Some of the best financial advice ever given to me by a colleague is encompassed in these four words: “Live like a resident.” Simple, yet profound. There are really five pieces of advice encompassed in this short phrase.
1) When you are a resident, don’t live like an attending. It appalls me to see someone taking out just as many loans as a resident as they did in medical school. They might be special doctor loans to live off of, it might be a car loan for that car you now feel entitled too, it might be a big mortgage, or it might just be running up the credit car loans. When you’re a resident live like a resident. You’ll make $40-50K, which is the average household income of an American. These few short years give you perspective on how your patients live that you can carry with you for the rest of your life. Maxing out a $5000 Roth IRA is a big deal when you only make $40,000 a year. You’ll sometimes have to decide between an upgraded cell phone plan and taking a road trip. Believe it or not, living within your means doesn’t get any easier whether you make $40,000 or $400,000, you’re just moving bigger numbers around in your budget.
2) When you finish residency, don’t upgrade to an attending lifestyle. If you could live in a 2000 square foot home in a mediocre neighborhood as a resident, you can still do it. Doing so allows you to do several things- First, you can get a jump start on student loans. Now that they’re all at 6.8% rather than the 1.9% my classmates refinanced at, paying them down quickly is much more important. Second, you can get your portfolio jumpstarted. As we saw in a recent post on compound interest, the early years of saving are the most important because they lend more time to compounding. Also, as can be seen given our current relatively low-yield/low-return environment, you’ll need to save more to retire comfortably compared to preceding generations. What better time to get started than right out of residency? It will be far harder to cut back your lifestyle later, than never to have upgraded it in the first place.
3) Work hard. You’re probably coming out of a residency where you’ve gotten used to 60-90 hour weeks. As one of my emergency medicine colleagues recently said, “I just got done working 20 shifts a month for three years; Why can I now only work 14?” He figures if he only cuts back to 17 he gets an improved lifestyle and a few extra thousand a month, which will go a long way. The marginal utility of money is much higher for him now than it will be in 20 years, and it will probably be worth it to him to trade more of his time for money now than later. Working more has the added benefit of improving clinical skills and establishing business contacts with physicians and others. The learning curve is still steep for a year or two out of residency, so why not pretend you’re a fellow and just upgrade your lifestyle a little.
4) When you do upgrade your lifestyle, remember that 5 times the pay doesn’t equal 5 times the lifestyle. You will pay far more in taxes as an attending. You will have a lot more business and CME expenses also. Many doctors in their first years out of residency will find more mouths to feed at their tables. Nicer cars burn more gas and cost more to repair. Bigger houses cost more to heat, insure, maintain, and furnish. You’ll also need to get serious about saving for retirement. Bottom line? 5 times the salary probably only means you can double or triple your lifestyle. The longer you can delay upgrading, the more financial benefit you’ll see. Sure, you don’t want to delay gratification until you’re 90, but just holding on a little longer after residency can make a huge difference later.
5) Remember that part of your salary is to make up for the fact that you spent over a decade of your life to train for your chosen profession. Your college roommates not only have lower loans, but they also have had more years for their savings to compound. You will need to save a higher percentage of your income (and a much higher percentage of your net income) to get to the same place for retirement as them. Whereas they are likely to do okay with a 10-15% savings rate, you’ll probably need to save 20-25% of your income. If your lifestyle upgrade encompasses those extra funds, you’ll never catch up.
So if you want to have the financial freedom to work fewer hours, retire early, explore lower-paying niches of your specialty, do medical mission work, or just have nicer stuff down the road, LIVE LIKE A RESIDENT during and for at least a few years after residency.
Loading ...
I’d suggest modifying the advice of living like a resident after starting out as an attending to only slightly upgrading your lifestyle for the first several years. If you spend 10 – 20,000 a year on fun stuff in your first years as an attending you’ll feel that your lifestyle is much better than as a resident but you can still save a huge amount. Pick the one thing that’s most important to you to splurge on and keep everything else in your budget at residency level.
That was my strategy and allowed me to pay off my med school loans in three years. I kept the same car and lived in a modest apartment but spent extra money to travel around the world.
Good luck on your site and I’ve been enjoying reading your entries so far.
Yes, you’re probably right. The truth is you can probably double your lifestyle and STILL get loans paid down and save up some money. But if you quadruple it you’ve shot yourself in the foot.
Pingback: From Starbucks to Nurse to Doctor - The Nerdy Nurse
Pingback: Student Loans vs Investing | The White Coat Investor
Pingback: Is Medical School Still Affordable? | The White Coat Investor
This is a nice idea, but it doesn’t really acknowledge the extent to which its feasibility is almost 100% dependent on when one has kids. Saying on survived in a small (in our case 800 SF) apartment in a crummy neighborhood so you can do it for a few years afterwards, too, doesn’t make as much sense when your kids are hitting school aged and you need a reasonable school district, and they are starting to need their own bedrooms, etc…. I would love to see more attention paid to how to handle this aspect of things!
“This is a nice idea, but it doesn’t really acknowledge the extent to which its feasibility is almost 100% dependent on when one has kids. Saying on survived in a small (in our case 800 SF) apartment in a crummy neighborhood”
This is one reason to consider relocating. I managed to put myself, my wife (primarily stay-at-home), and four kids through residency, including two kids through braces and buying one a car. You learn to pinch pennies quickly. We pretty much wrote off residency interviews in places like Seattle and Irvine because they were simply unaffordable on our budget and moved to middle America, where we’ve managed to hold down a 2700 square foot home in a nicer but less populated suburb with pretty decent public schools.
Now that I’m an attending, I’m taking a job a little further out, driving against traffic, and bringing home federal loan repayment, holding onto my moonlighting gig, and for two years, investing heavily in getting student loans off my back. I figure it’s a two year investment towards getting my life off to a good start. There will be more time for backpacking and solitude thereafter.
Yes, having a few extra mouths to feed, clothe, and house makes a huge difference. But the point of not growing into your income all at once is still valid.
@WCI: Fair enough!
I suppose I’m just mourning that I’m not in a position to do more of this – and wondering about other suggestions targeted more towards my situation. In particular, the discussion of skewing long work hours early struck me as pretty much 180 degrees away from the other women-physicians-with-kids, who are constantly trying to find ways to deal with the fact that the time they most need to limit their hours (when kids are under 5y) are the times the system expects you to work the most hours (and for the least pay).
Do you think there are any suggestions you would have aimed especially at people who have kids earlier in their careers (or get through residency a little older – in my case, I did an MD/PhD) and/or the spouse who is the physician is the mother, not the father?
Pingback: How Dave Ramsey May Be Leading You Astray | The White Coat Investor- Investing And Personal Finance Information For Physicians, Dentists, Residents, Students, And Other Highly-Educated Busy Professionals
Pingback: California Physician Home Loans | Student Loans vs Investing
Pingback: Oregon Physician Home Loans | Student Loans vs Investing