After graduating medical school, doctors-in-training enter a phase of their education focused on their specialty of choice. During this time, they’re called “residents”, and though they earn an income, it is only a fraction of the income they’ll earn once they are officially doctors. Once they complete residency or fellowship, it’s hard to resist rewarding their hard work with a big jump in their lifestyle, too. If they can resist this urge and live modestly for two to five more years, it can transform their finances. This modest lifestyle is sometimes referred to as choosing to “Live Like a Resident.”
What does it mean to Live Like a Resident? Since the average resident salary is in the mid $60 thousands, it means to live like someone who is earning a resident salary instead of living on a practicing physician’s income, which can start around $260,000. Residents make it work for a few years, spend carefully, make purchases that are within their means, and maybe save a little money. Maintaining that lifestyle just a little bit longer can really set a new physician up for financial stability and growth going forward.
If someone lives like a resident, what should they do with the extra income they earn? Read below for some advice on financial planning for physicians from the experts at Blankinship & Foster, LLC.
Pay Off Debt
We live in an economy of consumerism, and many people carry debt indefinitely. While a small amount of debt is normal, and of course it’s normal to use a mortgage and incur a monthly car payment, it’s not a good idea to maintain student or credit card debt long-term. By choosing to maintain the lifestyle you became accustomed to during residency, you can aggressively pay off student loans and get the income-to-debt ratio down to a sustainable level that will allow for wise home purchases or other investments. Make paying off debt a priority, starting with the debt that has the highest interest rate. We suggest creating a written plan to pay off student loans within five years.
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Start Saving
Now that you’re earning more money, you’ll have more to save. Saving money is one of the essential aspects of building wealth and ensuring a secure financial future. It can provide you with an opportunity to enjoy a better quality of life and be prepared for life’s uncertainties. You can also save with a goal in mind: perhaps a down payment on a home. If you are spending every dollar you earn, you’re going to have a hard time building security or making any future financial decisions. Saving 20% of your paycheck and aiming to save three to six months of emergency funds is a good starting point. Building an emergency fund will give you confidence that you can weather economic or personal storms that might affect your ability to work.
With each paycheck, you can have money directly deposited into your savings account. Or to make it even harder to access for everyday or impulsive spending, set up an account at a different bank. Choose an amount to automatically save and you’ll be surprised at the end of the year how much that account has grown. Automatic savings plans are really a wise way to go. Here is an article I wrote about them: Automatic Savings Plans That Work.
The early years of saving are the most important. With the magic compound interest, you can multiply your interest earnings, even on small amounts. The longer money works, the better the potential returns, so start saving now to reap the biggest benefits later. Warren Buffett once said, “If you don’t find a way to make money while you sleep, you will work until you die.” In other words, make your money work for you by saving and investing it!
Another wise way to save your money is to contribute to a retirement plan. Retirement savings also offer a chance to reduce the amount of taxes you pay. Contribute at least the amount that would maximize any matching agreements. For example, if you put 6% of your paycheck into a retirement account, your employer may match it. Increase your retirement contributions annually until you are contributing the maximum. In 2023, that amount is $22,500.
Fiduciary
We are fiduciaries, and it’s not just a word. It’s a binding commitment to put your interests first.
Purchase Disability Insurance
Disability insurance protects the most valuable asset of a physician–his or her ability to trade time for money at a high rate. It’s estimated that as many as one out of every seven doctors will receive disability benefits at some point during their career. Protect your income and alleviate stress about potential injury or illness by investing in a good, long-term disability insurance policy. Here’s a bonus of thinking about this now: the younger you are when you purchase the policy, the less expensive your premium will be.
Hold Off On Big Purchases
It’s important to show some restraint at this point in your career, as far as spending goes. Don’t overextend your financial commitments and be sure to set realistic goals that start with eliminating current obligations. Financial security will mean much more to you in the long term than an expensive car or a fancy home. Give yourself some time to get your financial footing and you’ll be grateful in the years to come for your wise choices. Living like a resident is a good idea not only for new physicians, but also for anyone starting a career. Focus on making wise decisions now; you’ll thank yourself later.
While living like a resident can be easier said than done, working with a financial planner can empower you to live within your means. At Blankinship & Foster, we can help you create a personalized plan that will help you reach your goals and create the life you want to live.
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