By Dr. James M. Dahle, WCI Founder
I’m occasionally asked to give very young physicians, i.e. students and residents, some financial advice. Typically these doctors have a low income, a dramatically negative net worth, little financial education and plenty of naiveté. In fact, I was recently questioned by a student how anyone could possibly spend more than $10,000 per month (to which I replied that I spent more than that on taxes alone.) The truth is that many of these physicians will find themselves spending more than $10,000 a month long before their net worth even reaches zero.
The most important advice I can give any student or resident is to LIVE LIKE A RESIDENT. That means not taking out additional loans during residency (you might be surprised how many of your peers cannot live on a resident’s income) as well as living a lifestyle similar to that of a resident for two to five years after residency. The slower you can grow into your attending physician income, the better off you will be financially. It is entirely possible to pay off your student loans, save up a big down payment for your dream house and be closing in on millionaire status within five years of residency completion. But most docs won’t be in that situation, and some docs will never get there, all because they grew into their peak income entirely too quickly. Make plans now to avoid being in this situation.
Managing student loans properly is also critical for the young physician. The two main options are to stay in the government programs (IBR or PAYE), planning to work at a 501(c)3 to hopefully qualify for Public Service Loan Forgiveness, or to refinance the loans as soon as possible and pay them off quickly. Recently, one private lender even started refinancing loans for residents while allowing them to make $100 a month payments until the completion of residency, saving many doctors tens of thousands in interest. At any rate, if you owe hundreds of thousands of dollars, you should become an expert in student loan management.
Many residents are severely underinsured. If people depend on you financially, you need a large quantity of term life insurance. Even if you cannot afford the $2-5 million a young physician family probably needs, at least buy a $1 million five year term policy and then upgrade when you finish residency. Disability insurance is similar. It will never be cheaper than during your residency and your need for it will never be greater. Try to buy as much as they will sell you as a resident, and then reevaluate your needs upon completion of training.
If you have children, you need a will that dictates who will care for them and who will manage your money for them in the event of your unexpected death. A simple will is inexpensive, whether done online as a do-it-yourself project or through a qualified attorney.
Start investing with your very first paycheck. Read the documents HR gives you and be sure to obtain any available match in your employer’s 401(k). You can also invest in a Roth IRA. Favor Roth (after-tax) accounts while in residency, as you are likely to never be in such a low tax bracket again.
If you had a time machine, what advice would you give to your younger self in med school or residency? Would it be about spending, investing, or insurance? Comment below!
[This article originally appeared in the AAEM/RSA Modern Resident.]
Solid advice, WCI. If I could add one thing, it would be to also WORK like a resident, or something close to it when you start your career as an attending. Taking extra shifts, weekend calls, or moonlighting / locums shifts can help you get a head start on your financial goals.
I like that! Never thought about it like that, but did do it.
Good article for students and residents and also for those who are in practice and overspending. Recognize everyone who achieves FI has made a number of mistakes along the journey. Don’t dwell on mistakes but plan for the future. Learn to enjoy reading this site and POFs site and others. Read Mike Pipers books and WCIs. The hardest step is getting started.
The advice I would give my younger self is that even though I didn’t choose medicine for the money, it is not greedy or beneath me to learn to manage my finances well. Many people will be more than happy to exploit my lack of knowledge which can place my love and desire to be a physician in jeopardy. Learning the basics of finance does not have to be time consuming. Simplicity beats complexity. Behavior matters more than anything else in finance. As a young physician you have the strengths of the ability to delay gratification and an incredible work ethic. Use them to your advantage in your personal finances as well.
Beyond the touchy feely motivational advice above, I would add the following actionable advice: Go to the Schwab or Vanguard websites. Open a Roth IRA and fund it to the best of your ability. Get the money in it now. You can only fund up to $5500 per year. You can’t retroactively fund the years you didn’t contribute. You will have time to learn how to invest it later.
Fully agree with the Roth IRA early. You likely won’t even need to pay taxes on the money since you will be in such a low bracket/no bracket with deductions.
One of the hardest challenges to living like a resident is that most residents or early attendings are at a point in their lives where they want to start a family. My kids have been the biggest lifestyle creepers in my house, not so much in terms of demands but just spending more on preschool, clothes, food, etc
Save at least 20% of your income with every paycheck–even during residency, bump it up to 30-40% when you first get a ‘real job’. There is no excuse for not being able to live off of 20% less of your income during residency. Somehow 99+% of the world finds a way to survive on much less than a resident’s salary. Start your kids off with the same principle whenever they earn money. I fully agree that the most powerful principle is living like a resident for 5 years after residency. The snowball you make early in your career can/will turn into the abominablel snowman much quicker and easier than if you start later. Every extra dollar saved a year earlier is much, much more valuable and powerful than a dollar saved later. The principle my grandpa taught me was, “if not now, then never”, meaning if you wait to save, donate to charity, etc until you are more financially secure, that day will never arrive. It’s a mindset not a dollar amount.
