What I Wish I Knew About Finance As a Medical Student and Resident
Let’s talk about the “f-word.” That word being failure, of course (what did you think I meant?). Hindsight is 20/20. To err is human. We can’t escape failure, as much as we might want to, especially when we receive that stinging feedback. It’s true that the path to success is paved with failure—but, as it turns out—everything you thought you knew about failure is probably wrong (🤯!!!). Well, maybe not everything, but I have an interesting tidbit for you. Contrary to common beliefs about learning from failure, you actually learn more from success. This is true of personal success and personal failure. But did you know that people learn equally and just as much from others’ failures as from others’ successes? In other words, when failure is removed from the “self’,” when you take the personal out of the equation and psychological distance is achieved, people tune in and learn from failure.
So, now that I’ve gone all psychological on you, the stage is set and you have some context for what comes next.
This post is about learning from others’ failures or regrets, because…
“The only real mistake is the one from which we learn nothing.” – Henry Ford
I’ve come across a lot of blog and social media posts over the years about the things medical students and residents wished they’d known earlier. None of it surprises me, except maybe for the fact that most of the time what they regret is unrelated to finance. Maybe trainees don’t consider financial matters to be as important as choosing the right school, prioritizing personal time, starting early to prepare for licensing exams, or doing research. It’s also possible that they just “don’t know what they don’t know”, which is the oxymoron of financial illiteracy in a highly educated population. Financial regrets and advice seem to emerge a few or more years into physicianhood.
In light of this, I’ve collated some of the most common financial wisdoms that I’ve heard from junior radiologists who, after looking back at their earlier selves, realized “what they wish they’d known” about finance during their training. Give it a read—your future self might thank you. And, yes, read it because you can learn better from others’ failures and successes without the “ouch” factor (you’re welcome).
It’s not true that as a doctor you’ll never have to worry about money again.
Sometimes this way of thinking is part of the message students receive. Case in point from a Canadian Medical Director:
“It can be daunting to think about tuition and how you’ll pay for medical school, but try not to ruminate on it too much. You stand to earn a substantial salary once you’re practicing medicine and will eventually have no trouble paying off your debts.”
Because they believe it IS true, many students figure they’ll worry about finances later. Medical student loan debt starts accruing interest while in medical school. While making minimum payments in residency, it’s still accruing interest. This means that by the time a resident finishes training, $200,000 of loans could have grown to nearly $400,000 – sometimes even more. Without some degree of financial literacy, many students make financial mistakes that cost them a small fortune. Note: I’m a strong advocate of financial literacy being a required part of the residency curriculum.
I don’t have to live up to someone else’s standards.
You may have heard this before: “She’s a doctor, she can afford that,” or, “A doctor has to have a nice (insert material item).” This pressure to “live like a doctor” may even come from family members and close friends. Even during residency, the outside world thinks that doctors have the world handed to them. It’s this kind of thinking that prompts medical students to drive new BMWs, use student loan disbursements to make car payments, and justify it with their future doctor salary. If a physician lets someone else dictate their spending, lifestyle, or self-image, that person will likely never have control of their finances and never be satisfied.
Buying a house as a resident isn’t always a smart move.
I don’t know what the statistics show, but I’ve heard from a lot of residents who regretted buying a house. I’ve also read accounts of residents who claimed they “made money” when they sold their house and were happy with their decision to own instead of rent. And of course, if you’re married to a high-earner and have no debt, none of this may apply to you. The thing with real estate is that the cost is dependent on a multitude of factors: location, housing market, sale price, mortgage rates, renovation and maintenance costs (and the owner’s DIY skills), and property taxes. Aside from the $$$ costs, there is also a time-cost in owning a home that there isn’t with renting a home or apartment. And I don’t have to tell you that time is a limited commodity during training (keep reading for more on this).
There are a lot of reasons why owning a home during residency may not be a good financial move: you don’t have a down payment; you already have a lot of debt; radiology residency is only 5 years and it can be hard to break even, let alone make a profit in that length of time; and new homeowners tend to underestimate the costs of maintenance, property tax, insurance, and furnishings. Buyer beware.
It pays to understand student loans.
