Like many other resident physicians, I had credit card debt when I started working. I accumulated the bulk of it during my postgraduate days living in a high-cost-of-living area when I was 22, but I added to that amount when I had to pay for med school applications, secondary essay fees, and travel costs to interview. During my time in med school, I lived off student loans, but during the 3 months between my med school graduation and my first paycheck as a resident doctor, I had accumulated even more. I needed money to move to a different state, pay my first month’s rent, and cover things like food and gas while I was awaiting my first residency paycheck. I didn’t have a spouse to help and my parents, while loving, didn’t give me the money I needed either. Before I knew it, I had $10,000 in credit card debt. Fortunately, I was able to pay this off in a year a half after starting residency. Here’s how:
I realized I didn’t like being charged interest on money I’d already spent. My first temptation was to delay paying it off. I was only making around $60,000 per year as a resident so I didn’t have a lot of extra money to spare. I knew that my income would increase when I finished residency, so it seemed logical to just wait to pay it off when I got the income boost. That changed the minute I logged into my online bank account. I was shocked when I realized I was being charged $100/month in interest. When I looked further, I saw that the interest rate on my credit card was 12%. This meant that I was going to pay an extra $1,200 a year in interest until I paid off the debt. Seeing how much interest I was being charged motivated me to pay it off quickly, even while I was still in residency.
I decided to pay it off in less than 2 years. As most folks know, a resident’s salary is not very high. Paying off $10,000 in credit card debt when you’re only making $60,000 a year can be tough, but I made a decision to do it. I knew that if I delayed paying it off, each dollar I was paying in interest was less money I could use to invest and build my net worth. Although I could have dragged the payments out during my entire time in residency, I really wanted to pay it off sooner so I could have the freedom to invest more money. This motivated me. I made a goal to pay it off in 2 years. (One year would strain my budget too much but 2 years gave me a realistic goal I could look forward to).
I lived with a roommate to make extra monthly payments. As a resident, I knew I would be working a lot. Although I really wanted my own living space, I knew I wasn’t going to be home very often to enjoy it. I figured I might as well share the space with a co-worker and use the money I saved in rent to pay down my debt faster. So that’s what I did. I got a 2-bedroom 2 bathroom apartment for $1700 a month. My roommate split the rent, electricity, cable, and internet bills with me. Instead of paying almost $2000 a month for rent and utilities, I only had to pay half of that cost. Saving nearly $1000 a month in living expenses gave me extra room in my budget to not only pay down my credit card debt but to also save a little money in cash to start an emergency fund.
I set up automatic deductions to pay $500 each month. This seems aggressive but $500 was my number. I knew I wanted to pay this exact amount each month, but I also knew I couldn’t be trusted to make this payment of my own volition. Thus, I had 20% of my net pay go to an entirely different checking account, which I called my “wealth building account.” I set up a $500 deduction from this account to my credit card each month and let the remainder of the money build up in that account as my emergency fund. Because this money was deposited and deducted from an entirely different account, I never saw the money in my main account and thus didn’t miss it too much. I got used to living on the remaining 80% of my net pay. Doing this did make me feel more “broke” than some of my co-residents who had more disposable money to spend each month, but it made me feel good to know that I was paying down my credit card debt and building up my emergency fund at the same time.
I used money from my tax refund and the first stimulus checks to pay it off. When I was in my first year of residency, coronavirus hit. While this was devastating for many reasons, the silver lining of this occurring meant I got a stimulus check. I used most of the money I got from this stimulus check and my tax refund in early 2020 to make extra payments on my credit card debt. While many other folks went online shopping with their money, I was paying down my debt. When I got the second stimulus check, I was able to pay off the credit card debt completely. A goal I had set for 2 years, had been accomplished in 18 months. I was thrilled.
I was diligent about not accumulating more debt once the balance had been repaid. Making that final payment to my credit card felt great, but I’d be lying if I said it lasted forever. Ironically, I was very tempted to charge even more expenses on my credit card, especially when I wanted the newest iphone, newer clothes, or the ability to take more vacations with my friends. Many people argued that I could just charge the money on my credit card and pay it off when I became an attending, but I chose not to go that route. I hate debt and the more debt I had the less I could invest to grow my net worth. Plus, I didn’t want to set bad habits. As someone who blogs a lot about personal finance, I know that finance is more about changing behavior than being good at math. If I got into the habit of buying things that I couldn’t afford now, I would likely buy more than I needed, accumulate substantially more debt, and have a harder time being debt free as an attending. I wanted a different life.
