Written by: Corey Janoff
As a new wave of interns & residents begin working at teaching hospitals across the country, we thought it would be a good idea to put together a guide to money in residency so you can get started on the right foot. The sooner you can establish good habits, the easier your path to financial freedom will be (possibly even fatFIRE).
As a physician, financial planning starts in residency or even medical school. Get a solid foundation and work on the money fundamentals.
Without further ado, let’s dive into the money topics you should get a handle on in residency!
The first order of business in residency is to get a game plan for your student loans. If you don’t have student loans, feel free to scroll down.
The average medical student graduates with over $200,000 in medical school student loan debt. That balance will likely increase to over $250k by the time you are done with your medical training due to accumulated interest.
Unless your student loan balance is small and you plan to pay it off quickly, I generally encourage everyone in residency to enroll in the PSLF Program if you decide to pursue Public Service Loan Forgiveness.
Related Podcast: PSLF – What Doctors Need to Know.
Public Service Loan Forgiveness (PSLF) is where you make qualifying student loan payments while working for a qualifying non-profit or government employer. After 10 years of payments, your remaining federal student loan balance will be forgiven. For some doctors, PSLF can save them hundreds of thousands of dollars. The key is to make sure you are meeting all of the requirements. In short: Your loans must be Direct loans. In addition, you must work for a qualifying employer – government or non-profit. You can confirm your employer qualifies by filing the Employment Certification Form each year. Believe it or not, almost every hospital is considered a non-profit.
Your servicer must be FedLoan Servicing. You must be on a qualifying repayment plan – IBR/PAYE/RePAYE or 10-year Standard. You must make 120 monthly payments. The first step is to convert/consolidate your loans into Federal Direct loans serviced by FedLoan Servicing and enroll in one of the qualifying payment plans. Every $300 income-based student loan payment you make during residency is a $3,000 payment you avoid making in practice. The sooner you start paying on those student loans, the sooner you can potentially have them forgiven.
If you don’t end up working for a qualifying employer after residency and therefore lose out on PSLF eligibility, that’s fine. However, you can explore options for paying them off in practice or refinance your student loans to a lower interest rate.
Rent or Buy a Home in Residency?
In short, don’t buy a home during residency. The cost of short-term homeownership often exceeds the cost of renting. In addition, most residents don’t plan to live in the same home for more than five years, which makes renting more attractive from a financial perspective.
I understand you feel like you’re “throwing your money away at rent” when you could be building equity in a home. I can tell you from experience, though, your primary residence is not an investment but rather an expense. So if you can recoup all the costs you put into it when you go to sell, consider yourself lucky.
Long-term, owning a home tends to be better than renting, but you’re not in residency long-term.
Of course, there are exceptions. For example, maybe you plan to stay in the same city when you’re done with training because your spouse works there and you’ve already established your roots. Those scenarios can be assessed on a case-by-case basis.
Important Insurances for Medical Residents
There are the usual insurances, such as medical insurance and car insurance, that everyone should have. Homeowners insurance if you own a home. Your residency program should cover malpractice insurance.
One often-overlooked insurance is umbrella liability insurance, which provides additional liability protection on top of your car & home insurance. This is usually relevant in the event of a lawsuit.
For example, you get in a car accident. You are at fault. The person you hit sues you for more than your car insurance covers. In that scenario, the excess liability comes out of your pocket unless you have an umbrella policy to absorb the excess liability.
Get umbrella liability insurance through the same company you get your auto and home insurance through. Inexpensive and well worth it for the cost.
Physician disability insurance is crucial to secure as early as possible. Specifically, you want an own-occupation disability insurance policy that protects you if you can do the specific job duties of your specialty.
Related Podcast: Own Occupation Disability Insurance – Do I Need It?
Your income is the key ingredient to making your financial world work. So as long as you depend on your income, it is important to protect it as best as possible.
For more direction on where and how to secure a good own occupation disability insurance policy during residency, meet with one of our financial advisors.
