Recently, I gave my residency chief talk. Every year, all 4th-year residents at my program get one hour to talk about any topic they wish. I decided to discuss personal finance for physicians, which will be the subject of many future posts. One of the goals of this blog is to educate physicians on many things we never learn in medical school. This is a big one.
Disclaimer: I am not a financial advisor. This is a starting point. If you are interested in learning more I suggest you read a few financial books listed below and as many “The White Coat Investor” blog entries as you can.
Q: What do musicians, artists, and physicians have in common?
A: Poor financial literacy
There are four key components to get ahead financially:
- Get educated
- Save (and keep saving money)
- Protect your assets
- Plan for the future
That’s it! Easy huh?
Ramit Sethi from the book and blog “I will teach you to be rich” compares personal finance to losing weight. Just like diet books, there are thousands of books promising you infinite wealth, short work-weeks, and infinite fertility. The basics are easy enough for both (eat less, exercise more = spend less, save more) but hard to follow.
- Get Educated.
You should read AT LEAST ONE financial book a year during your residency. Seven is better. The first book should be read in the first 6 months of residency to get you thinking about finances early. This may be the first time you ever have a real income. I recommend reading the White Coat Investor book, which is catered to physicians.
Other great books that cover the basics of personal finance include:
- I Will Teach You to Be Rich – Ramit Sethi
- The Millionaire Next Door – Thomas Stanley and William Danko
- The Four Pillars of Investing – William Bernstein
I also recommend the bogleheads.org blog. There are a ton of professionals and well-educated folks here that can answer any financial question you have. They were very helpful with helping my wife and I do the “Backdoor Roth.”
- Save (and keep saving money).
Physicians are poor accumulators of wealth. If you read “The Millionaire Next Door,” a survey of thousands of millionaires in the US, you will see physicians used as examples for Under Accumulators of Wealth (UAWs). There are many reasons, including:
- Late start
- Lack of financial knowledge
- Large financial overhead
- Lack of financial discipline
You may be wondering what “Large financial overhead” means. It is the presumption that physicians are supposed to be rich. Society expects you to buy nice cars, have nice boats, and live in nice neighborhoods.
So how can we be better prodigious accumulators of wealth (PAWs)?
Let’s look at two different physicians.
- Physician A is 32 and saved no money during residency. He will start with a $250k salary and put away 10% of his into a 401k. Assuming a 6% return over 30 years, he will have approximately $1,976,455 in his retirement account at the end of his career. Nice, but he certainly could do better.
- Physician B is 32 and saved $20,000 in a tax-deferred retirement account during residency, starting at age 28. She has a $250k salary and will save 20% of her income, the recommended amount by most financial experts. At the end of a 30 year career and assuming a 6% return over 30 years, she will have $3,838, 039 in her account and a much more comfortable retirement.
Isn’t that amazing? Physician B will have almost 2 million dollars more in her account because she saved what she could during residency and continued to save 20% of her gross income throughout her career.
What should residents do?
- Save your money in a 401k or a Roth IRA, depending on your income. I will explain these accounts in a future post.
- The vast majority of residents should rent their home.
- Consider Public Service Loan Forgiveness if you have large student loans.
- Educate yourself. Read at least one personal finance book each year.
- Live like a resident. Don’t overspend anticipating a higher income. The White Coat Investor recommends living like a resident for 2-5 years AFTER residency to really get ahead.
That’s it for part 1! My next post will further explore the personal finance basics for physicians. Questions? Comments? Feel free to post or email!