As a young medical student, you cannot wait to graduate and get to residency. A huge paycheck awaits.

Maybe you are sitting there reading this and you are now transitioned to practice. You’re struggling with financial decisions. You are wondering whether you should put money here or there or there or here. It’s so confusing! You could tear out your hair.

After all, once you are in practice- we are talking about $200,000 annually as a primary care physician, and $400,000 if you do specialize. Quite a paycheck, right?

Unfortunately, wages are stagnating and making laser-like focused decisions are becoming more important than ever.

Can you relate to that? As a physician, you go through different stages in life and in each of those times you will have a different focus.

Before you go all out and start planning all the things you can buy, and the kind of life that you can live, let’s have a “Come to Jesus” meeting, a reality check.

The Protection Phase: Residency

Here you are- done with medical school. Starting to make a little bit of dough.

You are probably in your late 20’s or early 30’s – high in debt (hauling it all around the country), and unfortunately… low in income.

Typically, at this stage, it’s all about- protect, protect, and protect some more.

The main goal is to set yourself up for success post-residency.

For most physicians, they need to ensure that they have an adequate cash reserve and appropriate insurance coverage, especially if they have people depending on them.

A hack here is living on less.

Simply, live like a resident.

This advice is said over and over and over. It’s tired, but it’s true. Simply, establish a budget and stick to it. No need to commit to high rents, car payments, and mortgages.

Where many residents fall and mess up is that they don’t have financial fortitude. They are so busy. They don’t have time to keep track of what they are spending.

There’s a simple solution. It’s really easy. Very low tech…. Are you ready?

Take out a set amount of cash every month for groceries, for eating out, and for fun & games & entertainment.

Stick the eating out & fun cash in your wallet.

When you are out, that’s it! You are forced to budget without keeping track of the budget. If your wallet is empty, you are done.

For groceries, stick that cash in an envelope. Get into that envelope when you need groceries, when that cash is gone. No more shopping!

Develop that kind of discipline for whatever area you may struggle in- whether it is buying clothes, eating out- one or two area of spending discretion that you cannot control.

Here are some other quick hacks while you are in residency (in this order!):

1) Enroll in PSLF as soon as possible, if you are working in a non-profit. Want to pay off your loans even sooner (but not get debt forgiveness)? Refinance your loans while in residency.

2) Buy $300/mo in an account that you can’t touch, but could access if necessary. Avoid cash value life insurance and long-term financial commitments.

3) Grab free money when it is available. Take advantage of employer retirement matches (if available) in your retirement plan.

4) Buy your next vehicle in cash. Don’t finance anything!

5) Invest in a Roth IRA. They money can come out tax free for your first home purchase or even better, tax free in retirement.

6) Get term life insurance (at least $1 million) and disability income insurance ($3k/month minimum) before you transition to practice

To better understand PSLF and IBR vs PAYE, check out this podcast and this podcast.

To check out companies you can refinance your debt with during residency, check out this podcast and this podcast.

The Pay-Down Phase: Transition to Practice

You are more likely to be married and with a family – more financial responsibility. You will probably have a first job and the 6 figures will begin to trickle in.
The key for year one: DON’T BUY A HOUSE.

(Note: That’s only year one. Know that you love the area and the practice? Go for it!)

What if you don’t like the area? What if you don’t like the practice? What if you do move?

Once you do buy a home, don’t be surprised to find yourself living paycheck to paycheck. The $4,000 to $5,000/month that you were saving, suddenly disappears into the house.

New blinds, new furniture, new this, and new that.

To help with accountability, a financial advisor who specializes with physicians will come in handy. For you to live on 60 to 70% of your salary as a retiree, you need to start investing early and systematically.

This means maxxing out your 401k, doing a back-door Roth IRA, setting aside more and more money in your cash cushion, and of course paying off your debt.

The most financially successful physicians that I’ve met with focus on one aspect of their financial life: being debt free.

