This one came in by email. Enough details have been changed/obscured that no one will recognize this couple. Although I say it a lot, it's been a long time since I've written anything about living like a resident. So today we'll talk about what that means.
I am a senior resident with $250K in loans, a little credit card debt, and $25K in cash that we are holding because we may need it for IVF. So far we've spent a ton of money on it without success. In fact, we may change states after graduation to one that mandates IVF coverage in their insurance plans. I'll be making about $250K plus a signing bonus but we expect my wife who is working now won't be working then. I understand the best move for me will be to pay off that credit card debt, refinance the student loans and then start making payments toward the student loans but I had a few questions.
I've heard you talk about saving approximately 20% of your income towards retirement. Does that assume you have already repaid the student loans? Or should I be saving 20% of my income AND paying back the student loans at the same time? I guess this probably depends on the interest rate I can get after refinancing my loans. What are your thoughts on the IVF quandary? Also, I have a question about buying a house. I have heard you say that you should live like a resident for two to five years. Does that mean that you should not buy a house for two to five years? Should you not buy a house until your student loans are paid off? What about the fact that you are not earning equity during this time?
Wow, lots of questions. They're all the same questions that every other graduating resident has though, to be honest. Let's start with the big picture and then talk about IVF at the end.
Here's the way “live like a resident” works:
You're Some of the Poorest People in the World
The main thing is to realize that you aren't rich. You're actually very, very poor, at least as measured by net worth. Your net worth right now is something like -$250K, right? So you're more broke than the bum living under the aqueduct down the street. So, knowing you're one of the poorest people in the world, you've got to ask yourself,
Self: “Well, it turns out the way to build wealth is to take some portion of your income and dedicate it toward building wealth. The larger a portion of your income that you can carve out for wealth-building, the faster you gain wealth. Anything you spend (whether it is on food, housing, or IVF) is money that cannot be used to build wealth. Whether the money goes toward student loans, toward investment accounts, or toward a home down payment, it all builds wealth. How MUCH you dedicate to it matters a lot more than how you dedicate it.”
You: “But I want a bunch of stuff, and besides, I deserve to have all this great stuff because I'm a doctor and my income is about to go to $250K per year. That's 5 times as much as I was being paid as a resident.”
Self: “In reality, your income is about to go from something like $100K a year to $250K a year because your wife is going to stop working for some reason despite you guys being some of the poorest people in the world. Plus, you have a major expense coming up that is pretty much mandatory if you want to reach your most important goal of having a family. So your gross income is only going up 2 1/2 times and your net income is probably only going to double, and that's without even thinking about some other major expenses you're going to have like retirement savings and student loan payback. The truth is most of that $250K has already been spent. You spent it 6 years ago on medical school tuition.”
You: “Oh, you're right. Crap. This sucks. I thought I was going to be a rich doctor and now it looks like I'm still poor despite being a doctor.”
Self: “Yes. It's unfortunate, but that's the way most docs start out their career. Some do something about it that allows them to reach financial freedom after just 15-20 years of practice while others actually live paycheck to paycheck most of their career and never build any wealth.”
You: “That sounds bad. What can I do so I'm not one of those docs who gets to be 63 and only has a net worth of $300K?”
Self: “Live like a resident for 2-5 years, use the remainder of your income to build wealth, then slowly grow into your income as slowly as you can and never grow into it all the way so you can always put 20% of your gross income toward retirement.”
Self: “You can have anything you want, but not everything you want. You can do the IVF, but you can't do the IVF and the nice car and the nice vacation and the eating out and the fancy doctor house and have your wife stay home. You've got to pick and choose.”
You: “I see. Well, maybe my wife can continue to work at least until the baby comes.”
Self: “Now you're talking.”
You: “And maybe we can either rent a little starter house or perhaps even buy a duplex and rent out the other half to help pay for it. Then when we are back on our feet and ready to buy our fancy doctor house we can either sell it or just keep it as an investment.”
Self: “Now you're talking.”
You: “Maybe we can really investigate IVF and find a place that does it a little cheaper or figure out a way to get insurance to help us with it.”
Self: “You've got it now.”
You: “I wonder how quickly I could get these student loans paid off. Maybe if we live on the average American household income of $50K, pay $50K in taxes, put $25K toward retirement and put $25K toward a house downpayment, we could put $100K a year toward the student loans. Then they'd be gone in 3 years. We'd also then have a good downpayment for our doctor house.”
Self: “There you go. That's living like a resident. If you do it right, you only have to do it for 2-5 years. By living like no one else, you can later live like no one else.”
Hope that helps.
What To Do With Fertility Treatments
As far as IVF goes, it's clearly a major priority for you guys. So prioritize. Figure out what you're not going to do so you can pay for that. What you do with that $25K in cash pales in comparison to what you do with the $250K you make next year and the year after that and the year after that. Focus on that. Figure out what matters most to you, buy that and avoid spending on anything else (including a big fancy doctor house that isn't going to make you much happier anyway) so you can take care of business with your finances.
I don't care if you rent or buy during the “live like a resident” period. Either is fine. But you can't buy the doctor house. Remember a house is both an investment (the dividends are the saved rent) and a consumption item. Consume as little as possible while living like a resident so you have the money for what you really care about and to buy your financial freedom.
What do you think? How does a couple like this live like a resident? How do you balance priorities? Did you have IVF related financial issues? How did you address them? Comment below!