[This is a refresh of our THIRD annual “medical school graduation” post. My my, where has the time gone?]
Congrats! You’ve just matched and internship is around the corner. Enjoy this time (you’ve earned it!) but don’t get too comfortable. There are several key financial tasks you need to address so that you can start your professional life off on the right foot. Or as the ophthalmologists like to say “PD” (pedis dexter, "right foot" get it?). Some of these financial items need to be done BEFORE you start internship, while other considerations represent long-term mentalities you should adopt. Also, we lied in the title, there are more than "ten" items you should think about.
But first, a friendly reminder to spread the love. We here at DOCTORED MONEY want to empower you to be great clinicians and we hope you find our advice helpful. We just have one request, share this blog post with anyone you think may benefit from it!
And as always, if you have more questions or think something is totally bogus, just reach out to us and let us know! We will do our best to help out.
Learn about and understand PSLF
Have federal student loans? You absolutely need to understand your loans and PSLF inside and out. Seriously, you need to become an expert in PSLF. Making a mistake could literally cost you $100,000+ (we’ve seen $400,000 errors, sadly). So check out our presentations about loan basics. PSLF is not just for people going into primary care or for people working in specific locations. Anyone working for a university or non-profit such as a 501(c)(3) hospital (which is almost all hospitals) is eligible. For example, you are almost certainly employed by a non-profit during your residency. But exceptions exist, so make sure.
File Your Taxes
If you have federal loans and hope to benefit from PSLF, you’ll want to consider filing taxes for 2018, even though you had no income and are not required to file. Go here and check it out. If you made "$0" income, you'll have to mail in a paper return. You may wonder why you should even bother filing if it’s not required. The reason is that you can use your tax return as documentation of your (lack of!) income when starting loan payments. If your income was zero, your payments will be zero for a whole year! Filing taxes is the easiest way to prove your lack of income for 2018. This isn't critical, but it's prudent. And don’t worry if the April 15 tax “deadline” has passed. You can file at any time if you don’t owe taxes. So file, and do it before you graduate.
Consolidate your Federal Student Loans
THIS IS IMPORTANT for anyone with loans. You want to strongly consider consolidating your loans immediately after graduating, and well before residency starts, for four main reasons: Number one is because certain loans, such as Perkins loans, are not eligible for PSLF, but become eligible upon consolidation. Number two is because consolidation ends your grace period immediately, which means your payments are credited towards PSLF earlier than otherwise. For those hoping for PSLF, the grace period HURTS you. Number three is because if you consolidate loans and begin repayment prior to residency, you have no income yet to report, which means you loans payments for the next 12 months will be zero, yet you still get credit for 12 months of (zero dollar!) PSLF payments. But if you wait to start payments after starting internship, your payments can be as high as $300 per month. Finally, by consolidating you get "credit" for paying off interest in the form of consolidation. And this allows you to claim a student loan interest deduction when you file your 2018 taxes, which can save you $500+ on your taxes.
Go check out this blog post by our friend Ben White that elaborates on this strategy. And after you do that head over to StudentLoans.gov to get started. Be careful however, some federal loans have special benefits which you lose with consolidation. “LDS” loans for example. You’ll have to weigh whether PSLF eligibility is a better deal than any existing benefits on those loans.
Choose a Loan Repayment Plan
If you have federal student loans there are a number of repayment plans available to you. Some plans (4, in fact) qualify for PSLF, but many don’t. Read our Student Debt page to learn about your loans and repayment plans. If you are still unsure about what to do or what your life goals are, assume for now that you should try for PSLF and sign up for either REPAYE or PAYE.
Do not defer or forbear your loans during residency! You really can afford the monthly payments on an income driven plan. If you don't make payments you will miss out on valuable years of payments towards PSLF. Even if you don't end up doing PSLF down the road, you will still be eligible for immediate interest subsidies under the REPAYE repayment plan. These subsidies do not depend on PSLF, and are granted immediately. A bird-in-the-hand, if you will.
