Financial Priorities for Resident Physicians

Financial Priorities for Resident Physicians

Who doesn’t LOVE a list? You have your standard “top ten tricks,” “dos and don’ts,” plus things to try NOW, the “dirty dozen,” red flags etc. Since residents’ time, energy, and money is so limited, the financial advisors at Fuoco Group decided to come up with a list just for you to help build a financial foundation while you transition from residency to physician practice:

Five Steps to Financial Success (aka 5 to Thrive!)

Being a resident is simultaneously the most exciting and most difficult time in your life. You’re finally putting into practice what you spent all those years learning at medical school, but from a financial standpoint, like most residents you’re burdened with a sizable student loan balance.

Don’t despair. As you finish up your residency, your net worth may be negative but your earning potential is positive. Think of financial planning as a journey: you pick a destination, make a roadmap, and then stick to the path. Your financial plan will be your guide, so creating the right plan is imperative. Identifying your goals is an important first step.

We get it. Your primary goal while in residency is to become a great doctor. But in order to do that you also have to devote some time to your finances - not completely neglect them. Unfortunately, physician wages are stagnating, job security is waning, and it’s becoming more important than ever to make financial decisions with a laser-like focus on your long-term goals.

Here are the 5 financial steps you should focus on while in residency:
1.    Building a Budget and Savings Plan
2.    Creating a School Loan Repayment Strategy
3.    Funding Retirement Accounts
4.    Identifying the Right Insurance Coverage
5.    Protecting Your Financial Future

Building a Budget and Savings Plan
Where many residents trip and fall is in failing to find the financial fortitude to make a budget and stick to it. We often hear the excuse that they are so busy, they don’t have time to keep track of what they are spending.
The reality is that in order to have the funds to make your student loan payments, pay for life and disability insurance, and set aside money for investments and retirement, you’ll need to create a monthly budget. When building that budget, you will need to consider both your expenses and your savings. In addition, tracking your expenses involves both fixed and flexible costs.
•    Fixed expenses: These are costs that you don’t have much control over and must pay each month like rent or mortgage, student loan payments, and insurance premiums. You’ll want to keep these expenses to no more than 50% of your take-home paycheck or net income. (Deferring your student loan payments entirely might seem attractive now, but you’ll probably regret that decision later in life.)

•    Flexible expenses: These are costs that you have more control over like groceries, dining out, entertainment and clothes shopping. Try to keep your flexible spending to no more than 25% of your take-home pay.

•    Savings: The last 25% of your paycheck should be allocated to retirement investments and savings, especially an emergency fund. Contributions to your 401(k) accounts are made from your gross income and already deducted from your take-home pay. Consider also funding a Roth IRA, and if you qualify, a health savings account (HSA). You can also deposit some of this portion of your paycheck to a savings account earmarked for a big financial goal, such as a down payment for a house, but make sure to build emergency savings first.

If you realize you’re spending too much based on your limited income, focus on your fixed expenses first. Lowering these costs will have a bigger effect on your budget than cutting out Starbucks. Make changes in discretionary purchases that save money, like choosing the $50 per month gym membership over the $150 per month option. Develop that kind of discipline for whatever area you may struggle in—whether it’s buying clothes, dining out, or other areas of discretionary spending where you have little self control.

Creating A School Loan Repayment Strategy
Face debt head-on. On average, medical school debt was $189,000 for 2017 graduates. There are a number of income-based repayment programs you can use to start attacking your debt as early as possible, so you can pay it off as early as possible. While it's nice to not have to make any payments while you work your way through residency, it can hurt in the end. Sure, you can stop making payments, but the interest doesn't stop accruing. Options include:
•    Student loan refinancing to lower the interest you pay in your loans.
•    Switching to an income-driven repayment (IDR) plan if you have federal student loans. These programs set monthly payments to match your income and cost of living, keeping them affordable. For example, under the Pay As You Earn (PAYE) plan, first-year residents would have monthly payments of $300 to $350, according to the AAMC.

•    Negotiate a physician signing bonus. Signing bonuses of up to $25,000 are a common way employers attract the medical professionals they need.

•    Public Student Loan Forgiveness Program. Physicians whose work qualifies as “public service” can qualify. Public service includes full-time employment by a 501(c)(3) tax-exempt nonprofit or public institution which many hospitals are.