If I could go back in time I certainly would have liked to read your book or something similar (I think I was already logging many mistakes before it was published) before medical school and once a year to refresh as finances are easy to let slip to the back of the mind.
Would have made an overall financial plan/guideline with goals to help frame any decisions in light of overall achievement of said goals.
If I was going back in time, i would add an important caveat to the expectation that “It is entirely possible to pay off your student loans, save up a big down payment for your dream house and be closing in on millionaire status within five years of residency completion” – that caveat would be that location and cost of living are HUGE determinants of whether that strategy is feasible. I’ve been an avid reader of WCI for several years and do my best to “live like a resident”, but have found, in a high cost of living area (Washington DC), that the 5-year plan outlined above is next to impossible unless you are as frugal as a Mustachian. If needs or wants dictate living in a high cost-of-living area, expectations must be adjusted.
There are other caveats you can add while you’re at it- specialty choice/salary and cost of your medical school.
If your loans are average or less, and your salary is average or better, then you’ll probably eventually be okay in a high cost of living area. What might take someone else 10 years might take you 13 or something. However, if your loans are above average and your salary below average, you may never get ahead in a high cost of living area whether you want or need to be there or not. Moving might be the only road to financial independence.
This is the one area that gets me down a bit reading all the WCI – the base assumption seems to rest on the fact that I can “pay off my student loans in 5 years!”
My financial mistake (as much as I was able to control with no outside funding and a family) is my 350k of student loan debt. I’m a resident in FM. Realistically, no way to pay loans in 5 years. Best case is 7 years of payments and then qualifying for PSLF (the current path I’m on), but if the government kills PSLF I’ll be on the hook again.
Given the dramatically rising cost of medical school, I think this site quite underplays the impact of student loans. That could also just be my bias given my personal situation.
Otherwise I love the site.
Underplays huh. I feel like I overplay it 10 times more than the schools themselves! Student loan debt is a huge problem impoverishing far too many physicians. However, I disagree with your assertion that you cannot pay off your loans in five years as a family physician. You may choose not to, but that does not mean you cannot do so. Let’s run the numbers:
According to this: http://www.aafp.org/news/practice-professional-issues/20150513salaryreport.html the average FP makes $195K. Now, if I owed $350K, I’d be busting my tail and earning more than average. So let’s say you earn $225K. Now, perhaps $75K each year goes to taxes. Now let’s take my mantra of “Live like a resident.” That means you live on $50K. That leaves $100K to throw at loans. Perhaps you want to put a little into retirement accounts to reduce your tax bill a bit so you only throw $80K a year at the loans. Let’s say you refinance your loans to 3.5% variable. So in the first year, your $350K generates something like $12K in interest. So $68K goes toward the loans. In year two, you owe $282K. That generates something like $10K in interest, so $70K goes toward loans. You now owe $212K. In year three that $212K generates something like $7K in interest. So $73K goes toward the loans. That leaves you with $139K in loans. That generates $5K in interest in year four, so $75K goes toward the loans, paying them down to $64K. You’re done after 4 3/4 years. That assumes you didn’t take a job where the employer pays something toward your loans each year.
Now, if you decide you’d rather invest that money toward retirement and a home downpayment and go for PSLF, I can’t say I blame you. But to say you cannot pay off your loans in 5 years, sorry, the numbers don’t add up. The only reason that would occur is because you are living like an attending, not a resident. Those who say it cannot be done would be better off reading the stories of those who have done it until they feel sufficiently motivated and inspired to follow the same path. And I hope this site can help with that. The only people who should have student loans 5+ years out of training should be those going for PSLF and perhaps those whose loans are at 1-2%.
I can’t argue with that math based on your above assumptions.
But let’s be a bit more realistic about these numbers for any FM’ers who are going to look at this. While the average FP makes $192k, -new- grads make less. In my region specifically, they make about $170k. In addition, the idea of “busting my tail” to make more money again sounds good, but in FM with declining private practice options, you’re typically going to enter an employed position and be signed to a 2 year contract at a fixed compensation. After that it is based on your billings, which are dependent upon how much you built your practice in those first two years, which can fluctuate.
