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.
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