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Supercharge your net worth during residency

Posted on April 2, 2015March 29, 2015 by SmartMoneyMD

There are two essential financial differences between a resident and a medical student:

You will work more but have a stable (but low) income.
Your expenses will likely be higher as a resident.

Think about it. As a medical resident, you are not swimming in money. A medical resident’s salary is in the mid five figures. If you take into account the number of hours you spend working, studying, and preparing for conferences, your hourly rate is in the mid-low single digits. I calculated mine to be around $4/hour before taxes. At this wage, you’d better be living close to a medical student lifestyle. Be smart about your money.

Your expenses are likely higher as a resident too. Maybe you’ve moved away and no longer have roommates to share you housing expenses. If you have a family with a non-working spouse, you have to feed more mouths. Maybe you also have to use a car to commute to the various hospitals on rotation. With a single digit hourly wage and higher expenses, it behooves you to be financially savvy.

While many principles for medical student finance remain valid, there are some nuances. The following are power tips to increase your net worth during residency:

Try your best to minimize your furniture and material wealth. Downside more if you need to. Who knows where you might move to after residency for fellowship or a new job. My residency furniture consisted of Ikea products that were easily disposable via craigslist. I’ve actually kept a few of these items onward and used them until they broke.
Keep track of conference expenses. While most training programs offer a stipend, you can still itemize and deduct the expenses that exceed your allocated budget. Now is the time to maximize itemized deductions to reduce your already low tax burden.
Live below your means. The conservative approach is to continue this habit until you become financially independent. This means no new boats, no new cars, and avoid buying a home. You can’t go wrong with this approach.
Adapt your lifestyle to what you are comfortable with. If you are single and don’t mind having roommates, you can save a ton on rent and utilities. Live close to your workplace to minimize travel time and maximize sleep.
Roth IRA. The more you get into this tax shelter, the sooner it can grow. You can also contribute for your spouse too if there are enough funds.
401k/403b. If you really have extra money to squirrel away, you can consider contributing to your employers retirement accounts. I never had enough left over to contribute, but it can add to your nest egg. One caveat is that once you leave your program, you cannot contribute more to this account. At this point, you can either leave the investments in the account (and track them) until you start withdrawing in retirement or transfer the sum to an IRA or your new employer’s 401k/403b.
Watch your restaurant budget. You’re busy every day and want to unwind. Maybe have a few drinks on the weekends (or weeknights). Set a strict budget and try not to exceed it. Limit your latte habit.

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Remember, you’ve made it through medical school and are smart about medicine. Be smart about your money as well. Any other tips to add? Sound out below!

High Yield financial checklist for the busy medical student

Posted on April 1, 2015March 29, 2015 by SmartMoneyMD

This list serves as a financial checklist for the busy medical student, but can be certainly applied to other student roles where income is limited or non-existent:

Be aware of the true amount of student loans you really need to borrow. Federal student loan amounts are often based from anticipated tuition and living costs of a certain institution. You might not need the full amount depending on your spending habits. Look into the cost of books and food/entertainment. You might not need to borrow the full amount. Any unused money is basically your unused emergency fund that you’re paying interest on. Not the worst thing in the world to have a 6% interest loan sitting around, but you could do without it if you are careful.
Live modestly. A relatively large group of my medical school class took a trip to Costa Rica during spring break. I’ve seen some classmates fly to Europe for a long weekend. Fiji or VOSS bottled water? If you can afford it, great. Don’t convince yourself (or let others convince you either) that you can afford it if you really can’t.
If you need extra money and are willing to work, consider being a tutor or utilize any of your skills that can translate into higher pay.
If you have family who are willing to “match” your part-time income, put your taxed income into a Roth IRA. In fact, if you have excess funds from your student loans for daily living, put your secondary income into a Roth IRA. This concept is always debatable, but paying a 6.8% simple interest loan in exchange for decades of tax drag-free investment is worth the trade-off.
If you or your spouse has income and will be filing taxes, go ahead and pay down some of your student loan interest (up to $2500). It can be itemized during tax season for an income reduction. When you become a hotshot attending and make a gazillion dollars, your income will be too high to make that deduction. Continue doing so during residency if you can.

Any more to add to the list? Comment below!

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Develop your financial knowledge while in school and in residency

Posted on March 31, 2015March 29, 2015 by SmartMoneyMD

I wished that I cared more about finance during medical school. It always seemed like there was something else more important (i.e. USMLE, tests, clerkships…etc). Most students felt that way. Those who came from financially independent families surely didn’t care. It was also taboo to even discuss these matters. After all, we’re in the business of saving lives, right?

Sort of.

What I’ve realize from practicing medicine is that excelling in medicine only gets you so far in life. You still have to be able to translate the blood and tears we suffered through all these years into that German luxury auto that you’ve always wanted. And no one teaches you that.

