Financial Strategies 101 for Residents and Fellows
We often times get the question, “when should you start your financial planning or look for a financial advisor”. We believe that the sooner you can get a financial strategy in motion the better. We’ve found that many of the minor, but important financial decision you make early on will shape the foundation for your financial strategy moving forward. This will also help pave the way for a smooth transition into practice. The below topics outline some of these foundational items to consider, and mistakes we’ve seen made along the way.
First, it’s important to remember that not all debts are considered “bad debts” that need to be repaid immediately, unless you can’t bear having it hanging around. The balancing act of whether to pay down debt or invest can be a big question for many physicians but ultimately depends on your goals.
From a financial standpoint you have to compare the interest rate of the debt verse the potential rate of return you could obtain over a long time horizon. Debts with an interest rate of 0% to 5%, such as current mortgage rates, can actually be beneficial to you for tax purposes and you may be able to obtain a higher rate of return on your savings given a long enough time horizon. Debt with interest rates above 8%, including credit cards, should be paid down as quickly as possible. However, most student loans hover in the 5% to 8% area, and there are several ways you can choose to pay down these loans. Choose the path that’s best for you.
- Forbearance: This option allows you, based on your income in residency and the size of your loans, to defer payment until after you finish your education. The loans do accrue interest, and it’s added on to the overall amount of the loan once you begin repayment.
- Standard repayment: Like a mortgage, you can go to a lender and have your monthly payments calculated out for 5, 10, 15, 20, or 30 years. This would be your payment for the term of the loan.
- Income contingent programs: This program will calculate your monthly payments based on your current income, discretionary income and the poverty line. These programs can make paying your loans cost affordable and provide the possibility for loan forgiveness. To take apply for the Public Service Loan Forgiveness program you must make 10 years of on-time, qualifying payments, and you must work for a 501c3 non-profit institution. Based on the current Public Service Loan Forgiveness plan, the federal government might forgive the rest of your loan tax free at the end of the 10 years.
- Refinance: You can also take your student loans away from the government and move them into the private market if you decide one of the of the other programs does not fit your needs or goals. Private banks might be able to offer you a better interest rate than the government can. Be warned, though, that once a bank buys your loan, the government will never take it back causing you to not be eligible for government repayment programs or forgiveness.
Saving money during residency is hard, but it’s necessary. Your goal should be to build up between 3 months and 6 months of on-hand cash reserves either in checking, savings, or money-market accounts. This money can protect you and keep you afloat in case anything unforeseen happens in your life. This is especially important to consider during your last year, as interview, licensing, and exam expenses are often overlooked.
Get into the habit early of automating a sum of money monthly to a savings account, regardless of the amount. This helps form a habit, and you can increase the amount as your income grows. It can also help you kick-start your retirement savings.
There are policies that are meant to simply protect you from things you don’t see coming – disability, life, auto/home, and umbrella insurance.
- Disability Insurance: This type of insurance can be particularly helpful, especially if you are the breadwinner in your family. If you lose the ability to work, disability insurance can help you and your family maintain your lifestyle without descending into debt. Shop around for the best policy that will fits your needs and make sure to understand the definition of when the insurance company will deem you disabled.
- Life insurance: You can choose between term insurance for 10, 20, or 30 years, or you can choose a type of permanent life policy that stays with you forever. Premium rates, based on your health rating, are locked in, so your payments stay the same.
- Auto/home insurance: These are largely required by state law wherever you live. Check your state requirement to ensure you’re covered at least to the minimum standard.
- Umbrella insurance: Largely overlooked, umbrella insurance can come in handy if you’re ever sued or involved in an accident. It can protect your major assets, such as your home or income, by adding an additional layer of insurance coverage.
At the beginning of your career, the end of your career seems far away. But, it will be here sooner than you think. Making plans for retirement now will only help you in the longer run. Overall, you should try to save 20% of your income for your retirement years. If your employer offers a match, do it – it’s free money. If not, a Roth IRA may be a good option during training. As of now, you can put up to $5,500 into it annually. Other employer-sponsored programs, such as the 401k and 403b, are great options and once you are out in practice will want to be utilized. You can put a maximum of $18,500 (as of 2018) into them yearly pre-tax, reducing your taxable income.
Mistakes to Avoid
Planning for your financial future can be complicated and overwhelming, especially as you’re starting a career. There are common pitfalls you can avoid to stack the deck in your favor and set yourself up for greater success.
- Don’t overbuy your first home. Keep the sticker price to between 2-to-2.5 times your family income.
- Don’t spend too much or put away too little money into savings.
- Don’t put off saving money. Start now.
- Choose a strategy for your debt and risk management.
- Engage in estate planning. Set up a will or trust.
- Automate your savings contributions. The more you spend the money, the harder it will be to convince yourself to save it.
- There’s never a “right” time to start building your financial strategy. Get started now.
- Don’t go it alone. Educate yourself and work with a professional who can guide you on which options and strategies are best for you.
- Avoid getting all your financial education from Google. As a healthcare provider, your financial needs are different, and most financial advice won’t apply to you.
- Make provisions for your retirement on your own. Don’t assume employer-based retirement plans will be enough to sustain you.
It is important to remember that in any financial plan, there is not a “one size fits all” solution. This is why it is important to run the numbers before making any decisions or seek the help of a financial advisor to help you do so.