The Proper Start to Your Financial Journey

Author: James M. Dahle, MD
Author of The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing

Originally Published: Modern Resident, August/September 2015 

I’m occasionally asked to give very young physicians, i.e., students and residents, some financial advice. Typically these doctors have a low income, a dramatically negative net worth, little financial education and plenty of naiveté. In fact, I was recently questioned by a student how anyone could possibly spend more than $10,000 per month (to which I replied that I spent more than that on taxes alone.) The truth is that many of these physicians will find themselves spending more than $10,000 a month long before their net worth even reaches zero.

The most important advice I can give any student or resident is to LIVE LIKE A RESIDENT. That means not taking out additional loans during residency (you might be surprised how many of your peers cannot live on a resident’s income) as well as living a lifestyle similar to that of a resident for two to five years after residency. The slower you can grow into your attending physician income, the better off you will be financially. It is entirely possible to pay off your student loans, save up a big down payment for your dream house and be closing in on millionaire status within five years of residency completion. But most docs won’t be in that situation, and some docs will never get there, all because they grew into their peak income entirely too quickly. Make plans now to avoid being in this situation.
Managing student loans properly is also critical for the young physician. The two main options are to stay in the government programs (IBR or PAYE), planning to work at a 501(c)3 to hopefully qualify for Public Service Loan Forgiveness, or to refinance the loans as soon as possible and pay them off quickly. Recently, one private lender even started refinancing loans for residents while allowing them to make $100 a month payments until the completion of residency, saving many doctors tens of thousands in interest. At any rate, if you owe hundreds of thousands of dollars, you should become an expert in student loan management.

Many residents are severely underinsured. If people depend on you financially, you need a large quantity of term life insurance. Even if you cannot afford the $2-5 million a young physician family probably needs, at least buy a $1 million five year term policy and then upgrade when you finish residency. Disability insurance is similar. It will never be cheaper than during your residency and your need for it will never be greater. Try to buy as much as they will sell you as a resident, and then reevaluate your needs upon completion of training.

If you have children, you need a will that dictates who will care for them and who will manage your money for them in the event of your unexpected death. A simple will is inexpensive, whether done online as a do-it-yourself project or through a qualified attorney.

Start investing with your very first paycheck. Read the documents HR gives you and be sure to obtain any available match in your employer’s 401(k). You can also invest in a Roth IRA. Favor Roth (after-tax) accounts while in residency, as you are likely to never be in such a low tax bracket again.

Although you didn’t go into medicine for the money, if you fail to obtain a financial education early in your career and apply its lessons, you are likely to have significant regrets by mid to late career. Financial knowledge leads to financial freedom, and medicine is far more fun to practice when you no longer have to do it for financial reasons.