You also should know that if you don't choose a plan you will automatically be enrolled in the standard repayment plan, which, if you have a high loan balance, can be difficult to afford.
Research your benefits
For many of you, internship will be the first time you’ve had to decide on a long list of financial benefits and options. Don’t wait until the last minute, when you are under pressure. You’ve just matched, so you can contact HR at your new employer for benefits options and a list decisions you’ll have to make. Do you really need to pay for pet insurance? Critical decisions await you. Be prepared!
Fill out your W-4
You need to fill out a W-4 form before you start your job as a resident, and any new job actually. This form (often confused with the “I-9”) instructs your employer how much tax to take out of your paycheck based on information you provide. We made a great page (patting ourselves on the back, yet again) that explains how to fill it out. You may as well figure it out from now. And this calculator will show you how much federal tax will be taken out of your paycheck, depending on how you fill out the W4.
Know how to
look up your Credit Report
Your credit report contains your credit history and lenders look at it when determining specifics of loans and other things you are applying for. It has information about your loans, credit cards, and other information such as bankruptcies. You can look up your own credit report for free at AnnualCreditReport.com once a year. You should do this to make sure the information is accurate.
Note: Your credit report is different than your credit score. Your credit score is a number that is calculated from your credit report and different institutions use different methods to calculate your that number. Focus more on your credit report and make sure the information is accurate. Don’t worry about your credit score unless you are actively seeking a new loan or looking to move to a new apartment.
The main purpose of insurance is to cover you or others financially if something terrible happens. There are several types of insurance that are essential you have. We aren't going to go into all the details of each type of insurance, just know that you need it and need to do your research about what you are getting. Some insurance you’ll certainly get through your employer when you start your job (e.g. health insurance). But other insurance types you’ll want to get independent of your employer (such as life/disability insurance, car insurance, stc.)
Health Insurance - Everyone needs health insurance. Not only is it required by law (currently) but large medical bills can be devastating without it. Fortunately, if you are heading to residency, your new employer usually has you covered. But it's up to you to make sure you understand the insurance options they have for you.
Disability Insurance - [Check out our disability FAQ!] What happens if you get into an accident (or have an illness) and can’t work? How are you going to pay your bills and put food on the table? That is where disability insurance steps in. This insurance replaces a portion of your income if for some reason you can’t work. The details of how much income, for how long, and what constitutes disability differ between plans, so make sure to read the fine print. As with health insurance, many employers offer “group” disability insurance, so you may not need to go and purchase a policy on your own. But keep in mind that when you leave a job (i.e. finish residency) your employer’s insurance doesn’t follow you. In addition, group disability insurance is usually fairly flimsy. Plan to purchase your own personal policy in the last year of your residency or fellowship (at the latest).
Term Life Insurance - [Check out our life insurance FAQ!] Are there people that depend on you and/or your income? Maybe a spouse or children? Will your parents be relying on your future income for their needs? In these cases, you need term life insurance. It will pay out to them in case you die from that beekeeping hobby you decide to pick up. Also notice that we specifically said “Term life insurance.” Not life insurance with any other words or names attached. Term Life Insurance. Say it with us. Term Life Insurance. You should almost never purchase other types of life insurance (no permanent life, no whole life, no indexed life, no convertible life, no universal life, etc etc etc). Some life insurance is typically offered to you by your employer but it will very likely be insufficient for your needs and you should plan on purchasing your own policy. You can go here to get instant quotes without needing to reveal any personal information. Note that you can usually buy extra life insurance through your employer. In general this is NOT a good deal compared to purchasing life insurance on your own if you are in good health. However, if you have previous or current health issues, buying “guaranteed issue” insurance at the time you start your job may be your only option, and you need to take advantage of it.
Renters or Homeowners Insurance - A disaster at your home can be a disaster to your finances. And even if you are renting you still need to cover the expenses of replacing your property if something happens. If you own a home, you need homeowners insurance. If you rent, you need renters insurance. Simple.
Car Insurance (if you own and drive a car) - Many state laws dictates the minimum car insurance you need if you drive. Make sure you get the insurance you need, and preferably much more than the minimum.
