Imagine this, picture this: You’re finally done with medical school! Dreams of reclaiming your time, diving into your profession, and 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 three 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 Medical School
Another very common pitfall that we see residents making is delaying the decision of what to do with their student loans. Many physicians aren’t sure what they are going to do with their medical careers. On top of that, finances are tight. They wonder how they are going to make it from month to month. 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 is to enroll in PSLF (public service loan forgiveness) as soon as possible (Assuming you work for a qualifying 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.
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 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, saving for retirement or paying down their student 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.
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.
Guest 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”.
He’s glad to answer any questions about finances for physicians and the travails of residency.
You can check out his latest podcast at www.DoctorFreedomPodcast.com.