Written by: Corey Janoff
For doctors, one of the biggest life events is transitioning from residency or fellowship into practice. This usually involves a significant pay increase, a job change, possibly a move to a new city, student loan payments increasing, the desire to purchase a house, new car, maybe start a family, among other things. There are many things for physicians to address when it comes to financial planning around this time. If you can set the tone and get started with your attending career on the right foot, your long-term financial goals will be much more achievable. Today we will discuss some dos and don’ts when it comes to taking that step from residency into practice.
Consider Taking Time off
First off, congratulations on making it through the gauntlet that is medical school and residency/fellowship! If you go all the way back to kindergarten, you have basically spent 25+ years in school and training for your first real job. That is a lot. You need a breather.
When you finish residency/fellowship, you have an opportunity to take an extended break from work with no strings attached. Seriously. No out-of-office email. No need to check in with the hospital. No call. You probably won’t have an opportunity like this again until you retire.
Not everyone will be in a position to take several months off work after they finish residency, but if you have some savings built up or received a decent signing bonus from your new contract, consider setting your start date sometime in the fall rather than July 1. Unless you make a job change mid-career and can afford to take some time off, it will be hard to find another opportunity to take a three-month hiatus from work.
Enjoy that time.
Your First Job Likely Won’t be Your Last
I don’t have any hard data on this, but I would estimate that about half of my clients have changed jobs within three years of entering practice. There are a number of reasons for this. Better opportunity came up elsewhere. They wanted to be closer to family. Spouse got a job in a different city (maybe a fellowship or attending role if a dual-doc couple). Things just didn’t work out with the employer – the job didn’t live up to expectations. Compensation. You name it.
So before rushing to buy the forever home and firmly plant your roots in that city, make sure you plan to stay there long-term. This leads me to my next suggestion…
Rent before Buying and Be Smart With What You Buy
Again, there is a strong possibility you will end up moving from your first job within a few years for a different job opportunity. Also, if you are moving to a new city for your first attending job, you may not have a solid lay of the land.
I know you have been sick of “throwing money away at rent” all these years and you don’t want to do that anymore. Now that you can afford to buy a house, you want to. Your spouse is eager to settle down into a home you can call your own. Your parents are pressuring you. Your in-laws are pressuring you. Your friends are pressuring you. Instead of trying to close on a home right away during what will already be a hectic time, consider renting for the first six months or so.
Renting will give you flexibility to make sure you are going to be there long-term. If you don’t like your job and want to move elsewhere, renting will be one of the best financial moves you ever make. I promise, you will be able to buy the house you want soon enough. I just want you to make it a smart financial decision.
One of the biggest financial headaches people face is when they have to sell a house within a few years of purchasing it. Sometimes you get lucky and your house appreciates in value enough to offset the transaction costs involved in selling a property. But usually, when you factor in all of the transaction costs of real estate, you end up taking a loss if you sell a house after owning it less than 5 years. The longer you own a home, the more likely you will come out ahead when you sell it.
Sometimes you get really unlucky and your house goes down in value and you can’t sell it for anywhere near what you paid for it. Just ask anyone who purchase a home between 2005-2007. I know some people who would barely break even today on homes they bought during the mid-2000’s.
Once you are ready to commit to an area long-term and are in a position to purchase a house, please don’t overspend. Banks will approve you for a much larger mortgage than you should be borrowing.
I have written before about home ownership and have suggested as a general rule to keep your mortgage balance below two times your gross income. Maybe you can extend to 2.5x if you don’t have any student loans and expect your income to rise.
If you are borrowing 3-4x your income for a home purchase, unless you expect your income to double within the next handful of years, you will have a tough time achieving your financial goals. The less you spend on a house, the more likely you will become financially independent one day.
Save 20% of Income for Retirement
Now that you have started your career, it's time to think about stopping one day. The sooner you start saving for retirement, the sooner you can retire! I won’t even charge for that bit of advice.
Physicians often get a late start at the retirement savings game. Many of you don’t really start saving for retirement until your 30’s. Some don't start until later. Unless you want to have a late finish to your career, you have some catch-up to do.
Fortunately, most doctors earn enough income to sufficiently play catch-up and still have a comfortable, fulfilling life. Saving at least 20% of gross income for retirement is a good starting point for retirement savings. If you start saving that much in your early 30’s and do that for your whole career, there is a good chance you could stop working in your late 50’s to early 60’s. No guarantees of course, but you are getting started on the right track. The longer you wait to start saving, the more you will have to save each year to ultimately reach your end goal.