If you want financial freedom and time freedom, you have to be debt free.

If you can pay off your student loan during the first years of post-residency, you can begin to think about retirement.

This also means: get rid of any credit card debt as soon as possible. Get rid of any car loans as soon as possible. Get rid of ALL non tax-deductible debt as soon as possible!

A hack? Delay pricey purchases. Before you go for luxuries, review risk management, life insurance, and disability policies. It is all a matter of getting your priorities right.

Housing becomes a priority, especially if you have a family to take care of. There are a number of factors that will affect housing.

A hack? Go for financing options tailored for physicians. Bank of America has some great physician specific options. Also, consider working with an independent mortgage broker.

For more thoughts on real estate, check out this podcast and this podcast.

For another company that refinances student loans, check out this podcast.

The Accumulation Phase: Solidly In Practice

You will be between 35 and 60, getting closer and closer to retirement.

At this stage, the focus is on financial accumulation. If you will not have cleared your student loans, prepare a loan repayment strategy. More importantly, max out your retirement plan for a reduction in taxes.

Maybe you can even get rid of those insurance policies now that you’ve built up a great deal of assets.

But that’s not all…

As a matter of fact, one of the great struggles in retirement I see physicians have is the amount of money they have in traditional IRA versus Roth IRA. Make sure you have a big chunk in Roth! This way you can have money that comes out tax-free in retirement in addition to the taxable money.

Now the bigger issue… more than ever is getting a solid financial plan in place.

Have you ever seen the ING commercial that has a bunch of people walking around with random numbers hanging over their head?

One has $700,581 floating above them. Another has $2,348,634. Then another person is carrying $1,438,921.

It looks so confusing! What’s the difference between one or the other? How can they be so different? More importantly, it begs the question… what is my number?

One of my physician clients and his wife have done wonderfully over the years. She was a teacher and he was a surgeon. They put themselves through school and saved up over the years.

They even raised two great kids who became doctors themselves. They are successful beyond any measure of most people’s standards.

Yet, one thing nags at them. One gaping hole bothers them all the time.

They ask me every time we get together, “Do we have enough money?”

They are afraid of not having enough, afraid of having to back to work, afraid of being destitute after having been so successful.

The “big three” that determine your retirement are income, living expenses, and savings. Each of these components can drastically effect one another.

Consider that what you spend in retirement could be the same, higher, or lower than what you are currently spending. They key is figuring that out to the best of your ability.

One of my friends is making great money- $300,000 a year- and sometimes much more. He’s a fantastic salesman who loves his job.

He lives an incredible life. He goes on epic trips all across the country. He is a dreamer and innovator, someone with vision. On top of all that, he is a kind, kind person. He once paid for pizzas for all the nurses at the hospital when he was recovering from surgery.

Yet, he doesn’t have any sort of discipline- he isn’t saving a single dime. Where does it all go?

You have to know what those numbers are and that will determine the age at which you will retire. This gives you a definite time frame within which you can accomplish your financial goals.

There’s a whole bunch of other variables as well.

Do you want to include social security? Do you want to include inflation? What’s the rate of return that you are assuming?

Are you paying for your kids’ college? How often do you buy cars? Are you planning on buying a second home?

Do you have kids that are dependent on you financially?

Take lots of time and work with a great advisor that can walk you through multiple scenarios that fits your vision.

Final Thoughts

You now have an idea of what financial planning for doctors is all about. You may have a huge paycheck, but it is very easy to fall into the common pitfalls at each stage of life.

Ask for help. Get guidance.

You can do this!

I am here for you.

Dave Denniston, Chartered Financial Analyst (CFA), is an author and authority for physicians providing a voice and an advocate for all of the financial issues that doctors deal with. He is the author of 5 Steps to Get out of Debt for Physicians, The Insurance Guide for Doctors, The Tax Reduction Prescription, and his new book, The Freedom Formula for Physicians.