•    Military programs for medical school loan repayment assistance. The Army, Navy, and Air Force all have them.
Funding Retirement Accounts
It’s never too early to begin saving for retirement. For most residents, retirement seems a million years away, but the reality is that it’s inevitable, so you need to start saving for it now. Take advantage of the opportunity to participate in employer-sponsored retirement plans so the funds you set aside will have time to grow, tax-deferred, until you need them. This is especially true for any retirement plans that come with an employer “match,” as that’s essentially free money that will help you reach your retirement savings goals that much faster.

Don’t ignore these investment vehicles as a resident:
•    Health Savings Accounts: A triple-tax-free account which is the best deal going in investing, if you are enrolled in a High Deductible Health Plan. Some employers contribute to these accounts.

•    Roth IRA: As a resident, you may be in the lowest tax bracket you’ll ever be in for the rest of your life. Take advantage of this tax-free account while you still can. You can create one for a non-working spouse from your income and you have until tax day of the following year to make your contribution.

•    A 401(k) or 403(b): The 401(k) is an investment account that is run through your employer. You can allocate a portion of your paycheck to your 401(k) account, and your employer may match a portion of your contribution. The money is designed to be withdrawn when you retire. The 403(b) plan is essentially the non-profit (including non-profit hospitals) version of a 401(k) plan.

There is a traditional 401(k) and a Roth 401(k). All hospitals offer a traditional 401(k) option, but some offer both. For a traditional 401(k), you get a tax deduction when you contribute to the account. Your money then grows tax-deferred (usually you pay a capital gains tax whenever you sell investments for a profit). When you withdraw your money, the money is taxed as ordinary income. For a Roth 401(k), your money grows tax-free, and you don’t have to pay taxes on the income when you make a qualified withdrawal at retirement. However, you don’t get a tax deduction when you contribute to a 401(k) like you do for a Roth 401(k).

As you climb up the ladder, it may make sense to reexamine whether to contribute to a traditional or Roth 401(k). For most residents, a Roth 401(k) has a larger tax benefit than a traditional 401(k) during residency. The reverse is true when you become an attending, because your upfront tax deduction with a 401(k) is higher when you make a higher salary.

Identifying The Right Insurance Coverage
You buy auto insurance for your car, and renter’s or homeowner’s insurance for your home, but have you bought insurance to protect what’s most important? YOU! Malpractice insurance is a no-brainer, but make sure you have disability coverage in place and a term life insurance policy.
Residency is the often the best time to purchase life insurance and disability insurance to protect yourself and your family in the event you die prematurely, or are unable to earn an income because of a covered physical or mental disability. That’s because premiums are generally based on your age and health status at the time you apply. When you are diagnosing your need for disability insurance, remember hospital-provided disability insurance will probably cover only 60% of your income.

Protecting Your Financial Future

So now you are done with medical school and starting to make a little bit of dough. An average salary for new residents is about $59,000. Although it is trending upward, and increases year over year, residency is not the time to take on unnecessary debt. Your mantra should be “protect, protect, and protect my future some more.” The goal is to set yourself up for success post-residency. So for now, learn to live on less. Establish a budget and stick to it – do not commit to high rents, car payments, and mortgages. 

Surveys show that although medical professionals are often thinking ahead and concerned about their future, many do not have an estate plan or advance directives for medical decisions set up. Estate planning ensures your money, assets, and children go where you want at the time of death. It will minimize the assets that have to pass through the expensive, time-consuming, and public process of probate. It may also minimize the amount of estate and inheritance taxes due. Advance directives generally fall into three categories: living will, power of attorney, and health-care proxy, all priceless in the event you should become incapacitated and unable to make medical decisions on your own behalf.

Residency is a great time to begin your financial education. Make sure that includes training in the coding and billing specifics for your specialty.  Pay extra attention at these sessions, because it will pay huge financial dividends down the road for you. Learning about the “business” of medicine is just as important to your future career as learning how to manage the clinical issues. Specifically, discuss the financial and operational issues with the doctors you work with that are well-versed in these details.

Contact Us: Building a firm financial foundation is all about taking the right steps -- and in the right order. If you want to set yourself up for financial success today and be ready to transition to private practice tomorrow, clarify your goals and follow our 5 step plan. Have questions? We have answers! Fuoco Group is a proud supporter of the medical community in New York and Florida, and has been serving physicians since 1996. Contact our healthcare accountants and financial advisors today, toll free: 855-534-2727.


In The News

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Press and Events

Fuoco Group and TFG Related Entities are proud to announce that Managing Partner Lou J. Fuoco, CPA, CEPA, CVB, has received the 2020 Palm Beach Post Community Choice Award for Best Accountant in Palm Beach County. Lou Fuoco and the Fuoco Group won this award in 2019 as well.
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