If you have a spouse, children, or anyone who depends on you financially, it's wise to secure life insurance now during residency if you don’t already have it. Get more than you think you need because you can always reduce it later as your assets accumulate.
Even if you are single with no children, if you plan to get married and have kids one day, it could be wise to use your age and health to your advantage and lock in some favorable rates today. Think of it as a future planning tool.
The ability to get a life and disability insurance is based on health. The cost is based on age and health. Rarely do people get younger and healthier over time, so if you think you will need it one day, it could be wise to secure it now.
Lock in an inexpensive term life insurance policy (forget about any type of permanent policy at this point). Do it through a company that allows you to convert it to a permanent policy at any time regardless of health changes. Of course, you may never use that conversion privilege, but having the option available to you is powerful.
A general money rule of thumb maintains 3-6 months of living expenses in a savings account. While this can be challenging for residents, especially in more expensive cities, do your best to get to that level and maintain it.
If you don’t have an adequate emergency reserve, you could find yourself living paycheck to paycheck, and any emergency expenses end up on a credit card with a high interest rate.
High-interest rate debt creates an uphill battle for you to dig out of, so it’s best to avoid it if possible.
Budgeting as a Resident
Live within your means. It’s easier said than done, of course, but you can do it! In residency, your income is equivalent to the median household in America. Therefore, you should be able to make ends meet regarding money coming in and going out.
I’ve worked with residents in every major city in America, and I promise you it is possible to pay rent, pay your bills, take the occasional vacation, and even save a little money too.
The biggest thing you can do is keep your housing costs reasonable in relation to your earnings. Once in practice, I advise that a maximum of 20% of your income goes to housing. You might need to stretch that a little in residency (maybe 1/3 of income max).
Beyond that, simply be realistic about what you can and can’t afford. You’re not a big shot attending doctor yet. You’re a resident. Live like one. Eat top ramen and spaghetti. Go hiking for a fun outing (it’s free). Pretend like you’re still in college or med school, but with a tiny bit more spending money, and life will be good.
Investing Strategies During Residency
I don’t expect residents to invest anything. However, I would like to see you max out a Roth IRA each year ($6,000 as of 2021), if possible.
If you can stay out of credit card debt, maintain an emergency reserve, and max out your Roth IRA every year during residency, you’re doing great. Any investing beyond that is only accelerating your path towards financial independence.
Assuming you’re maxing out your Roth IRA and have the ability to invest more, try contributing to your 403b retirement plan at work, if available to residents. Ideally, you make Roth contributions to your 403b as well during residency.
Roth means the money goes in after you pay income taxes on your earnings, and qualified withdrawals in retirement from the account are tax-free.
Unless you have a spouse earning a decent income or family helping you out, it’s unlikely you will be able to max out a 403b and a Roth IRA during residency, but if you are, kudos to you. From there, open up a taxable brokerage account and start putting money into that. Be sure to tax-loss harvest anytime the market goes down.
Related Podcast: Back to Basics – Investing 101
Moonlight for Extra Income in Residency
If you’re hungry to get ahead or simply hungry and want to eat more, moonlighting might be a good option for you to earn extra money. Unfortunately, not all residents have the opportunity to moonlight, but it's definitely something to look into.
If you can make $1,000 per shift from moonlighting, work an extra 1-2 shifts per month, and you’re boosting your income quite a bit for a resident!
Use that money to fund your Roth IRA, increase your 403b retirement contributions, pay off debt, save for a future home down payment…the possibilities are endless.
Work hard now to set yourself up for financial freedom later.
Guide to Money in Residency Summary
Residency is a unique time. You’re working your butt off. It’s likely your first real full-time job where you earn real income. Now is the time to establish good financial habits that will carry with you the rest of your life. First, figure out a plan for your student loans. Renting a home is likely the optimal financial decision, as frustrating as that may be. Get own occupation disability insurance and possibly term life insurance. Build up and maintain an emergency reserve. Live within your means—Max out a Roth IRA. Anything more than that to accelerate your financial goals is added bonus.