He’s glad to answer any questions about finances for physicians and the stage that you are currently in.

You can check out his latest podcast at www.DoctorFreedomPodcast.com.

You can also contact him at (800) 548-1820, at dave@daviddenniston.com, or visit his website at www.DoctorFreedomBook.com to get a copy of The Freedom Formula for Physicians.

Imagine this, picture this.

You’re finally done with medical school! Dreams of reclaiming your time & diving into your profession, doing what you love are filling you with more and more excitement.

You’re going to get paid!

Well… maybe, not a whole lot, but you are still getting paid!

Yet, in this transition to residency, you’re feeling scared. You’re frightened of this mountain of student debt. How are you going to climb up that mountain?

You wonder, how am I going to make it?

But that’s not all..

How can I balance saving for retirement with buying a house? A bitter taste forms in your mouth as you think of friends who have been making six figures without having to work as long and hard as you have.

You see them owning a house, driving a shiny new car. You wonder… don’t I deserve that? Haven’t I worked hard enough?

These, my friends, are some of the traps many physicians fall into. As a matter of fact, we’ve identified five financial pitfalls that residents and fellows get ensnared in.

Pitfall# 1: Buying a Home Too Early

I love the idea of doctors buying a home. After all, isn’t paying rent to yourself better than paying rent to someone else?

Absolutely!

Isn’t it better to build equity as soon as possible?

Not necessarily!

You see, the problem is that physicians are often akin to our wonderful friends who serve in the military. Most of us move, then move again, and then move again.

For the first 10 years or so after our undergrad education, we’re vagabonds. We never know what city we’ll end up next, right?

In order to buy a home, we want to have money down- at least 5%. Then, we don’t want to have to sell it for many years afterwards.

You see there’s a selling commission of at least 5% plus often state and county taxes. When you sell, you are often automatically out 10% of your money!!

Even IF you did build equity, would you have overcome that 10% hurdle? Plus, do you have the cash flow to float an unrented place?

I was recently talking to a sweet, wonderful physician who bought 1 home in residency, 1 home during fellowship, 1 home when she started to practice, and now another home!

Two of these are rented, one is vacant, and the other they are living in.

These are cash flow sucks! Cash flow leeches! On top of that, the two rented properties are interest only loans. The pied piper is going to come calling soon and we had to come up quickly with a plan to unload these places.

The bottom line: Don’t buy a home in residency. Wait 6 months until after you are in practice and KNOW that this is the place you want to be.

If you want to build a rental real estate empire, put downs lots and lots of cash to minimize your monthly payments.

For more thoughts on real estate, check out this podcast and this podcast.

Pitfall# 2: Not Enrolling In PSLF Right Out of Residency

Another very common pitfall that we see residents making is delaying and delaying on a decision of what to do with their student loans.

Many physicians aren’t sure what they are going to do with their medical career. On top of that, finances are tight. They wonder how they are going to make it from month to month.

It’s so hard!

This leads to delay after delay and they get stuck in a quagmire, unsure of what to do with their medical school debt.

The best decision you can make to take the first step is to enroll in PSLF (public service loan forgiveness) as soon as possible. (Assuming you qualify in working at a non-profit of course).

We say this for a number of reasons:

• You start the clock on the 120 payments that will get your debts erased (currently tax-free!)
• The government tends to ‘grandfather’ folks into a program once they are enrolled in it. Meaning that if they change PSLF down the road, it won’t likely effect you
• Your interest isn’t compounding as quickly. Einstein once said that compounding was the greatest force in the universe. Interest on top of interest on top of interest sucks! Let’s minimize that as much as possible.

To better understand PSLF and IBR vs PAYE, check out this podcast and this podcast.

Pitfall# 3: Having Car Payments

For sure, one of the most difficult aspects of residency is the financial restriction. It is super hard to save!

There’s no doubt that saving up 20k to 40k to buy a car seems ridiculously impossible. Thus, when most residents need a new rig, they borrow money to make this happen.