Umbrella Insurance - This insurance does not protect you against lost or faulty umbrellas. Umbrella allows you to purchase cheap liability insurance in excess of your auto or home policies. It also covers some non-auto and non-home liability related risks. It’s VERY cheap (because you’ll likely never need it). For example, $300/year for $1,000,000 coverage. Plan to have umbrella insurance (at the latest) prior to finishing residency/fellowship.
Calculate your take home pay
You are probably aware of what your salary is going to be in residency, somewhere around $60,000. You can look up 2018 salaries for several programs as part of our ongoing housestaff salary collection project. Which means you will probably have around $5,000 a month to ‘play’ with, right? Wrong. You forgot about the tax man. Good old Uncle Sam gets a part of the $60,000 and depending on where you live, your state (and maybe local) government get in on the action as well. For example if you live in Washington State your after-tax budget will probably be something around $3,800 but if you live in NYC it's closer to $3,300. You need to plan accordingly.
For an easy way to estimate your after tax, take home pay go here and plug in your gross salary (what your residency program said they are going to pay you). It will give you an estimate of your paycheck. Remember to check your first couple paychecks when you start working to confirm your actual take home pay.
But! Keep in mind that any income tax withholding taken out of your pay may or may not represent the actual tax you owe. So don't make your budget for the year based on what ends up in your paycheck. You don't know if that's accurate unless you have already estimated the tax you will owe in April!
Longer Term Goals
Your financial education is a lifelong pursuit. The above items are steps that you should take very soon. But the following items fall into a longer term window. You don’t have to do them tomorrow but you should start working on them soon. And yes, that means during intern year. We wouldn’t go as far as saying this is more important that studying for Step 3, but maybe it is.
Build an Emergency Fund
Having an emergency fund that can be quickly accessed in, well, an emergency is very important. Most experts recommend having 3 to 6 months worth of expenses built up. Having a solid budget will help you figure out what those expenses are. Now, we realize that magically having 6 times the amount of money you spend in a month isn't going to happen. So start small and build up. Shoot for 1 month of expenses and start puting money towards that.
Note: A Roth IRA can double as both a retirement account and an emergency fund. That is because Roth contributions can be withdrawn at any time for any reason without tax or penalty. So consider opening a Roth IRA to start holding your emergency fund money (and choose a safe/conservative investment for now, that won't fluctuate much). If you have an emergency and need access to cash, it’s there. If the years go by and there is no emergency, you will have built up a sizable Roth IRA balance, and gotten a head start on retirement investing by not missing out on contributions (which are currently capped at $6000 per year).
Take some time to think about what you want out of life and set some financial goals to help get you there. Do you want to save up for a house? Pay off your student loans? Set up an education fund for your kids? Buy a car? Retire early? Doctors Without Borders? Whatever you want to do, write it down and work towards it. It's definitely easier to delay gratification when you have a good picture of what your gratification is going to be.
Retirement is the point in life when you can choose to stop working if you’d like to; it is the point where you have enough saved/invested to be able to do whatever you want with your life. Retirement is not necessarily the day you actually stop working. In order to really understand this idea you'll need to forget all your previous associations with the word "retirement". Most people think of retirement as some distant point in the future when you are too old to do anything. But that is not how you should think about retirement!
Retirement "starts" when you have amassed enough assets so that you can be financially independent. That last sentence had a lot of jargon in it. To put it another way, retirement is the day when you have enough saved that you never HAVE to work another day in your life but instead you can decide to do whatever the heck you want. And that is truly a magical day.
We had an old professor call this your “point of choice”. When you can choose what you want to do on a daily basis. Of course you can choose to continue working, not because you need the paycheck to pay the bills, but because you love your work (who else is going to check all of those 'review of system' boxes?). Or you can work for free at a rural clinic in Costa Rica living the Pura Vida. Or you can choose to never work again and make it your life goal to find the best tacos in every city in the world! Or you can choose to be that really awesome old guy who gets to relax in his retirement community eating applesauce. Saving for retirement isn’t just so you can give up on life, it is so that you can live life, no strings attached!
