I am reminded this week on how, young doctors today aren’t exactly known for their financial expertise. For the past 15 years, I have been holding a 4-hour financial literacy workshop for fourth year medical students. The students who come get a lot out of the educational workshop. The ones who do not come, I find flounder a bit.
Once fourth year medical students leave the safe confines of medical school and move on to residency training and beyond, they enter a steep learning curve and realize how ignorant money they really are, easily enticed by credit cards, lattes, and the latest smart phone or technology. But that reputation, it turns out, isn’t altogether fair.
Yes, current medical students have more student loan debt than previous graduates, and average credit card debt among twenty-five- to thirty-four-year-olds has climbed 50 percent since 1989, to over $4,000 per person. But medical students also have greater earning potential.
The best financial roadmap for young doctors goes far beyond just paying off debts. Being smart about money begins with being smart from the beginning about what you want out of life and understanding your limits. What would you do if you weren’t limited by time or money? Do you want to start a nonprofit, volunteer for medical missions and travel the world, or take a year-long work break to pursue a passion project?
Once you have those big goals in mind, it’s time to figure out a way to get there, which starts with the dreaded budget. Most people find that two-thirds of their after-tax income goes towards three big costs: food, housing, and transportation. If possible, minimize that pricey trifecta by living in a smaller home, taking advantage of less expensive transportation, and eating at home as much as possible. That will give the rest of your budget more freedom.
Your budget, which you can track easily on free websites such as www.mint.com (or if you are hesitant about putting information out there on a simple EXCEL spreadsheet), will probably look something like this:
- The basics: food, housing, and transportation: 50 percent
- Debt payments: 5 to 10 percent, depending on the size of student loans
- Savings: 25 percent, including retirement savings
- Professional expenses, including professional association fees, publication subscriptions, and attending conferences: 5 percent or less
- Household expenses, including services such as cleaning and general upkeep: about 5 percent
- Entertainment: 5 percent or less
These categories add up to less than 100 percent in order to allow for some wiggle room, and to personalize your plan to fit your own needs, such as child-care costs, extra-large student loan payments, or a to-die-for hobby.
A savings rate of 25 percent may sound high. In fact, most Americans manage to save just 5 percent of their incomes. But in order to establish financial security long term, putting one in four dollars aside for the future is necessary, especially considering that you may want to maintain your current lifestyle. The most successful savers start slowly, by putting just 2 percent of their monthly salary aside (through automated paycheck deductions) and then slowly ramping up that percentage as they earn more until hitting their goal rate. Even as a medical resident, where saving money is a far-fetched idea, paying yourself first is number one. Have the percent of income you choose to save done as a payroll deduction, you’ll never see the money, and the savings happens. Waiting until after you spend what you “need” to spend to save or invest the rest and it won’t happen.
Another tip for young professionals is to make sure you’re adequately insured — home, car, health, life, salary, professional indemnity, etc. You never know when you’ll need it to protect your assets. This is by far the most ignored part of being a young professional.
The indebtedness piece of the puzzle can be tricky, since many people are tempted to just slowly pay off their student loans extending repayment over their 10-year terms. Or, for that matter, consider the prospects of loan forgiveness through the Income Based Repayment (IBR) and the Public Service Loan Forgiveness (PSLF) combination. Much of the student loan indebtedness among medical residents carry high interest rates – fixed at 6.8 to 7.9 percent – which means medical school graduates are paying far more in interest than they can earn on any bank savings. That’s why it can be a smarter move to pay off high-interest student loans early, after putting aside a three-month cushion for emergency funds. This might not be possible soon after graduating from medical school, but within five years it might be.
Another classic mistake: Scrimping on professional investments. You worked hard for your career, so don’t stop investing in yourself now. Setting aside money (and time) to keep up with professional networks, participate in associations and conferences, and generally remain plugged in to new developments is critical to remaining an active contributor to your field.
If you’ve never stuck to a budget before and the whole process sounds a bit overwhelming, start by keeping track of your spending for two weeks. You might be surprised to find that you’re wasting money on happy hour tabs. Eventually, budgeting will feel like cooking: As long as you approximate the amounts as well as you can, things will generally work out, and, once you establish some routines, you don’t even have to think about it anymore.
