The transition from a med school student to a doctor is an exciting and stressful period, brimming with potential. After years of insufficient sleep and never enough money, the promise of a starting salary of around $63,000 can seem more like winning the lottery, and less like you should be focusing on financial planning. But while your new income bracket can alleviate inconveniences, don’t start writing your shopping list just yet. Financial planning for residents is more important now than you might have imagined.
If the end of your residency is in sight, it’s essential to realize that your finances get more complicated. But don’t worry. We’ve put together a list of smart financial planning tips for residents to get you started on the right foot.
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What is Unique About Physician Finances?
While the general personal finance principles apply whether you're earning $16,000 or $600,000 annually, there are a number of characteristics of physician finance.
Repaying Student Loans
Eliminating high-interest debt is always a strong move when it comes to financial planning for residents. High-interest credit cards, car, or student loans can all be detrimental to your financial health. Paying down this type of debt should be a priority.
If you're a resident with high-interest student loans weighing you down, reducing your interest rates using consolidation through programs like the Federal Direct Consolidation Loan or refinancing can be an effective remedy.
If you're not eligible for a lower interest rate, consider paying off your student loan after eliminating any outstanding credit card balances.
Avoiding or Eliminating Credit Card Debt
Used correctly, credit cards can be a beneficial tool in your financial toolbox, especially if they offer cash-back or other perks. From accumulating points to detailed tracking of money spent, credit cards have their advantages.
But carrying a balance on a high-interest credit card can quickly spiral out of control, particularly if you are charging disposable items, such as grabbing a coffee before morning rounds.
Credit cards work when you can pay off the complete balance at the end of each month, but not everyone has the ability to do so. If you carry a monthly balance, making payments that are more than the monthly minimum or making extra payments will help you chip away at the outstanding balance.
Buying a Home Sooner Than Later
Buying a house is more than making a purchase; it's an investment in your personal and financial future.
And unlike consumer debt, which falls under a 'bad' debt category, a mortgage is considered "good" debt. Mortgages carry lower interest rates than credit cards and other consumer debt. Borrowers can deduct interest payments when they file their taxes each year.
While each resident's situation is unique, most conventional lenders require total debt — including student loans, consumer debt, mortgage, insurance, taxes — to be less than 38% of a borrower's monthly income.
For many residents, that might feel like homeownership is out of reach. But it doesn't have to be. Specialty lenders like Homefinity make it possible for residents to start investing in their future through exclusive physician loans.
These doctor mortgage loans carry a number of advantages for physicians planning for life after residency, including
- low down payments (typically lower than conventional loans),
- no private mortgage insurance (PMI),
- the ability to qualify with deferred or income-based repayment (IBR) student loans,
- relaxed debt to income ratio,
- no income history.
Because it's essential to buy a house you can actually afford today.
Reducing Financial Risk with Insurance
As a doctor, you understand the value of assessing risks. Ensuring you have a quality disability and life insurance helps reduce the financial risk of a sudden accident or illness. While disability insurance is vital for physicians, it is often overlooked.
Employer-paid disability insurance programs generally pay 60% of your annual income. That can sound like enough until you do the math. If your annual salary is $63,400, on disability, you'd suddenly find yourself having to make do with $38,580 annually.
Tax & Retirement Planning
Retirement financing is a young doctor's game; it requires you to save anywhere from one to four million dollars.
Starting early is vital as compound growth is a retirement plan's best friend. Investing a smaller amount for a more extended time will generate the best results.
Smart tax planning can help boost your retirement outlook, especially regarding a tax-deductible retirement savings plan. While these retirement plans can vary, they all have a common hallmark: increasing how fast you can grow your savings by reducing the tax impact. In other words, save more and pay less tax.
Making an annual retirement plan contributions can generate an immediate financial advantage in addition to the ongoing boost from investment gain tax deferral.
Other retirement-friendly tax options can include contributing to a Roth IRA or an individual retirement plan like a SEP-IRA or Keogh retirement plan, each of which allows for annual contributions and tax deferral.
Invest your money with an eye on why you're investing in the first place. If you plan to invest for a long time, slow-build investments like mutual funds or stocks are popular choices as they tend to deliver the most significant return on your initial investment. On the other hand, if your investment focus is to save up for a mortgage downpayment, a low-risk certificate of deposit (CD) is often a popular choice because it can generate interest while keeping your money relatively safe.
Diversifying your investment polio can go a long way to mitigate investment risk. Mutual funds offer an easy way to get diversification because the fund generally invests in multiple securities. With thousands of mutual fund options available, ranging from market sector to region to ethical and socially responsible funds - where you choose to invest can reflect personal and financial priorities.
Is A Physician Loan Right For You?
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