It’s completely understandable, yet… it is wrong!

Yes, borrowing money to purchase a car is bad news.

The right way is to use CASH. Pay for your big ticket items like cars (& boats/RVs later on) in cash.

The business aspect of medicine today is uncertain. Salaries are not rising anymore. Many practicing physicians are remarking how they aren’t getting raises, that their income is flatter than a pancake.

Thus, you want fantastic cash flow. You want to have the least amount of liabilities possible. You want to be overflowing with cash.

When you have to buy a car, consider buying it with what you have at the bank- $2,000, $5,000, $10,000. Whatever you got…

Own it, don’t owe it.

I’ve seen many, many residents stressing out about car payments. This has prevented them from saving for a home or saving for retirement or paying down their med school loans.

While it certainly isn’t glamorous and it may even be embarrassing, driving a beater may not have you smile today…. But it will sure feel good a few years down the line when you have cash in the bank that your peers don’t have!

If you already have a car loan, it’s okay. No worries! Don’t sell it. Just plan on paying it off with time and COMMIT to holding that bad boy for at least 10 years to make it pay off in spades.

Final Thoughts

You are an amazing person. You’ve sacrificed so much for your community, your patients.

If you are feeling uncertain of how to manage your money in residency, take some time to reflect on how you can change

Consider one of these strategies that we’ve mentioned to reclaim your financial freedom.

We believe in you. We know the impact you can make.

Take one step at a time, one day at a time.

And you too, can avoid the financial pitfalls of residency.

About Author:
Dave Denniston, Chartered Financial Analyst (CFA), is an author and authority for physicians providing a voice and an advocate for all of the financial issues that doctors deal with. For questions about slashing your debt, reducing your taxes, or anything else with a dollar sign in front of it, email Dave at dave@daviddenniston.com or check out his latest podcast at www.DoctorFreedomPodcast.com.

 

It’s the happiest day of your life! Your wedding day… Best. Day. Ever.

Smiles, hugs, the white gown, the champagne, the first dance, the cake, and the limo.  Laughter peels through the air. Fleeting memories of vows and eager faces, music hanging in the air. Although, you could do without the bit of the mother-in-law drama!

You’re a physician who is married to another physician. There is no doubt, the two of you have an incredibly bright future ahead of you.  After all, you’re going to be making almost $400,000 combined!

You’re just getting through the final year of your residency. Practice is just ahead! You’ll finally be able to buy a house, go on vacations, and not be scraping by on a champion’s diet of apples, oranges, and top ramen.

Then it hits you like you just ran into a brick wall- $500,000 of medical school debt….  How the heck are you ever going to get out of that debt?

Is it going to take 20 years? 30 years?

Luckily, you read this article a couple of years ago and you’ve enrolled in the Public Service Loan Forgiveness Program (PSLF) and you think it may only take another 8 years if you are lucky. However, the payments are going to be killer in another year- almost $5,000 a month between the two of you!  That will kill the hopes to save for a home quickly. How the heck could you afford it?

Then, you meet some crazy financial guy that tells you that you need to get separated…

SAY WHAT?

We just got married and now we have to get separated?

Why Two Married Physicians Should File Married Filing Separately

Okay, I don’t mean that these two physicians have to get separated legally, but instead be married filing separately on THEIR TAXES.

The two currently do not have to be one and the same. It is a choice!

I had this same situation happen to me recently when two physician clients came into my office to explore their options on re-paying their debts.

DISCLAIMER: These are two physicians who are working in a hospital setting, thus under a non-profit. Remember, in order to qualify for loan forgiveness under PSLF, you have to work for a non-profit or a government entity.

We explored the differences between married filing jointly versus married filing separately. I was astounded by the results.

Below are three tables showing several scenarios we ran to show how married filing separately versus married filing jointly can affect your payments, and thus the potential loan forgiveness.

