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.
5 Truths Every Resident Needs To Know
July 1st is just around the corner and for those who are new to medicine or unfamiliar with residency life, July is the start of the new resident physician year. A resident physician is a doctor who graduated from medical school and is getting specialized training in his or her field of choice while still seeing patients. Residents are doctors who are still actively learning (like a student in school) while they are also working and earning money.
Besides experience, the main difference between a resident physician and a regular physician (like an attending physician who is done with his/her specialized training) is that resident physicians work a lot more and get paid a lot less. I’m still a resident myself, so as you can imagine, it’s a busy time in our lives. There are a lot of things we have to worry about, but finances shouldn’t be one of them. Here are 5 money-related truths every resident physician, and young professional with high earning potential, needs to know:
You are not guaranteed to be rich. Just because you are a doctor and will have a high salary, does NOT mean you don’t need a plan for your finances. Most people who make more money, get into more debt. Your time as a resident is not an excuse for poor money management and credit card accumulation. Many doctors’ net worth is not nearly as high as it should be considering how much they get paid. Make some financial goals for yourself now and try to avoid some common pitfalls. Learning a few finance basics as a resident can go a long way.
Spend less. Save more. Minimize debt. Things can be challenging during residency so try to live below your means or at least avoid living above your means. You don’t have to have a detailed budget but creating a basic spending plan to prevent yourself from accumulating [more] debt during training might be helpful. Save money in an emergency fund so that small, unexpected expenses like a car repair, urgent trip back home, or new cell phone doesn’t derail your budget or financial goals. Vacations can serve as a much-needed break from the stress of residency, but try to pay for them in cash by saving a couple hundred dollars from each paycheck. If you can, invest some money in index mutual funds via your work retirement plan or your own Roth IRA. The goal in residency is to keep your head above water financially and avoid getting into more debt.
Have a plan for your student loans. Choosing to “deal with it later” is NOT a plan. Read about the different student loan repayment options and choose one, likely an income-driven repayment plan, so that your payments are affordable in residency. Most residency programs qualify for public service loan forgiveness so take a couple minutes out of your day and sign up for this free program so that you have an option for your student loans to be forgiven after 10 years. When choosing a student loan plan recognize that the optimal student loan plan for you as resident may change when you become an attending. That’s okay. Just figure out the best federal repayment plan for you now, likely PAYE or Re-PAYE and consider hiring a company like Student Loan Advice or Student Loan Tax Experts once you finish training so they can run the numbers for you and help you determine the best repayment plan for you as an attending.
You need Insurance. As a resident physician, there’s a good chance you have health insurance from your employer that is either free or low cost, but health insurance isn’t all the insurance you need. Every resident physician needs long-term disability insurance. You may get a small amount through your residency program but that is unlikely to provide enough coverage. Most residents and attendings will need to purchase an additional individual long-term disability insurance policy. If you have a spouse, kids, or family members that you support financially, you may also need to purchase term life insurance. If you have a side business, you may also need extra liability insurance coverage. Figure out all of the insurances you need and make sure you get them.
Think twice before you buy a house. Owning a home can be a major milestone and lifelong dream, but it may not be wise to do so in residency. You cannot just compare the monthly mortgage price to the monthly rent price and make your decision. There are additional fees and costs associated with home ownership that can be challenging to deal with as a resident. Do what is best for your family, but make sure you consider all of the pros/cons of buying a home before you make the decision to rent vs buy.
6 of My Best Financial Decisions
As young professionals looking to make 2021 better than 2020, some of the decisions you make can have a huge impact on your overall net worth and ability to achieve your financial goals. In case you’re not quite sure where to start, here are some of the best money decisions I’ve made that have had a positive influence on my finances.
1. Learning the basics of personal finance. Dedicating time to learning the basics of personal finance has paid off much more than I can even imagine. Learning the importance of spending less and saving more has helped me gain self-control, live below my means, and set up an emergency fund. Understanding the different retirement accounts and the need to invest money has put me on track to retire early and have a high net worth in the not-so-distant future.
2. Deciding to get out of debt. This decision was a life changer. Before I realized that becoming debt free was so important, I had a substantial amount of credit card debt, a car loan that I was paying the very minimum on, and enough student loans to make your head spin. Once I realized that having these monthly debt payments was drastically decreasing how much money I had left in my pocket each month and once I saw how much I was paying each month in interest on all of this debt, I decided to make a change. Less than 2 years later, I paid off the credit card debt and car loan. Because I paid off this debt, I had more money left over from each paycheck and was able to use that extra money as an emergency fund and contribute more to my retirement fund. If you, too, decided to get out of debt, I’m confident it will have a drastic improvement in your net worth as well.