Learn about Investing
If you want to retire, you need to invest. And that means investing in the stock market (typically though mutual funds). We wish we had an amazing couple of pages explaining investing. Unfortunately we don’t. Yet. But fortunately for you there are lots of people out there that have written some great things about investing. Check out our reading recommendations here.
But if you have any money to invest, and have no time to learn right now, just do this: put as much away in your hospital’s 401k/403b (if you have one available to you), and choose a “Target Date” or “Target Retirement” fund with a date which corresponds to about the year you turn 60. If you don’t know enough to know if a Target Date mutual fund is for you, trust us, it’s for you. Don’t let indecision delay your retirement fund contributions.
Spend Less Than You Earn
We cannot emphasize enough that spending less than you earn is the most important financial action you will ever undertake. It doesn’t matter if you are a hotshot surgeon making a seven figure salary, if you spend more than you have you will be hurting. We realize that it sounds really simple, and it is really simple, but for whatever reason most people don’t follow that rule. Instead they buy things because they think they “deserve” them. Honestly, there are very few things in life that you deserve and most of the “stuff” you can buy doesn’t fit into that category. You simply cannot assume your post-resident or fellowship salary will be sufficient to pay off today’s overspending.
But what about the immortal advice of Tom Haverford? We would say that you should “treat yo’ self” to a solid habit of saving and investing. Unfortunately, most people don’t follow that advice. The average American individual savings rate is 5.7% according to the U.S. Bureau of Economic Analysis. Spoiler: That is way too low.
As a physician you probably need to be at a savings rate closer to 20% of your pre-tax salary. That 20% savings rate might go to paying down loans, building up an emergency fund, investing in a Roth IRA or a 401k/403b, or some combination of those. You’ve got 4 years of med school with no salary plus 6 or so years of a really low training wage to make up for. Now, we understand that living on a resident’s salary isn’t always a walk in the park but getting used to ‘living within your means’ is a skill that you really need to start developing now. So, if you and your significant other are contemplating some big purchase, keep in mind what a wise man once said: The three most loving words are “I love you,” and the four most caring words for those we love are “We can’t afford it.”
In order to spend less than you earn you will need to set up a budget. There is a mountain of writing out there about budgeting; we aren’t going to rehash everything thing that is out there, but there are two important things to keep in mind about budgeting.
First, your budget should work for you. There are lots of fancy software and methods to budgeting but if it doesn’t help you meet your goal it doesn’t work for you. It might take a little time to figure out what exactly works for you and you may fail at first. Don’t give up; adjust as you need to and change budgeting styles when life changes. Second, a budget is not a review of the past month’s expenses. A budget is something you can refer to to help determine if you can “afford” something. You need to figure out what money you take in every month and then you designate how that money is going to cover your expenses.
Whatever method you choose for budgeting (and whatever technology) stick to it. And if you want a recommendation, we are big fans of zero-sum budgeting and YNAB.
Priorities and Summary
You may be wondering what order you should act on all of the above information (emergency fund? debt pay down? invest? insurance?). In reality many of these things will probably happen simultaneously and we'll have some guidance on that shortly. Unfortunately, we can't give advice about every situation (unless you email us and ask a specific question) but we will try to simplify it somewhat and give you some order.
#1 - File your taxes, consolidate your federal loans, and pick your repayment plan. As you are going through that, learn about PSLF and make a plan of how you will pay off your student loans. Your plan might change, and that’s okay, but make a plan now regardless.
#2 - Figure out your take home pay after accounting for taxes and benefits; set a budget accordingly. Make some financial goals and think about what you want your priorities to be.
#3 - Get all of the insurance you need and start building up a 1-month emergency fund (possibly within a Roth IRA).
#4 - Aggressively pay down your expensive debt; that means credit card, consumer, and auto loan debt. Certainly do not accumulate any additional debt.
#5 - Redefine retirement for yourself and start to learn about investing.
Beyond that, keep working, keep learning, keep budgeting and keep moving into the future.
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