Financial Planning at Each Stage of Your Medical Career
After spending the majority of your life in school, you’re excited to start your medical career. But are you prepared to manage your income, while paying down debt?
According to a recent study published in the International Journal of Medical Economics, researchers found that “Residents and fellows had low financial literacy and investment-risk tolerance, high debt, and deficits in their financial preparedness.”
Factors like lifestyle creep and high student loan balances can cut your paycheck more quickly than you may anticipate. Read on to find comprehensive information about the financial stages you may experience throughout your career – and certain goals to keep in mind at each stage.
Stage 1: Residency
According to Glassdoor, the average base pay for a medical resident is $58,803. This is absolutely livable, but with student loans looming over you, you may still feel stressed about finances. The two most important things you can do right now are make a plan for your student loans, and, simply stated, live within your means.
The interest rate on each of your various student loans has a tremendous impact on the total amount you will pay over the life of your loan. As you know, interest accrues year-to-year on certain student loans; so, if you have a 7% interest rate on a $100,000 loan, you will owe $107,000 after the first year. But, after the second year, you don’t owe an additional 7% on the original $100,000 you borrowed; your interest compounds, meaning you owe 7% on the $107,000 which accrued after the first year. This is how student loan balances can get out of hand, and why doing everything in your power to get the lowest interest rate possible is so important.
You have many options for paying back student loans, and though you could take advantage of forbearance or deferment periods during residency, our advice is to start paying back your student loans right away – even if you’re only making minimum payments each month. If you think you may qualify for loan forgiveness or public service loan forgiveness (PSLF), you’ll want to start making qualifying payments as soon as possible. Even if you won’t qualify for PSLF, getting after your debt means you’ll pay less in interest charges in the long run.
You’ve probably also heard of student loan refinancing. If you’re able to refinance all existing loans into a new loan at a lower interest rate, you could save thousands over the life of your loan. If you’re interested in student loan refinancing, as well as your other repayment options, set up a complimentary consultation with Commerce Bank. We’ll help you understand your unique financial situation, and make recommendations to help you achieve optimum savings.
In addition to making a plan to tackle your student loans, as a medical resident, you should work on establishing responsible financial practices. Make a monthly budget, and make sure you’re not spending more than you have coming in. That way, when you take your first job out of residency, you’ll have already formed excellent financial habits that will help you build a solid financial future.
Stage 2: New to Practice
This is the optimum time to refinance student loans. Again, by refinancing at a lower rate, you could save thousands over the life of your loan.
After residency, your income will probably increase drastically. If you’re currently on a federal income-based repayment plan, your monthly student loan payment will also jump up. This is the ideal time to weigh all repayment options, and consider options like loan forgiveness and student loan refinancing.
It’s also key to start your career at the right salary. Salary negotiation can be especially tricky for female physicians, who earned an average of 27.7% less than their male counterparts in 2017. By researching your market value and having the conversation before signing your employment contract, you could end up earning thousands more each year.
You may also be going through major life changes around this time, like getting married, having children and buying a house. Again, by practicing fiscal responsibility and taking steps like automatically transferring a set amount to savings each paycheck, you’ll be in a good position to plan a beautiful wedding, or sign on a house where you can grow your family.
Stage 3: Established Physician
This life phase may begin around age 35 and end when you decide to retire. Your finances are stable, and you should probably work with a financial advisor to assist with investing and retirement planning.
Aim to pay down student loans and consumer debt as soon as you can. Don’t carry a credit card balance month-to-month. Consider opening a Roth IRA retirement account. You may also be interested in working with a private banker, who can provide attentive personal service and advice targeted to high-income individuals and families. Check out this podcast for information about retirement planning and wealth management.
It’s also important to keep in mind that your vision of financial success may be different from your peers. Living debt-free offers a sense of relief and freedom. You will also accumulate wealth during this time, and look at diversifying your assets. From stocks and bonds to 401(k) plans and Roth IRA’s, a financial advisor can help you make the best decisions for your unique family and professional situation.
Stage 4: Retirement
The time to relax and reap the rewards of decades of saving. According to this article by CNN, one rule of thumb is that you'll need 70% of your pre-retirement yearly salary to live comfortably. Be honest about your hopes and desires for retirement: do you want to travel? Are you interested in going back to school to study a subject you’ve always been passionate about? By understanding your projected retirement spending, you’ll probably be more motivated to build up savings – and enjoy your golden years to the fullest.
While you’ll enjoy a comfortable life and fulfilling career as a physician, it’s critical to think strategically about your finances. Anyone can choose to live outside their means and accumulate debt – fortunately, a financial advisor can help you plan for the long-term, while you focus on helping and healing your patients.
If you’d like assistance planning your student loan repayment strategy, Commerce Bank is here to help. Schedule a complimentary consultation today, and get on the path to maximum student loan savings.