In this real-life scenario, the wife is now in practice- she transitioned in July of 2014. He is two years behind and will be transitioning to practice in July of 2016.

Keep in mind that the IBR payment changes AFTER you report your income- let’s say by May of each year. For simplification purposes, we will assume it happens in January of each calendar year.

The wife- Dr. Giselle Smith- $110,000 in eligible student debt.

Scenario	Income	IBR Payment
Single	$55,000	$469/mo
Married Filing Jointly/ One Still In Residency, Other In Practice	$240,000	$726/mo
Married Filing Jointly/ Both In Practice	$370,000	$1,100/mo
Married Filing Separately (Only Her Income)- Transition Year	$120,000	$328/mo
Married Filing Separately (Only Her Income)-  Fully In Practice	$185,000	$537/mo

 

The husband- Dr. Tom Smith- $315,000 in eligible student debt.

Scenario	Income	IBR Payment
Single	$53,000	$444/mo
Married Filing Jointly/ One Still In Residency, Other In Practice	$240,000	$2,002/mo
Married Filing Jointly/ Both In Practice	$370,000	$3,220/mo
Married Filing Separately (Only His Income in Residency)	$55,000	$349/mo
Married Filing Separately (Only His Income)-  Transition Year	$120,000	$953/mo
Married Filing Separately (Only Her Income)-  Fully In Practice	$185,000	$1,557/mo

 

Combined- Husband and Wife Together

Scenario	IBR Payment- Married Filing Jointly	IBR Payment- Married Filing Separately
Year 1- She is Fully In Practice (transition year income was previous year), He is full year in residency	$2,084/mo	$677/mo
Year 2- She is fully in practice, he is full year in residency	$2,728/mo	$886/mo
Year 3- she is fully in practice, he is in transition year	$3,074/mo	$1,490/mo
Year 4 & beyond- both are fully in practice	$4,320/mo	$2,094/mo
TOTAL PAYMENTS IN 4 YEARS	$146,472	$61,764
DIFFERENCE	$84,080

 

We could go on and on, but check it out- you could be saving yourself literally HUNDREDS OF THOUSANDS of dollars IF your debts get forgiven through PSLF PLUS being married filing separately.

Keep in mind to look at this decision holistically before jumping in the pool and filing this way. There are real-world tax consequences to this decision when you file for taxes as married filing separately versus married filing jointly.

In this particular instance, the difference was minimal only about $2,000 per year in combined federal and state income taxes. It made far more of an impact on their debt reduction to go for it, rather than take the cash flow hit.

Make sure to discuss any potential tax impact with your advisors so that you fully understand the consequences.

Final Thoughts

As a physician, you’ve made a commitment to helping others and your community.

Now make a plan to pay-off your debt!

Consider for a moment… could you utilize that strategy that we have discussed?

Also, one other topic this isn’t discussed enough, what if you could COMBINED two of the debt forgiveness programs simultaneously?

For example, you could enroll in PSLF, work for a non-profit in an under-served area, and then at the SAME TIME, do a state forgiveness program for 2 or 3 or 4 years (whatever the minimum commitment is).

This could hedge the bet of the federal government taking away the punch bowl from the party. This way you have substantially less debt no matter what happens.

If, as a young physician, you focus on paying off your debts, save for a rainy day, live within your means and put money away for retirement, you can then do the things you’ve long dreamed of doing and be well down the road to financial independence.

About the Author:
Dave Denniston, Chartered Financial Analyst (CFA), is an author and authority for physicians providing a voice and an advocate for all of the financial issues that doctors deal with. He is the author of 5 Steps to Get out of Debt for Physicians, The Insurance Guide for Doctors, The Tax Reduction Prescription, and his new book, The Freedom Formula for Physicians.  For questions about slashing your debt, reducing your taxes, or anything else with a dollar sign in front of it, email Dave at dave@daviddenniston.com or check out his latest podcast at www.DoctorFreedomPodcast.com.