The key advantage of being a young, poor, student is time. Time to gain experience. In finance, you get compound interest. As far as getting yourself there, learn to be financially competent. Take some time to study about finance. An hour a month, perhaps. Make time. When the financial advisors start preying on you during residency, you will be prepared. Learn the vocabulary. Read my high yield financial outline for the busy student. Every initiative you take to educate yourself in finance or business is an investment into your future self.

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Getting your finances in order after residency

Posted on March 30, 2015March 29, 2015 by SmartMoneyMD

The AMA recently published a bullet point listing of basic do’s and don’ts for young doctors going out into practice.

The recommendation to avoid or eliminate credit card debt needs to emphasized. I could easily count with two hands the number of classmates in my medical school who overtly carry credit card debt. As a potential high income earner, you are targeted by credit card companies because you have good credit and are approved easily for loans.

Additionally, here are some soft recommendations for the new grads as well:

Be careful about buying a new house when you get your first job. Now that your income has increased significantly, it is easy to increase your expenses as well. You don’t want to buy more house that you can afford. If you job does not work out and you have to relocate, you will be stuck with a huge mortgage as well.
Add to that Roth IRA. You want to diversify. Pre and post-tax investments.
Do your homework before committing to a financial advisor. Watch out insurance salesmen. While you need to be adequately insured, make sure what investment vehicles that you truly need before you buy. I’ve been pitched whole life insurance several times before. It might make sense for some people, but it certainly does not if you have $400,000 in student loans that you need to repay or if you have credit card debt.

Any other suggestions or questions? Sound out below!

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Doctors must achieve a baseline level of financial competency

Posted on March 29, 2015March 31, 2015 by SmartMoneyMD

As doctors, we don’t need to be financial gurus (a la Bill Bernstein), but we must establish a baseline level of financial competency.

This doesn’t even mean that you have to like finance, numbers, or even money. Our medical licensure mandates a certain number CME credits to stay current; the same is true for our financial knowledge. It really doesn’t take much time either. You also don’t need to know everything in detail, just the basics and enough to make educated decisions, hold a conversation with your tax advisor, or money manager.

Start slowly. Sign up for our monthly newsletter. Pick up a book. Read two hours a month. Increase as needed. It’s not a race, but the more time you spend on the subject, the better off you will be. Trust us.

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Miscellaneous Itemized Deductions may be worth less than you realize

Posted on March 27, 2015March 27, 2015 by SmartMoneyMD

One common phrase that we hear professionals say in passing is, “Oh, you can deduct that expense.”

What does that exactly mean? Generally, that means that you can count the amount that you spend against your taxable income, effectively lowering the amount by a certain amount. This amount is almost never equal to the amount that you spend. It does not mean that you are getting free money either. You have to spend money in order to lower your tax bill.

The most common category of miscellaneous itemized deductions used by a salaried doctor include unreimbursed job expenses. The amount that you can deduct must EXCEED 2% of your adjusted gross income. Let’s look at an example:

Bob earns $50,000 salary as an internal medicine resident. He spends $3,000 on meeting expenses that are unreimbursed by his program. Two percent of his $50,000 is $1,000. Bob can only deduct $2,000 of the $3,000 that he spent.

As a single filer with a salary of $50,000, Bob is in the 25% marginal federal tax bracket. That means he “saved” about $500 of federal taxes (25% of $2,000), but he had to spend $3,000 to do so.

If Bob didn’t go to the meeting, he would have “kept” $2,250.

The argument goes both ways. Itemized deductions are valuable especially for high-income earners with high business expenses. The more you spend on business expenses, the more that you can deduct. The bottom line is that you have to spend money in order to save money. There is no free lunch, but you can have a discount if you do buy it.*

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*Only a figure of speech. Meal deductions are also reduced by 50% in deductions. The argument is that you have to eat anyway, whether or not you are on business.

Pay your student loan interest while your salary is still low

Posted on March 26, 2015March 27, 2015 by SmartMoneyMD

Tax season is in full season, and it is timely to go over a few pointers to help everyone out.

For most medical students and residents, student loans remain in deferment or forbearance. This means that you aren’t obligated to make any monthly repayments. It also means that interest accrues and compounds during that time. It also means that your mid-6 figure loan debt continues to grow.

Ideally, you should try to make monthly payments whether it is on a 15 or 30 year repayment plan, to keep the magic of compounding from working against you. Financially, you ought to repay at least $2,500 annually in student loan interest for a tax deduction at the end of the year. It only works before you attain attending status, because there is an income limit that you will exceed after training. For 2012 and 2013, phaseout for student loan deduction begins at $60k for a single filer and $125k for a joint filing. In 2014, it starts at $65k and $130k, respectively. If your annual adjusted gross income (AGI) exceeds the limit, then there will be no deduction for payment of loan interest.

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