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Financial Wellness Advice for Medical Residents
- Apr 27, 2022
There’s nothing quite like that first residency paycheck, even if the amount is quite underwhelming in the grand scheme of things. Now that you make money, what are you going to do with it? You can enjoy yourself with lots of spending or start focusing on your long-term goals. This post is meant to promote the latter using the principles described in The White Coat Investor.
Disclaimer: this post is meant to be informative only and should not be seen as financial advice; please speak with your financial advisor prior to making financial decisions.
The pillar of financial wellness as a resident (and really for anyone) is to limit how much you spend. Do you really need to purchase that new car or that house on the hills? Having an affordable apartment or similar rental housing, even if it means finding a roommate, is the best move. Rent is only going up everywhere and will be your largest, most consistent expense. Make the most of your program’s resources, ie- the cafeteria, and limit spending wherever possible. Then again, you’ve earned your salary, and setting a monthly budget for your discretionary spending is a reasonable decision.
Paying off student loans
Like monthly rent, consistent and high levels of expense are dangerous. It’s worthwhile to pay off your highest interest loan first and as soon as possible. If aggressively paying off loans isn’t an option right now, set up a 10, 20, or 30 year payment plan that you can commit to. The longer payment period, the more money overall you will pay towards your loans. Refinancing your loans is a decent option for high interest, high value loans but does cost money to do, so make sure your time period for paying off the loans leads to a net benefit. The best option is getting help from family in paying off loans, although not everyone has this luxury.
Investing into a Roth IRA
Now that you’ve set up a spending budget, found affordable rent, and starting putting money towards your student loans, it’s time to start looking towards the future. Your resident salary is the least amount of money you’ll ever make (hopefully), which means you’re in the lowest tax bracket. Enter the Roth IRA – an investment option through a brokerage such as Vanguard with a $6000 yearly limit. The money you put into a Roth IRA has already been taxed based on your bracket and when you withdraw will not be taxed at all. This means your money is taxed at 22% instead of 35% as an Attending (see here: https://www.bankrate.com/taxes/tax-brackets/), depending on when you withdraw. Tips: always try to hit your yearly contribution limit and do not withdraw until you really need the money (ie- for a house) so that it can build up exponentially over a long period of time.
Investing into a 401(K)
When you go through orientation, you’ll be taught about what 401(K) options you have at your program. The most important detail is the match percentage, often around 3-5% and increasing based on years of service. For example, if you contribute 3% of your paycheck (let’s say $80 every 2 weeks), then your company gives you an additional $80 for your contribution. That’s why they call it free money! There’s also a vesting period, where you have to work a certain number of years to be able to keep a certain percentage of the match. 401(K) money is not taxed, and so you actually pay less taxes overall. So why do people say not to over-invest into your 401(K)? Look back at the Roth IRA; your tax bracket usually increases when you get older. When you withdraw your 401(K) money at retirement or after 59.5 years of age (to avoid a tax penalty), you will likely have a higher income than you do now. Sounds nice, doesn’t it?
Financial wellness as a resident is challenging but not impossible. Look for ways to supplement your income, whether with a side hustle like tutoring or writing blog posts or setting up moonlighting opportunities. Make sure you have a couple of free credit cards with good benefits to build up your credit score. If you have the time, learn about investing from YouTube or The Motley Fool before setting up a brokerage account. Do your research before making large financial decisions or speculative investments like cryptocurrency (beware of FOMO!). At the end of the day, just remember that going into medicine, you chose delayed gratification. Financial wellness is another part of the journey, and staying on top of the basics will eventually get you to where you need to be.