If you are like most residents, you are anticipating a long and productive career as a physician. Yet your excitement over your professional future may be tempered by concerns over your current financial picture. And with good reason.
According to a recent report on resident physicians’ financial preparedness, about half of U.S. medical residents have medical school loans exceeding $200,000, making it their No. 1 financial concern. This amount of debt invites a number of questions: How do you pay down your loans while juggling other expenses? How do you begin putting away money for other big-ticket items, such as a house and your children’s education? And, once you have attained a certain level of purchasing power, how can you start saving for a comfortable retirement?
Allan Phillips, Certified Financial Planner™ with Taylor Wealth Solutions and the author of The Guide to Income Protection for Medical Residents, Fellows and New Practicing Physicians and a member of the AMA Insurance Physicians Financial Partners program, has provided a road map to take you from debt reduction to financial security. Here are two essential financial moves that residents should make.
Prioritize your debt payments. “You don’t want to start paying off your student loans without assessing your debt in the context of your overall financial picture,” Phillips said.
Accordingly, advised Phillips, look at your various debts and prioritize those with the highest interest rates. “It’s not always a good idea to front-load student-loan debt payments,” he said, particularly when your interest rates are low—below 5 percent. In such cases, it may be best to pay the minimum required loan payments to free up your money for long-term wealth-building goals or other priorities, such as saving for a house.
Conversely, added Phillips, you may want to accelerate your loan repayments if the interest rates are above 5 percent.
As you are prioritizing your debt repayments, look into your eligibility for public service loan forgiveness opportunities and income-adjustment loan repayment programs. The AMA offers information for members, and the American Medical Colleges provides a database of loan repayment and forgiveness programs.
Make smart choices on spending, saving and investing. Phillips urged residents to establish a realistic budget. This means that if you and your spouse want to go to the movies, you may need to forego a nice dinner out before or after the film. It may also mean bringing your lunch to work, along with a Thermos full of coffee. Those daily runs to the cappuccino bar add up. You should not live in utter austerity—everyone deserves a treat and a splurge every now and then—but just account for it in your budget, Phillips said.
More on those big-ticket commitments: the kids and the house. They are expensive—as if you didn’t know. “If you’re planning to start a family, make sure to figure these expenses into your saving plans instead of putting everything toward retirement,” Phillips said. As for the house, it is wisest to avoid committing to a mortgage in which the monthly payment would exceed 15 percent of your gross income. “Otherwise, it will be difficult to meet your retirement goals,” he added.
As for those retirement goals, Phillips said that one of the easiest ways to build up savings is by participating in your employer’s 401(k) or 403(b) retirement plan. There is generally a maximum percentage of your paycheck you can allocate to the plan. “Try to contribute as much as possible unless you absolutely require a cash flow for a major life event,” he said. You will find that many employers also match a portion of your allocation, he noted.
If your employer does not offer matching contributions as a benefit of your traditional retirement plan, you may want to consider opening a Roth individual retirement account (IRA), Phillips noted. “A Roth IRA can be a good place to save, and it offers flexibility,” he said. “Funds can be accessed for goals that could develop down the road, and you can elect to withdraw an amount equal to the contributions you made without tax penalty.” However, he cautioned, if you withdraw earnings before age 59½, you may suffer a penalty.
Given the choice between an unmatched traditional 403(b) and a Roth IRA, though, opt for the Roth. “First, invest in the Roth IRA up to the $5,500 annual contribution limit,” he said. “Then, if you have additional savings to put away, you’re allowed to contribute up to $18,000 in the 403(b) or 401(k) in 2017.”
Phillips concluded by reminding residents that the basic rule of thumb is to devote about 15 percent of your total income to savings. “If you’re just starting out, you will want to direct most of it to your emergency fund,” he said. “But when you have made a good start there, you can start directing more to your retirement contributions. As you progress in your training, you should increase your savings goal well beyond 15 percent, or you may have a harder time reaching your retirement goals.”
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Editor’s note: AMA Insurance does not provide financial planning or investment advisory services. Taylor Wealth Solutions is not affiliated with the AMA. Taylor Wealth Solutions offers insurance products through Taylor Financial Corp. Securities offered through Taylor Securities Inc. (member FINRA/SIPC).