It’s easy to put off any thought of managing student loans when you’re busy trying to become a doctor or a radiologist. Managing student loans involves borrowing as little as possible and entering the right loan repayment program for you on day one as a resident. For the latter, you need a plan. The most comprehensive guide is available here for free. Note: This is an area where it can be very important to consider your personal situation, especially if you’re married to another earner.
Start by consolidating your federal loans so that you’re eligible for Public Service Loan Forgiveness (PSLF) (even if you may not ultimately go this route) and enter into an income driven repayment program. The best choice for most residents is REPAYE (Revised Pay As You Earn). (Note: The goal here is to pay the minimum required qualifying payment each year and to have as much debt forgiven at the end of ten years.) The monthly payments are usually an affordable $0-$300/month so you can avoid deferment or going into forbearance. Next you want to refinance any private loans you have (which are not eligible for PSLF). Private student loans can be refinanced for free and you should consider refinancing whenever you can get a lower rate. Typically, when you finish residency you can get a better rate because of your enhanced income status.
Anything you pay for now (using borrowed money) will cost you 50% more in the long run.
It actually may cost more than this and it’s due to the compounding effect of interest on loans. That means that a Caramel Cocoa Cluster Frappuccino® Blended Coffee (one of the top ten drinks at Starbucks) with a price tag of $4.95 might actually cost about $7.50 in the long term. The $2,000 tab to travel to your cousin’s wedding could wind up costing $3,000. Think of it as paying a premium for everything you buy using money from loans.
I don’t advocate total frugality as a trainee and a reasonable amount of discretionary spending will not be nearly as consequential as how a newly graduated radiologist spends her salary. But beyond a reasonable amount, you could be setting yourself up for regret. It’s a good idea to think about how much something is “actually” costing when using borrowed money. You don’t know how your future self will feel about how your present self is spending. If for some reason you decide you don’t want to be a radiologist, you will still have to pay back the money you borrowed.
Not all medical schools cost the same.
If you get accepted to only one medical school then the choice is simple. It would also be hard to pass up a full-ride scholarship. Otherwise, it pays to consider each school’s cost. (Note: I don’t mean what the school advertises, but what you will have to pay, which is often very different.) Going to a public school in the state where you are a resident will usually decrease your overall loan burden, and the difference between public/resident and private/nonresident costs can be substantial. Think twice about taking on $300,000 of debt if you have the option to spend half that much by choosing a less expensive school.
Tuition, Fees, and Health Insurance, AAMC, 2020-2021 (Note: minimum cost is $0)
Note: I don’t know if the $347,612 number is an error, but it caught my eye.
You can’t make up for missed opportunities to contribute to retirement accounts.
About half of hospitals offer residents a retirement plan (401k, 403b) and some will match your contribution up to a limit. By not taking advantage of this match you are leaving money on the table, essentially taking a self-imposed pay cut. You also miss out on the tax break because the money you contribute to a 401k is tax deductible, which lowers your taxable income. This is advantageous if you are pursuing Public Service Loan Forgiveness and are on an income-driven repayment plan because the lower your income, the lower your loan payments, and thus, the less debt you will eventually pay back.
The other retirement contribution that residents should consider is the Roth IRA. You pay the taxes on the front end (at the time of contribution), but there are no taxes on the back end (at the time of withdrawal) and money grows tax free while it’s in the account. As a resident, you may be in the lowest tax bracket you’ll ever be in for the rest of your life so it’s a good time to contribute to a Roth IRA because the front end taxes will be low. You can also contribute to a Roth IRA for a non-working spouse from your income. Note: You can’t put off contributing to a Roth IRA during residency thinking you will just make bigger contributions after you graduate. This is because you’re only allowed to contribute a certain amount per year ($6,000 in 2021).
Residents should have disability insurance.
A professional has a greater statistical probability of suffering a severe disability that impedes their ability to work than of dying prematurely. More than one in four 20-year-olds will experience a disability for 90 days or more before they reach age 67. If you become too ill or injured to work before you reach peak earning potential, you’ll still have to pay back the lender that bankrolled your medical school education. The lender will not care that you are disabled.