3. Living with a roommate. To be honest, this was a tough decision for me to make. As a doctor who was in her late 20s and moving to a new city, I really wanted my own space. I had lived with roommates for almost a decade and wanted to have something of my own. Although I could certainly afford my own apartment, deciding to live with a roommate saved me so much money! I was able to spend $600 per month less on rent which amounts to savings of over $7,000 per year. With this extra $7,000, I was able to invest a substantial amount of money and pay off my credit card debt and car loan relatively quickly. Although there were times that I wanted to have my own place, learning to live with another person allowed me to decrease my debt and build my net worth much faster. Take time to consider if this is something that might work for you as well.
4. Setting up a spending plan. When I started learning about personal finance, many of the books I read mentioned the importance of having a monthly budget. Although I tried to have a budget, I felt it was too restrictive. I started to get anxious whenever I had to purchase even one thing that wasn’t in my budget. Because of this anxiety, I scrapped the budget and set up a less restrictive “spending plan.” In my spending plan, I had a certain percentage of my paycheck invested for retirement, another percentage that automatically went to a savings account to help me pay off debt and save up an emergency fund, and another chuck of money that went to checking account I used solely for paying bills. Any money that was left over after those allocations, I was free to spend how I saw fit. This allowed me to enjoy my life a little more without feeling so restricted. If you also find that budgets are hard to follow, consider setting up a spending plan.
5. Buying a slightly used car. As a young professional who needs reliable transportation, I needed a car. Although I was tempted to get a brand new car that looked nice and had all of the newest features, getting a new car was going to cost me a lot of money. Paying for a new car meant I would have to finance the car through the bank or car dealership which meant I would get into tens of thousands of dollars in debt and have a substantial car payment every month for the next 4-6 years. Although I could have afforded the payment, buying a slightly used car instead of a new one, was going to save me so much more money. Since buying a slight used car that was only 2.5 years old cost almost half as much, I was able to save a substantial amount of money each month and use that savings to invest, travel more, and save up for retirement. Buying the used car also added a dose of humility and reinforced the importance of living below my means. If you’re considering buying a new car, I’d encourage you to consider getting a slightly used car instead. The cost savings could be significant.
6. Contributing money to retirement early. As a young professional with a lot of uses for money from each check, I seriously contemplated not contributing towards retirement. I was in my later 20s at the time and thought “I’m many years, if not decades, away from retirement. Holding off for a few years probably won’t make that big of difference.” Thank God, I changed my mind. One of the most powerful indicators of how much money we make investing is time. The sooner we invest, the more money we make in interest and the sooner that money starts to make even more money for us in return. This concept of compound interest is key to the overall value of our investment portfolio and net worth. If a person starts investing in their late 20s vs their late 30s, the person who invested earlier will have exponentially more money and a drastically higher net worth because of compound interest. If you are on the fence about investing toward retirement, I’d encourage you to make the decision to start today.
Now that you’ve read about some of my best financial decision, think about some of the decisions you’ve made. Which decisions have had the largest impact on your net worth? What things could you change in the future?
Are Student Loans Good Debt or Bad Debt?
As many of us are well aware, the cost of a college education has rapidly increased. In fact, many college graduates finish school with tens of thousands of dollars in student loans to repay. While some people feel as though the price of their degree was worth it, many others aren’t so convinced. Truth is, student loans can be “good debt” for some people and “bad debt” for others. Let’s determine where it falls for you:
1. Did you actually earn a degree? Many people finish high school and enroll in a college with good intentions to get their degree. Unfortunately, life doesn’t always work out as planned. Due to the rising cost of tuition, work obligations, competing expenses, or family responsibilities, some people may have to post-pone their college dreams. Accumulating student loan debt, without a tangible degree to increase your potential job opportunities and salary can be detrimental to your finances. If you obtained a degree then the student loans may be "good debt." If you didn't then they may be "bad debt."
2. How much debt do you have? While getting a college degree is a notable accomplishment, it’s important to examine if you did so at a fair price. Some people get scholarships to pay for the entire cost, others have to maximize federal and private loans to cover their basic needs. Where do you fall on this spectrum? The more debt you have, the more you may have to consider whether the debt was worth the added benefit of the degree.
3. Were you able to get a job after graduating? Not all colleges are created equal. Some schools may be better at helping their graduates get jobs than others. Unfortunately, not all degrees are created equal either. Some degrees such as those in engineering or science may be more marketable or have better job prospects than others in language arts or history. If you earned a degree but are struggling to find a job with that degree, then it may be time to question if the loans you took out to get the degree was money well spent.
