After four years of undergraduate school, four years of medical school, three to five more years of residency, and probably $250,000 in student loans and personal debt, you’ve finally graduated from an entry-level income to making the big bucks.
It’s been 12+ years of living on scraps while watching your attorney friends enjoy the benefits of a six-figure income. However, with this new increase in income, it can be tough to figure out how to prioritize your moves toward a solid financial foundation.
For that reason, we’ve put together the top five steps you should take to get your finances in order after residency.
1. Attack your student loans (and other debt)
When we say attack your student loans, we don’t necessarily mean focusing solely on paying down the massive pile of debt you’ve accumulated.
If you haven’t already, figure out which repayment plan best fits your situation. Prioritize paying down your loans based on the cost of the debt – if you have credit card debt that is accumulating interest at 20%, focus on eliminating it first and working your way down based on the interest rate of your loans.
A good rule of thumb to follow is pay down any debt with rates above 5% before allocating income towards investment accounts.
2. Keep living like a resident
After living on a shoestring budget, it can be extremely hard to stay disciplined and not splurge on a new BMW or a $750,000 house. After all, the bank will roll out the red carpet and offer anything they can to get your business.
However, you are already 10 years behind the rest of the world in compounded interest.
Consider someone who starts investing $10,000 per year at age 25 for 20 years, stops contributing to the account, and lets it compound at 7% annually until age 65. If you waited to start investing at age 35, you would have to contribute almost $17,000 every year until age 65 in order to have the same account balance at retirement.
The more money you can allocate to paying down your loans and investing early on, the easier it will be to reach a comfortable retirement.
3. Hedge your new income with disability insurance
It can be a major pitfall to rely solely on group disability coverage from your employer in the event of a disability.
Imagine you are one of the 25 percent of Americans who will become disabled for some period of time during their careers. Because your employer sponsors your group policy, the 60 percent of your income it was supposed to replace may actually pay closer to 40 percent after taxes and adjustments for other forms of income. If you currently earn $20,000 per month, can you afford to live off $8,000 after taxes and adjustments without drastically reforming your budget?
Approximately 70 percent of physicians have their own disability policies. If you’re considering your own policy, it’s much cheaper to purchase disability insurance as a resident or fellow. Many high volume agents will have access to discount programs that will make it even less expensive, sometimes by 20 to 30 percent.
Look for a policy with an own-occupation definition of disability that is non-cancellable and guaranteed renewable. You’ll want to lock in your rates for the life of the policy without the insurance company being able to change your rates or cancel your policy. Compare own-occupation disability insurance options here.
4. Create a sound financial plan
Hopefully, you’ve already opened a Roth IRA and have been contributing to it during training. But if you have not and are still under the income limits ($131,000 if single and $193,000 if married and filing jointly), max this out.
If you need to set one up, “robo-advisors” such as Betterment and Wealthfront are great, low-fee options that are simple to use and leverage well-diversified index funds. Good financial advisors will charge upwards of a 1.0% management fee if you have limited assets, so Betterment’s fees starting at 0.30% are a great place to build your assets if you are just getting started.
If your new employer offers a 401(k), SEP-IRA, HSA or any other employer-sponsored retirement benefits, max these out as well to take advantage of full marginal tax rate deductions. Many employers will match contributions up to a specified percentage, which is free money that grows tax-deferred.
5. Choose inexpensive, well-diversified index funds
You may be able to operate on vital organs, but let’s get one thing straight – you are not Warren Buffett, George Soros, or Carl Icahn. Don’t try and time the market or buy and sell individual securities.
Dalbar releases an annual study that consistently shows poor investor performance relative to the markets is due to irrational investment behavior. Choose inexpensive, well-diversified index funds and let them grow. Consider target date funds that will reallocate based on how close you are to retirement.
If you are anxious about market swings, avoid becoming your own worst enemy and consider an advisor who can help keep your plan intact. Paul Samuelson, America’s first Nobel Prize winner in economics, beautifully said, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
This article was contributed by Colin Nabity, the CEO of LeverageRx, an online financial help desk for medical professionals. To get free financial help and compare products and services including doctor loans, disability insurance, and contract review, visit LeverageRx.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.50% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.49% effective March 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.50% – 7.27%1||Undergrad & Graduate|
|2.50% – 7.12%3||Undergrad & Graduate|
|2.53% – 8.79%4||Undergrad & Graduate|
|2.50% – 6.65%2||Undergrad & Graduate|
|2.55% – 7.12%5||Undergrad & Graduate|
|3.00% – 9.74%6||Undergrad & Graduate|