to invest 20% of my income as a 3rd year. I also plan to increase that to at least 25% of my income when I start as an attending after loans are paid off.
I obtained specialty specific disability insurance at the end of my 4th year in medical school with a future purchase option. I have put off life insurance, because I don’t have any dependents. However, I am working on obtaining an inexpensive life insurance policy now to lock in rates.
I plan to become financially independent by age 50 (18 years out of residency). Current estimate for financial independence is at least 2.5 million in today’s dollars in retirement accounts.
Step 2: Evaluate Your Personal Spending
This step is simply to make observations about how you live your life. Keep track of all financial expenses, and look back and categorize what you have spent over the last 3 months.
- Do you save, how much, and where does it go?
- Do you have Emergency Savings?
- How much do you spend, and what do you spend on?
Often simply observing where your money is currently going will make you more aware and careful of how you spend your money. Create a detailed record of where your money is consistently going. This simple step will help you with step 3.
Step 3: Identify Competing Priorities
Competing priorities are anything preventing you from achieving your goals. My competing priority to drive a new car interferes with my goal to save and retire early. If you aren’t saving the amount you need to, where can you cut costs?
- Is there anything you are currently doing that is getting in the way of reaching your financial goals?
- What do you need to stop or start doing today to begin making progress towards your goals?
- What sacrifices are you and your family willing to make today that would lead to you making progress to accomplishing your goals?
Make a list of small changes you decide you want to make, and make a plan on how to implement them. Remember even small changes progressively will lead to big results.
Step 4: Apply for REPAYE and Eliminate High-Interest Debt
If you have any high-interest debt, like credit card debt, make it a high priority to eliminate. The AVERAGE interest on a credit card is 17.30 %. That is absurdly high! Never allow yourself to carry a credit card balance month to month. If you are in this habit, stop now. Credit cards can be useful for benefits, but if you carry credit card debt, you are losing.
Consider this quote that demonstrates the disastrous effects of high-interest debt on your financial status and overall happiness.
Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels . . . it has no love, no sympathy; it is as hard and soulless as a granite cliff. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands nor orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you. — J. Reuben Clark Jr
Simply put, do you want interest to be working for or against you?
- REPAYE: For most people, this is the best option as the government will subsidize ½ of your yearly interest after making your minimum monthly payment. Required monthly payments are calculated based on your income. Learn more about and apply for Income-Based Repayment (preferably REPAYE) at https://studentaid.gov/app/ibrInstructions.action
- During end of MS4 year, file taxes, apply for federal consolidation, and apply for Income-Based Repayment. If during your MS4 year you had $0 income and you apply before residency, then your required monthly payments will be $0 for the first year.
- You need to recertify your income once a year as a Resident.
- If you are in a more unique circumstance, like your spouse is a high-income earner, REPAYE might not be for you.
- After Residency, it is likely more advantageous to refinance to get lower interest rates.
- I personally wouldn’t depend on potential loan forgiveness. Why hold off eliminating debt in 10 years when you can likely get rid of it in 2-5 years or less?
Ultimate Guide to Student Loan Debt Management for Doctors
REPAYE vs PAYE/MFS for Married Residents
Don't Give Up on Public Service Loan Forgiveness
Step 5: Obtain Disability and Life Insurance
Everyone should obtain disability insurance for residency. This protects your most important asset: your ability to produce future income. Good disability insurance can be obtained that will cover at least your yearly resident salary with a Future Purchase option that can increase your coverage to match your future salary. Learn more about what to look for in Disability Insurance and where to buy it in the following WCI articles.
If you have any dependents, life insurance is critical. If not, it’s definitely something you should look into but not as urgent. Many good plans are very affordable, that cost as little as $30/month for a $1 million policy.
Step 6: Establish a 3-Month Emergency Fund
This should cover your necessary expenses for 3 months and is ideally at least $5-10,000 as a Resident. This is very important as it protects you from a “rainy day.” This might include an injury before disability insurance starts (usually takes 90 days), a natural disaster, or even a pandemic. You can’t predict the unexpected, but this will help you be more financially secure regardless of what happens.
Step 7: Begin the Monthly Habit of Investing Towards Your Retirement Goal
In a WCI Podcast, physician millionaires gave the same advice repeatedly:
- Pay yourself first
- Start investing as a resident: it’s more about developing a habit at first than how much you are investing.
Simple Steps of Investing:
#1 Employer Match
Find if your employer provides a match – Don’t leave free money on the table
I’d choose Vanguard. Why? They are the only mutually-owned mutual fund company in the world and they operate on low costs and outperform their peers.
#3 Make Investing Automatic
Pay Yourself First (the less effort required, the more successful you’ll likely be).
#4 Invest in Low Fee Index Mutual Funds
Diversify investments by choosing an index fund that includes a broad array of stocks. The one that’s most recommended on the White Coat Investor blog is the US Total Stock Market Index Fund.
#5 Savings Rate
Work up to investing at least 20 % of your gross income as an attending. Remember that you can start small at first, especially as a Resident, so you can be sure you succeed in developing this habit. When your income increases, investing at least this much should be your goal.
Step 8: Instead of Lifestyle Creep – Choose to Investment Creep Instead
Find ways to fight against the social pull. As your income increases, increase your savings at least as much as you increase your spending. Take the opportunity to practice Living Like a Resident while a resident. What’s your guilty pleasure? I know that there is an increasing pull to buy bigger and nicer houses, cars, and other luxuries, but are these things important enough to you to compromise your future financial goals?
Where are you in relation to your peers in how you spend your money? I have observed that the people who have the most net worth have developed habits to spend less than their peers, especially earlier in their careers or training. Usually, this entails having older cars, choosing less expensive housing, and putting off some of your wants for a time when you have more financial stability.
Step 9: Choose to Educate Yourself
Choose a way to increase your financial knowledge. Make your own booklist. Or maybe you prefer podcasts or blogs. Whatever you choose, if you make your effort consistent, you will begin to learn what you need to know to become more successful.
Where I would start:
- The White Coat Investor
- The White Coat Investor’s Financial Boot camp
- How to Think About Money
- Millionaire Next Door
- If You Can
This is an essential step. I have noticed as I have invested consistent time in reading books, blogs, and podcasts, I have been inspired to change in simple but significant ways that I wouldn’t have thought of on my own. If you choose to rely solely on your own ideas and knowledge, your progress will likely be significantly reduced.
Step 10: Evaluate Your Financial Goals and Progress Toward Those Goals
Make it a habit of evaluating your investments, savings and your whole financial plan every 6 months. Make course corrections where needed. This will help you adjust to changes in your social and economic situation, but not so often that it causes you to worry about your investments.
Remember that progress is the priority, not drastic, immediate growth. The goal is to make long-term life-changing decisions that usually start as incremental, sometimes almost indiscernible, progress. Just like interest and investing, your consistent small efforts are designed to produce lasting results. So if you feel like making all of these changes right now is overwhelming, pick something small. Your confidence will increase as you prove to yourself your ability to make sustained changes.
- Establish a financial plan – think long term
- Evaluate your personal current state of affairs: observe your financial behavior
- Identify competing priorities
- Apply for REPAYE and eliminate high-interest debt
- Insure yourself
- Establish a 3-month emergency fund
- Make investing a regular monthly habit
- Investment creep instead of lifestyle creep
- Choose to educate yourself
- Evaluate your progress regularly and make needed adjustments
What tips for financial success would you give a med student or new resident? Comment below!