4. Does the job you got earn you a decent salary? “Decent” can vary from person to person. The general rule of thumb is to make sure your student loans don’t exceed your [projected] income. For example, if you get a degree in education and the average salary for teachers is $45,000 then your student loans should not exceed $45,000. Some people extend this rule to 1.5x their salary, but usually anything more than can be challenging to pay back. Although these rules may not apply to everyone, having a general guideline can help us ensure that we aren’t borrowing more money than we’ll be able to repay. If you borrowed less than 1.5x your salary then perhaps the student loans were a good investment.
5. Does the degree you earned lead to other opportunities? Taking out student loans can be about more than getting a degree to increase your pay. Aside from the job opportunities and salary the degree may or may not have afforded you, think about other opportunities. Did the skills you learned with the degree allow you to accomplish a lifelong goal? Did the people you met while getting the degree give you access to lucrative networks and people that can help you going forward? Did it provide you with invaluable life lessons, maturity, or the self-confidence needed to help you gather the courage to go after your goals with reckless abandon?
My point: Obtaining student loans to attend college is something that is commonplace. While the worth of a degree shouldn’t be judged purely on how much money it cost you or the job you obtained afterwards, one must be realistic. If student loans are going to be considered “good debt” then we must ensure they meet a few criteria. We should refrain from taking out much more than our projected salary, use the degree to advance in our careers, and leverage our time in college to obtain access to other invaluable opportunities.
Are you debt-neutral, debt-averse, or “debt-particular?”
Most of us have financial goals we’d like to achieve, whether that’s owning a home, earning a certain salary, or having a set amount of investments and passive income. We may even desire to become debt-free. When it comes to debt, most people fall into 1 of 3 categories: Debt-Neutral, Debt-Averse, or Debt-Particular.
DEBT-NEUTRAL:
Debt-Neutral is the category used to describe people who lack strong feelings about debt. I don’t think anyone likes debt, but some people may simply feel indifferent to it. Perhaps they view debt as a way to make things more convenient and use it to purchase things they wouldn’t ordinarily be able to buy.
Unfortunately, being debt-neutral, especially when it comes to consumer debt, can get us into trouble. Borrowing money to purchase things, especially items that decrease in value over time (like cars, clothes, and electronics), can can lead to bad habits that lower our net worth. While credit cards, equity loans, and financing deals can make things more affordable in the short-term, they often end up costing us more overall, especially when we consider the interest that is added.
DEBT-AVERSE:
Debt-Averse is the category used to describe people who hate debt. This category is usually full of young professionals who took out student loans or racked up credit card debt early in life. Now they may be in the repayment phase and likely loathe every second of it. They realize that the more debt payments they have, the less money they can use to save and invest the way they would prefer.
People who are debt-averse are usually “in tune” with their finances and have a budget or spending plan that allows them to pay off their credit cards, student loans, and auto loans by a certain date. They may even be hesitant to get a mortgage. While this may sound aggressive, it has several advantages. Being eager to pay down debt, will help you save money over time since you won’t have as many loans to repay. Plus, it also changes your spending habits and mindset. The process of paying off debt is a long-standing practice of frugality that makes you less materialistic and teaches you to live below your means. When you no longer have debt to pay back, you can be a lot more selective in the jobs you take, number of hours you work, and quality of life you live.
DEBT-PARTICULAR:
Too much of anything can be detrimental, so people in this group attempt to use debt to their advantage. They are usually experienced investors who know better than to purchase liabilities (things that decrease in value) with borrowed money, but may feel differently about assets. Instead of being indifferent to consumer debt or living a life of frugality to pay off their loans in record time, they have a different philosophy: use debt to increase your net worth by borrowing money to purchase things that increase in value over time.
Instead of simply paying off debt, they focus more on increasing their income. Many people in this group have read some investment guide or come across Robert Kiyosaki’s “Rich Dad, Poor Dad” and realized that purchasing assets is one of the ways the rich get richer. They may have even considered taking out loans to purchase real estate or invest in a business that could increase in value and create an additional revenue stream.
My point: There are 3 groups of people when it comes to debt. Those who are debt-neutral and have a decent amount of consumer debt with no realistic timeframe on when they will pay it back. Those who are debt-averse and have an aggressive plan to pay back their debt in record time. Lastly, those who are what I call “debt-particular.” They avoid bad debt (by not borrowing money to purchase things like cars clothes and electronics that decrease in value), but don’t mind good debt (taking out loans to invest in assets like real estate or businesses that may increase in value overtime or provide an additional revenue stream).
Which group do you think you are in?