If you want to retire before age 60, save more. How do you save more? Easy – spend less. Or earn more. Either one works. Which leads me to my next suggestion.
Be Judicious with Increasing Lifestyle
When your income quadruples overnight, it is easy to upgrade your lifestyle and not think anything of it. We all do it. It’s human nature. When you make more money, you stop thinking about how much extra it costs to add guacamole to your burrito. You justify your larger expenditures with your ability to pay for them from your cash flow. Which is totally fine!
Where people run into trouble is when they increase their lifestyle spending before setting up a plan to achieve their financial goals.
Find the things that you really value and truly make you happy and spend more on that. All the other stuff, fuggetaboutit.
You know why most Americans park in their driveway? Because they have a garage full of junk they don’t use. Most of those toys and gadgets and stuff don’t make people happy. Don’t waste your money on it. The things that do make you happy, spend more.
Maybe you have a passion for cycling. You love going on long bike rides through the countryside on Sunday mornings. Go buy yourself the road bike you have always wanted! The several thousand dollars you spend on it is nothing when you consider the happiness it brings you.
But buying the $70,000 brand new luxury sedan because it is nicer than a $12,000 Kia Optima with 50,000 miles is a waste of money if you are not on track to achieving your real financial goals. Sure, the heated seats may get hot faster in the nice new car, but the seat heaters in the Kia will eventually get your bum nice and toasty.
I don’t mind if you splurge on cars, boats, vacations, or whatever you want. But make sure you are on track to achieving your important financial goals before upgrading your lifestyle.
One goal many doctors have is to pay off their student loans. So, let’s address that.
Have a Plan for Your Student Loans
When you transition into practice and your income goes up, your student loan payments will increase with your income. The increase in student loan payments may not happen overnight though. If you are on an income-driven payment plan on your federal loans, your payments may not increase until the following year. And the following year, you only had half of the year (or less) at your attending income level, so it won’t be until year three in practice that you are making income-driven payments commensurate with your income level.
This can trip people up, because they don’t plan for those increased payments. Be sure to estimate what your monthly payments will be with the payment plan you are one and prepare for it. An easy way to do this is the student loan payment estimator on StudentLoans.gov.
Now, this really only applies to people planning to keep their federal loans and make the minimum payments required by their income. If you are pursuing PSLF, this is likely the path you are taking.
If you won’t qualify for PSLF or don’t plan to pursue it, then figure out the optimal way to pay off your loans while still accomplishing your other long-term financial goals.
You may refinance your loans to lower the interest rate and pay them off faster. Maybe you are taking a job that offers reimbursement for student loan payments.
Whatever the case may be, come up with a plan before you transition into practice, so your student loans are under control and you have a path to paying them off.
Having a plan in place is a great start, but sometimes plans get derailed. Therefore, it is important to also plan for the possibility that your plan may not work out as planned. #Plan.
Increase Disability and Life Insurance
The biggest thing that could derail your financial goals is an untimely death or disability. You could have a retirement savings strategy in place to put you on track for financial independence in your 50’s and that plan could go out the window if you lose your income do to an illness or injury that prevents you from working. Your family could be in financial peril as well.
I’ve talked about disability and life insurance before. Get it. Protect yourself. Protect your family.
Early in your career, get as much disability insurance as you can get. Later on, after you have accumulated some assets and don’t need all of your income anymore, you could lower it or drop it completely (same with life insurance potentially).
Yes, it is expensive. But you know what is more expensive? Being disabled without income. Or leaving your family behind to survive without income or with less than what they had when you were around. Nobody who died or got disabled ever regretted having the coverage.
Just do it. Get an adequate amount of coverage. Hopefully you never need it and it is a giant waste of money.
Transitioning from residency into practice is an exciting time for a new physician. Get your career started off on the right track by developing a plan to achieve your long-term financial goals. Don’t get caught up in increasing your expenditures and living that stereotypical doctor lifestyle. Pretty simple.
It’s easier said than done. It will take hard work, sacrifice, and discipline. Make an effort to turn your finances into a source of comfort and strength, rather than a point of worry and stress.
These are the opinions of Corey Janoff and not necessarily those of Finity Group, LLC or Cambridge Investment Research, Inc. Consult with your financial advisor before making any investment decisions. Any investment involves the possibility of loss.