So redo’ing your math for $170k. My region isn’t bad for taxes, so I’m down to say $120k. Live like a resident at $50k, but I’d like continue my habit of retirement savings, so $50k per year left to throw at loans. I refinance to 3.5%. If I continue paying $50k/year at 3.5%, it will take 97 months, or 8 years 1 month. I would make a point that this also entirely ignores things like emergency fund, family expenditures, etc.
I’m not saying I disagree with the idea of paying loans off ASAP, in fact I do entirely agree with that notion. I’m simply arguing that things aren’t quite as rosy financially in all of medicine, so the notion of always paying off the loan in five years is a base assumption that I’m not sure works for everyone.
There is an FP who is a regular poster who was in a similar situation to you. Not making much. Not gaining progress toward his financial goals. Shortly after he started reading this blog he took a new job in Alaska making $400K. Paid off loans. Bought home. Now saving for retirement like crazy. Etc etc.
Bottom line, it might take doing something more dramatic than you’d like in order to be out of debt in 5 years given that you owe twice your salary in student loans.
The best $20 I ever spent was buying the book Random Walk Down WallStreet. If this does not teach you that the stock market is crooked, nothing will. With that INDEXING is the best way to invest and history has proven this to be true. After that I read Bogle’s book and others. Never trust anyone but yourself with your investments. If you use a fee based advisor you better be educated on the subject. Of course you will work forever if you do not SAVE a % of your income. As others have stated fund your ret plans to the max. Nothing better than a Roth. And Of course tell others about WCI website and book; both must reads
I will be lecturing at ACEP this year on the topic of early career finances.
It’s not just how to manage your money, but nobody teaches you what various financial terms (and account types) mean, which I have found to be the most important lecture topic for residents.
Interesting. I’ve offered to lecture at ACEP before and didn’t get much interest.
Nate, can you post your presentation?
I also lecture to Med students and residents on this topic.
What topics are they most interested in?
Live like a resident is the best advice, but it is just so hard for most to follow. There is such psychological pressure to reward oneself for all the hard work of residency, so much pent up demand for…everything. It’s like wining up a huge rubber band of delayed gratification, most just let it go wild after those big paychecks start rolling in.
I like your advice to just try and slow the process of hedonic adaption, at least until loans are paid off. I would be interested to know how many of your readers actually continued to live like a resident for 5+ years after residency (I would define this by increasing spending no more than inflation after subtracting unavoidable new costs such as relocation/licensing/cme). As frugal as I am I still allowed my spending to expand. Anyone able to pull this off?
You know, ever since I did the math and realized I came out about $180K behind taking HPSP, I felt like maybe that slowed me down. But one big benefit is that my income increased gradually rather than dramatically like most docs. That can be done artificially, of course, but it was mandatory for me. My “big jump” in income coming out of residency was from $40K to $120K rather than to $200-400K. There’s no way we could have even made payments on the huge “doctor house” and “doctor cars.” Still, we probably went from living on $32K to maybe $55-60K for those first couple of years. A dramatic increase by percentage, but not by dollar amount.
I did it for 6 years after residency, we increased our spending about 10K post residency. It felt huge after living on about 45k. We didn’t include any of our loan payments in the numbers though. At year 7 bumped it up again, but still living on well under 100k outside of business loans and taxes.
The key is just never growing into it, once you do I can only imaging how hard it is to go back. Everyone I talk to, no matter what they spend, has trouble finding anything to cut.
Although I commonly post that living like a resident in the most important advice from WCI, I must admit that I did increase my spending about my $50k resident salary (WCI was only in cerebral embryo when I finished fellowship). However, I did save 40% of my gross income per year for the first five years out of fellowship. I have scaled that back to 35% currently :-). I’m not sure if WCI means that everyone needs to actually live on a resident’s salary, but the principle is that debts are paid down/off and savings are significantly accelerated when you finish residency. Live well below your income until you’re on the path to financial freedom. That will be very different for each individual as outlined by WCI. Someone with $100k in debt and $500k in income may not need to live off of $50k/year in order to “live like a resident”, however someone with $300k in debt and $100k in income will likely want to cut back from their lavish resident lifestyle!
It’s more of a concept than an exact level of spending.
With the end of my pgy-1 year coming to an end, I have managed to save and invest 11k. I’ve got my Roth and outside disability insurance as well. I plan to save/invest 10k each year of my remaining years of residency. I have read the book and try come to the site from time to time. Thanks WCI for your help.
You’re welcome. Sounds like you’ve got a great start! Better than me.
If I could tell myself from just two to three years ago anything, it would be to apply to cheaper dental schools in addition to two in-state ones and four in metropolitan areas. The only school that accepted me was the most expensive one of the six, and rather than wait another year and potentially not be accepted anywhere, I’m now looking at paying back loans of at least $350,000 when I graduate.