One resident I met described these steps for the way to get through residency training: Never stand when you can sit; never sit when you can sleep; and see a doughnut, eat a doughnut. In other words, when you are a resident, life is tough and you eat what you can when you can. With a roughly $60,000 salary coming in, catastrophically large student loan payments looming, and no way to afford hiring out help to care for your home let alone pay down debt or hire any services to help make life a little easier, life as a resident is very, very tough.
If you are reading this, you have likely made it through your residency training. Congratulations! You probably have a more appropriate salary, the kind of salary most “regular” people dream of having. Yet, easy street is still not within your reach. Your student loans are even higher because interest accrued throughout your residency. You’re ready to live large but instead have to figure out your new job, one that comes with a good bit more stress and pressure than many other professions.
And did I mention that the monstrous student loan debt is still looming?
When you combine the high income with higher student loans, plus the desire to live a bigger (or at least somewhat more comfortable) lifestyle, it is understandable that you may not have the time or mental energy to investigate ways to build your financial house. You are not alone. Luckily, Financial Residency can help. Our goal is to help you conquer your finances and live your best life, every day.
This article is meant to provide tips and guidance for how to build your financial house soundly in your first year out of residency.
How Much Do I Need To Save?
Whether or not you’ll have enough money to retire is a big question, possibly the most important question anyone can ask. After all, in order to be able to retire comfortably, you will need, at a minimum, a place to live, food to eat, and reasonable health care. That sounds like a short list, but we all know those things can be terribly expensive. It doesn’t help if you have a large student loan debt coming along for the ride.
Not too long ago, $1 million was the magic number for most people to be able to retire, but inflation being what it is, a million dollars just doesn’t buy what it used to.
With the average person retiring at age 63, and with a life expectancy of about 85, that leaves 22 years of retirement. That’s at least 22 years to enjoy some free time, filled with volunteer pursuits, hobbies, or even simply sleeping in every once in a while. Of course, the older we get, the more medical costs we tend to have, and the harder this dream is to obtain.
The general rule of thumb for saving for retirement is to put away at least 15 percent of your income every year. More is always better. This is total savings, so it includes the money your employer might offer as part of your compensation package.
If, for example, your employer will match up to 5 percent of your contribution to a 401(k), you would need to put in 5 percent yourself, they would match 5 percent, getting you up to 10 percent. You would then need to add another 5 percent to come to a total of 15 percent. You could do this by increasing your own 401(k) contribution or by investing in a Roth IRA or other such investment product. A financial planner (like me) can help you determine the best way to maximize your savings.
You may have noticed that I still haven’t told you how much money you need to save for retirement. That’s because the magic number is different for everyone. Here is a calculator that can help you find out your magic number. I also hope you will give me a call so I can help you identify some good options to build your savings.
How Do Doctors Get Rich?
This is quite the loaded question, isn’t it? Don’t we all grow up hearing that becoming a doctor is the “best” profession because not only do you get to help others, but you can do it while earning a top salary? Yet, as you are no doubt learning all too well right now, when you graduate from medical school with six figures of student loan debt on top of earning $60,000 or so a year, it’s awfully hard to get to rich. Even when you do get to a point in your professional career where you are commanding a top salary, that debt will likely still be there with you.
So, the first thing to consider is that some doctors never get rich. That’s right. It’s true. This is not necessarily a bad thing. Some specialties don’t pay as much as others. Some doctors work for nonprofits and forego the higher salaries they could command in a more lucrative career. How does this affect their financial life then?
The second thing to think about is why you chose this field in the first place. It likely wasn’t to get rich. There are easier ways to train for a lucrative career (think law or finance) than going to medical school and completing a residency. Doctors and other health care professionals typically go into this profession to do some good.
But, don’t worry. Just because student loans are high and residency salaries are low doesn’t mean you are destined to be poor. Give me a call. I am certain I can help you find ways to live your best life while working in the noble profession of health care.
Is It True That Doctors Are Bad With Money?
Of course not, inasmuch as there are people in any profession and any demographic who are good with money and not so good with money. Which camp you are in has nothing to do with your profession and everything to do with your financial habits and finance education to this point.
It is true that while doctors are experts in the care of others, they were not trained to be businessmen and women. In a hospital or private practice setting, there are often multiple administrators whose job is to manage the business side of things. This makes good business sense for the hospital or practice overall, but does leave a gap in your personal abilities to run a business or manage your own finances.
It’s also important not to cave to the mindset that now that you are finally done with medical school you can be a bit reckless with your money. It’s not uncommon for newly minted doctors to buy a fancy car or expensive clothes because, well, you’ve been skimping for so long and going without sleep and living in your scrubs, so you probably feel you deserve to splurge a little. My idea of a small splurge is to buy a nice pair of shoes…not a new BMW.
Should Financial Considerations Affect My Choice of Specialty?
This is no small question. It is a simple truth that some medical specialties pay more – sometimes a lot more – than others. The highest paid specialties include plastic surgery, orthopedics, and cardiology, while family medicine, pediatrics, and internal medicine consistently rank among the lowest paid.
So, why doesn’t everyone run out and become a cardiologist? Quite simply, that’s not everyone’s calling. If you were drawn to make treating sick children your life’s work, then pediatrics is going to be the right fit for you, regardless of paycheck. Can you imagine going through the rigors of medical school, residency, and all the training and lost sleep that goes with it only to spend 80+ hours a week doing a job you don’t love? Choose the specialty that’s right for you, and I’ll help you figure out how to annihilate the debt that comes with it.