When should you get DI? If you have a pre-existing medical condition (which might mean you get denied insurance) you might want to wait until you are a resident. About 70% of residents are offered fully paid group disability insurance through their employer that does not require a medical exam or medical history taking (but the insurer may deny anyone who had previously been denied DI). An individual policy is best, but it will cost more than a group policy (ranging from 1% to 3% of your annual income per year).
Medical students and residents with spouses or other dependents should have life insurance.
If someone depends on you financially, life insurance provides for them if you die. Some residents with children choose to purchase life insurance during residency (or before) and others wait until they finish training, when they can more easily afford the premiums. Those who wait are gambling with their spouse’s and children’s financial future. Other good reasons to purchase life insurance early are that you will pay lower premiums (as you will be younger at the time of insurance purchase), and you will lock in the insurance rates while you are still healthy. If you wait, and become ill or disabled as a resident, your premiums could rise significantly, and you may even become uninsurable.
Permanent life insurance is almost always a costly mistake.
There are two basic types of life insurance. Term life insurance provides a predetermined death benefit and covers you for a predetermined number of years, usually five to 30. The annual premiums are fixed and are based on your health and life expectancy at the time you apply for the policy. Permanent life insurance combines a death benefit with a savings or investment account. There are several varieties, including whole life, variable life, and numerous variations of universal life insurance. The policy covers you for as long as you’re alive. The premiums can be fixed or not, depending on the policy you purchase. Like term life insurance, the premiums are based on your health and medical history.
Permanent life insurance is NOT the best choice for most people. It’s several times as expensive as term life insurance for the same amount of coverage. While your policy does accumulate some cash value through its savings or investment component, which a term policy doesn’t have, you pay a hefty premium for this feature and for having a policy that will definitely pay out one day. Nearly every radiologist will receive a pitch at some point in their career to buy permanent life insurance. Often, the medical school or radiology department will bring someone in to “advise” residents on buying life insurance, and that person’s goal is often to sell as much expensive insurance as she can. Residents, and often well-intended departments, may not recognize that the “advisor” is a sales person that does not have the best interests of her clients in mind. Naive radiology residents and practicing radiologists being “sold” permanent life insurance is one of my top financial pet peeves. Note: Residents should get disability and life insurance from an independent insurance agent. Even if the hospital offers a group plan, the coverage is often inadequate. Individual plans for trainees are relatively cheap.
I could have started a 529 for my kids during residency, even before they were born.
A 529 plan (from Section 529 of the federal tax code) is a tax-advantaged savings plan, typically established by parents or grandparents to help pay for a child’s or grandchild’s education. You can open a 529 plan before your kid is born and list yourself as the beneficiary, and then change the beneficiary after birth since 529 plans allow the beneficiary to be changed to a member of the family of the old beneficiary. The two major types of 529 plans are savings plans and prepaid tuition plans. Savings plans, the most common type, allow for investing in mutual funds that grow tax-deferred. Withdrawals are tax-free if they’re used for qualified education expenses.
Prepaid tuition plans allow the account owner to pay in advance for tuition at designated colleges and universities. Prepaid tuition plans are offered by a limited number of states and some higher education institutions. They vary in their specifics, but the general principle is that they allow you to lock in tuition at current rates for a student who may not be attending college for years to come. They grow in value over time, and the money that eventually comes out of the account to pay tuition is not taxable. Prepaid tuition plans may have restrictions on which particular colleges they may be used for. The money in a savings plan, by contrast, can be used at just about any eligible institution.
You aren’t restricted to investing in your own state’s 529 plan, but doing so may get you a tax break. Bottom line: As with other kinds of investing, the earlier you get started, the better. With a 529 savings plan, your money will have more time to grow and compound. With a prepaid tuition plan, you’ll most likely be able to lock in a lower tuition rate, since many schools raise their prices every year.
Time is more valuable than money. It’s limited in supply and once it’s gone, you can’t get it back.
You can lose money and make more. And radiologists are fortunate in that they have a higher than average physician income ($427,000) so they can make a lot of financial mistakes (up to a limit) and still do okay. But time is something you never get back. How you spend it is therefore one of the most important decisions you will make. As a student or resident, you will have a limited amount of discretionary time away from studying and taking exams. How you spend it will reflect your personal values. If you have a spouse and children, they will want a piece of your time and I’m guessing you will want to spend time with them.