Financial Planning Focus: Physicians - Part I: Residency

Doctors in today’s society face more financial hurdles than one may think. To start, most of these young professionals do not start earning a living wage until their 30s. After four years of undergrad, four years of medical school, and three to five years of residency, that’s over a decade of higher education to be completed before they start their first real job. Not to mention, the first eight years of school come with the cost of tuition ranging between $200,000 and $300,000. 

However, one positive aspect of this profession is that the high demand for doctors and evidently the high costs of health care (which can be debated at another time) yields a promising wage that will eventually put physicians ahead of the pack in the long run. Managing debt, starting a family, buying a home, saving for retirement, and proper insurance are just a few of the financial planning items that are important to discuss early on in a doctor’s financial journey.

To make it easier to follow, I have compartmentalized a doctor’s financial life cycle into three stages: Residency, The First Five, and The Prime Time. Due to the detail involved during each stage, this will be a series of articles addressing each stage of the cycle.  

Residency

While in the residency phase of life, many doctors feel as if it is all downhill from here. They have passed their boards and officially cemented Doctor before their name. What a great feeling! For the next 3-5 years, they are finally able to start earning some money in the “intern” phase where they continue to hone their skills in their specialty. From a purely financial outlook, earning between $50,000 and $80,000 might seem like a decent start as a resident, but with student debt north of $200,000 on average makes it difficult to do things that most 30 year olds are doing at this stage of life. I have highlighted a few of the key financial moves to make during this stage of the lifecycle below:   

1. Home Purchase

After years of apartment hopping, it is tempting to finally buy your own place. If your residency is in a place that you plan on staying for longer than 5 years, then it probably makes sense to buy your home, condo, or townhouse. Luckily physicians are put in a different category in the banking world which will enable you to purchase a home with little to no down payment, which is helpful when balancing a relatively modest income and huge pile of student loans.

If you do not plan on staying in the location of your residency or plan on buying a larger home when residency is complete, then it might make sense to continue to rent or to buy with an interest only loan. With an interest only loan, you will typically get a lower interest rate than something that is longer term and fixed, which will reduce your monthly payments during the interim and allow you flexibility when you are ready to skip town or upgrade.  

2. Starting a Family

Between the ages of 26 and 34 are statistically the most popular time in life to start a family. This major life event not only changes your day to day lifestyle (including many sleepless nights) but also your financial foundation. It is important to have estate planning tools in place such as a will, power of attorney, and adequate life insurance. 

Depending on the types of loans you have (public, private, co-signed), your estate may be on the hook for the balance in the unfortunate event that you passed away. Student loans, along with your mortgage and any other debts that you and your spouse may have should be covered with some type of life insurance. Many employers offer group term life insurance as part of the overall benefit package, however it is important to check and make sure that is enough to cover your debts at a minimum. Term life insurance is relatively cheap and a good option to ensure your family’s well-being.

3. Disability Insurance

Disability insurance is something that many doctors should look into during the residency phase of their life. Disability insurance provides an income if you were unable to work because of an accident or illness. I could haunt you with stories of people getting sick or in a car accident and going months or years without being able to work but I will leave it as this is a good protection to have when you are earning large amounts of monthly income and your lifestyle requires large amounts of monthly income. Because doctors are specialists and high earners in their field, it would be difficult to replace that income with another job in the case that a physical or mental disability occurred. The earlier you open a disability policy, the cheaper it will be to insure yourself and your family.  

4. Retirement Savings

From a wealth building standpoint, the law of compounding interest over long periods of time has yielded great results. It is important to start saving and investing at an early age. The best way to do this in the early stages of life is to utilize your company’s 401k plan, especially since the company will match a certain amount of your contributions, which is essentially free money towards retirement. 

Depending on your loan situation (interest rate, balance, etc), it typically makes sense to put any extra money towards your loans. With average student loan interest rates in the 6-8% range, it is hard to get a guaranteed rate of return like that in the investment world. In the case where your student loans are low interest (below 5%), you could consider investing part of your excess income in a Roth IRA, which will grow tax free and has the potential to earn greater than 5% in the long term.  

5. Student Loan Payments

During this phase in the doctor cycle, you will be required to make student loan payments since you are now earning an income. Depending on the interest rate and other sources of income (spouse), I would recommend making the minimum payments outlined by loan company. If you have money left over at the end of the month, then I would recommend following the guidelines above in terms of balancing student loan payments and retirement savings. 

Also, during residency, there are many different types of loan repayment programs (REPAYE, Public Service Loan Forgiveness) and the possibility to refinance your loans at a lower rate, which will decrease your overall interest paid. This is something that will increase your chances to build wealth quicker and worth looking into so that you can start making a dent in your overall debt.

While there are many factors to consider at this stage in the game, the ones listed above are merely general principles that I like to follow. These principles can also be applied to many others entering the workforce as well, not just Physicians. In the next article, I will discuss some key financial moves to make in the first five years after residency. Click here to read Part II: The First Five

The topics discussed above are generic in nature and are provided for educational purposes only. This paper does not consider or address any individual’s actual facts and, as such, it is not individual advice. You must always consider and apply your unique set of circumstances within these broader topics.