Can I Afford to Buy a Home?
One of the most important things you can do for yourself to ensure that you can retire comfortably is to own your home outright at the time of retirement. If you wait until you have paid off your student loans to start saving for a down payment, you’ll never get there. At least one doctor we know has said that her student loans are essentially her second mortgage because she pays about the same for each of them each month.
The keys to buying a home despite student loan debt are:
- Buy a house that is within your means;
- Work on developing good overall financial habits so that you keep your debt relatively contained to those student loans; and
- Consult a professional financial advisor to discuss consolidating your loans or applying for student loan forgiveness so that you can afford to save the money you need to buy your first home.
Should I Refinance My Student Loans?
Consolidating loans sounds like it makes a lot of sense, doesn’t it? You take your different loans that are racking up interest at different rates, and move them into one big loan at one (hopefully low) interest rate, and presto – money saved, right? Not so fast.
Sometimes, consolidation for high loan amounts is not available to you as a borrower. A good job, low debt to income ratio, and excellent credit may be needed to qualify for the best interest rates. If you do not have these qualifications, do not despair. There are a number of federal income based loan forgiveness payment plans that may suit you better and still save you money – potentially much more money. Give me a call to learn more and I can help you maximize your loan situation to take advantage of the best available plans.
What Is Student Loan Forgiveness and How Does It Affect My Financial Life?
If you have been reading my blog for a while, you likely know that student loan forgiveness is an incredible tool offered by the federal government to help individuals who have a large amount of student loan debt disburse that debt in exchange for working in nonprofit or service-based jobs, or based on your ability to pay.
The basic premise is that if you work for a nonprofit organization, pay your student loan premiums on time for a period of time (typically ten years), at the end of that time period, the remaining balance is “forgiven.” You will still have to pay taxes on that forgiven loan amount, however, so I highly recommend that you work with a financial planner to ensure you are saving and properly investing money along the way so you can meet that tax obligation.
There are other types of debt forgiveness as well, but the basis for all of them is that you will pay a reduced monthly amount for a set period of time, qualify by either working at a nonprofit or by having a very high debt to income ratio, and your monthly payments can be adjusted to something more manageable, with a large amount of debt forgiven at the end of the set time period.
Sound complicated? For me, it’s easy. I help people just like you find ways to drastically reduce student loan debt all the time. Even if you choose not to work with me as your financial advisor, I do hope you will reach out to a professional to help you maximize these programs.
Get My Financial Life In Order: Do I qualify For Student Loan Forgiveness?
If you are reading this, you likely have a very large amount of student loan debt and a proportionally low salary. You may quality for the REPAYE income based repayment plan. I can help determine if you meet the criteria to enroll in this plan.
The best part of loan forgiveness with an income based plan is that it allows you the ability to work a normal number of hours in the specialty you choose without compromising your ability to pay your loans. If your discretionary income is such that paying the full amount on your loans is a hardship, you might be able to pay an amount adjusted to allow you to afford a normal life, with potential forgiveness of the remainder of the loan after a set period of time, usually twenty-five years. As noted above, though, there are taxes to be paid on the forgiven amount, so be sure to check in with me or another financial advisor for guidance.
How Do I Choose a Financial Advisor to Help Me Get My Financial Life In Order?
So glad you asked.
- First, look for the Certified Financial Planner designation. This signifies that the advisor has passed rigorous examinations and is licensed to dispense financial advice.
- Consider the planner’s fee structure. You might see fee-based, fee-only, or commission-based. In my professional opinion, fee-only or fee-based tend to be the advisors with your best interest at heart.
For example, I charge a flat fee for services rendered so that you know exactly what you are getting. You are paying for my time and expertise, neither of which are dependent on any investment or financial decisions you may make. My motivation is to help you make the best decisions for you, period.
With a commission-based style of earning, the planner will earn a percentage on any financial products, such as mutual funds, they may sell you. This means that the more they sell you (and help you part with your money), they more they earn. Don’t get me wrong, there are many ethical commission-based financial advisors out there, but for the type of advice for clients like you, who have a large amount of student loan debt and a unique employment situation, this type of financial arrangement is often not the most economical choice for you as the client.
Fee-based financial advisors are in the middle of the two, where the advisor might charge a flat fee for one type of service but a commission for another.
- Most importantly, consider the fit. Most financial planners, myself included, will include a free consultation so you can ask each other questions and see if my expertise and approach is a match or your needs. If so, great, you’ll be able to move forward knowing exactly what it will cost to hire the advisor. If not, there is nothing lost but a small amount of your time.
Where To Go From Here
Building your professional life is exciting. You have chosen a noble profession and are in a position to go after your dreams. That student loan debt is but one bump in the road. It’s a big bump, to be sure, but there are professionals like me available to help you navigate the student loan system and your repayment options to help you maximize your income and live your best life.
We at Financial Residency believe strongly in helping to build community. Consider subscribing to our podcast for more tips and information on how to maximize paying down your student loans. When you subscribe to our newsletter (it’s free), you will also receive several free e-books and bonus extras, including A Guide to Physician Mortgage Loans, and 7 Day Jumpstart to Your Financial Residency.