What about you? Are you developing bad habits by purchasing things you can’t afford using debt or are you willing to do what it takes to pay down your debt quickly and start investing, even while you’re in training or making the median income? If I can be credit card debt free, so can you.
6 Financial Mistakes Most Residents Make in Training
As resident physicians most of us are just trying to keep our heads above water. While our time in training helps us become better doctors, many of us do some unwise things in terms of finances. Here are 6 of the top financial mistakes residents make in training:
1. Using the promise of future money to justify unwise purchases. I’ve seen numerous residents buy luxury cars and other expensive items during training. Although some have enough wealth or savings to afford these items, many others do not. There is nothing inherently wrong with having nice things, but going into debt to buy something you don’t need may not be the wisest decision, especially while you are in residency. Just because our salaries are set to increase once we finish training does not mean we should accumulate more debt before we get to that stage or finance a car with high monthly payments. Many of us already have six-figure student loan debt. Adding a high car loan to that amount at a time when we are only making around $60,000 a year can decrease our monthly cash flow and delay our ability to build wealth.
2. Not having a plan for their student loans. Some residents, especially those who live in high cost of living areas, find it challenging to cover their monthly expenses on their resident salary. As a result, they choose to defer their student loan payments until they become an attending. Although this may seem like a smart way to improve your cash flow, pausing student loan payments causes even more interest to accrue on your loans, forfeits interest subsidies you may qualify for, and prevents you from meeting qualifications for the public service loan forgiveness program. Instead of deferring your loans, come up with a plan. Look at the various income-driven repayment options and pick one you can afford. Fill out the employment certification form and take advantage of your time in residency in which you can make low payments that still count toward public service loan forgiveness.
3. Failing to ensure themselves against catastrophe. Many of us are healthy and tend to assume that things will work as we plan. Unfortunately, life has an inevitable ability to surprise us with situations we didn’t see coming. One of the best things we can do as residents is protect ourselves and our future income by setting up an emergency fund and getting disability insurance. Saving up money in an emergency fund will give us a way to cover unexpected expenses without having to take out debt. Getting an individual disability insurance policy, outside of what is already offered through our residency, will provide give us a steady monthly income if we happen get disabled from a car accident, diagnosed with a progressive medical condition, or suffer a mental health disorder that prevents us from working full time as physicians.
4. Racking up high-interest credit card debt. Many residents have such a large amount in student loans, that they have become immune to debt. They assume they can just pay it off when they get their attending jobs. Because of this thinking, many residents purchase things before they can fully afford them and end up taking out even more debt during training. They charge vacations, large purchases, travel expenses, and other unnecessary items on credit cards that end up costly substantially more money in the long run. Although we may be able to pay off our debt as attendings, it still accumulates interest while we are in residency. Plus, money spent towards credit card bills in training is less money we have available to invest and build our net worth. If you absolutely need money in training to cover things like moving expenses or childcare, then take out a low-interest personal loan with a plan to pay it back as soon as you are able, but try your best to avoid high-interest credit card debt.
5. Not using retirement accounts to build wealth. Many residents are not taught the basics of personal finance in training and may not know or understand the benefits of investing early. Perhaps they have heard of a Roth IRA or are aware that there is an option to contribute to the retirement plan at their residency, but they consider retirement a long way away and do not know that taking advantage these accounts in training can jump start their ability to build wealth and create the life they want. The truth is, because of inflation, we cannot save our way to wealth. We have to invest. Because of the power of compound interest, the sooner we invest, the sooner we build our net worth. One of the best ways to build our net worth is by investing in the stock market on a consistent basis. Because of the tax benefits, asset protection, and retirement matches from our job, investing through retirement accounts is one of the best ways to build wealth.
6. Buying a home without considering the full cost. There’s nothing inherently wrong with purchasing a house, but I’ve noticed that many residents do it for the wrong reasons. They incorrectly assume that if their projected mortgage payment is less than their estimated rent payment then they should buy a home. However, comparing rent prices to mortgage prices will give you an incomplete picture. There are transaction fees involved in buying a home (like attorney fees, inspections, and appraisal costs) that can add thousands more dollars along with the added costs of maintaining a home (like homeowner’s insurance, property taxes, and repairs) which can easily add another $400-500 to your monthly mortgage amount. The truth is, even if the rent price is higher than the mortgage price, the added fees associated with home ownership can still make renting cheaper. Be sure to count the full cost when deciding to rent vs buy.
My point? As resident physicians we aren’t expected to do everything right but avoiding these 6 financial mistakes will help ensure that we are setting ourselves up for financial success when we become attendings.