Residency is finally over and you just signed your first big contract as a staff anesthesiologist. But before you spend that salary faster than you can deposit it to your bank account, there are a few moves you should make to set yourself up for financial success. By Zachary Buccino, MD
The first thing anyone should do with their money, regardless of career, is to start an emergency fund. Unforeseen events happen and usually when you least expect them. The average amount American’s have in saving is around $8,000 while the average amount of monthly expenses ranges around $6,500. That means the average American is essentially living month to month which quickly becomes derailed by a major unexpected expense. Financial institutions vary on how much they recommend you have saved for emergencies. Some say as much as double your yearly income while others say as little as three months’ worth of expenses. Closer to a few months’ worth of expenses is a more achievable goal and you will have less money sitting in an account that isn’t earning much interest. (Keep yourself accountable! Here are five top tips for making and keeping a budget.)
The next thing you should invest in is maxing out your retirement accounts. Most medical students and residents have very little work experience and probably have contributed very little, if anything, to a retirement account thus far. Which means you are way behind your non-medicine peers. And the earlier you start the more you can take advantage of compounding interest. Most of you will either opt for an individual retirement account (IRA) or an employer backed retirement account (usually a 401K or 403b).
The benefits of an IRA are that you can choose what you invest your money in. There is really no limit to what you can invest in whether it be individual stocks, mutual funds, index funds, or bonds. A lot of companies offer “lifecycle” funds that will slowly make your contribution less and less risky as your reach retirement age which means you are less likely to lose large amounts as you are about to withdraw funds. The amount you can contribute is also less than an employer back plan at $7000 per year. A 401K is typically offered from a for profit institution while a 403b is offered by nonprofits. Both have contribution limits of $23,500 per year and usually have limits to what investments are offered. The big advantage to an employee backed plan is if they offer an employer match. For example, employers may promise a 100% match up to 3% of salary. Which means if your salary is $50,000, they will put in $1,500 as long as you also contribute at least $1,500. It makes sense to use the 401k or 403b if your employer offers a match, if not start with an IRA for the flexibility and then invest in the employer plan after that.
The biggest debt most people have coming out of residency are student loans. The average resident owes about $263,000, including both undergraduate and medical school. Now is the time to take them seriously and pay them off. There are a bunch of different strategies to do this. Income based repayment plans, loan forgiveness, military service and ultimately refinancing for a lower rate. Always make sure you do your research. A lot of loan forgiveness programs can have stipulations including having to live in a certain area for a specified amount of time, making a set number of payments consecutively, and refinancing could forgo some protections that federal student loans may offer. As a side note, just because these programs are available today does not mean they will be in the future so have a backup plan if these options fall through.
Your student loans might be the most expensive debt you have but your kids (if you have them) will probably be your biggest expense. Especially if they plan to go to college. This is where a 529 (education savings) account comes in. The great thing about them is that there is no income limit, you can contribute as much as you want at a time (however there are max contribution limits that vary from state to state), and they can be versatile in the right scenario. If your child decides school is not for them, you can change the beneficiary to another child or even to yourself for educational expenses. They can be used for vocational or trade school tuition as well. There is no time limit for a beneficiary of the account to use the money as well. If you’ve had the account longer than 15 years, you can also convert it into a Roth IRA for your kids.
The final thing you need to do with your money right out of residency is to pay yourself. You worked harder than most of your peers in other career fields to get to where you are today. You have scarified countless hours studying and missed out on many special moments in order to give your patient’s the best possible care. It’s time to enjoy the fruits of your labor.
Author’s note: I am not a financial advisor, and I have no financial disclosures for this discussion. The views and opinions are my own and do not reflect in any way my employer. I am an active-duty anesthesiologist in the U.S. Army and employed by the Department of Defense.
The ASA Committee on Young Physicians is pleased to present this monthly article series on personal finance. These articles are not written by hedge fund managers or real estate tycoons but by practicing physicians. Some have business degrees and some do not – but every contributor is an anesthesiologist who has some guidance to offer the rising generation of attending physicians. It is not the intention of the committee to offer definitive financial advice, but rather some pearls of wisdom to consider while developing a personal fiscal plan.
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