The first few years after residency can have an especially profound long-term financial impact, considering the time value of money. Here are a few tips for maximizing this time financially.
1) Avoid the “Typical Physician Lifestyle,” Especially Initially
The difference in income between being a trainee and a practicing physician can be 3–8 fold. After friends in other careers have been earning an income for nearly ten years, there is certainly an element of delayed gratification that compels people to purchase the kinds of items that they were unable to previously afford. Naturally, this has a bigger effect if it involves a big-ticket item, such as a large house or fancy car. There could also be pressure from friends, family, and society, who may have certain preconceptions about how physicians should live.
Lifestyle inflation perfectly in step with the increase in salary does not work well for a number of reasons. The progressive nature of the American tax code means that the marginal tax rate at higher tax brackets in states like California and New York increases to over 50% of your income. Medical school loans can be as high as the $3000-$4000/month range, which is comparable to a second rent or mortgage. Due to the late start, physicians have a shorter earning career and are a decade behind in contributions to retirement accounts. Despite these issues, physicians are nevertheless well-positioned to catch up, but not if the first few years after graduating involve excessive spending to make up for lost time.
2) Let Compound Interest Work in Your Favor Rather Than Against You
The typical interest rate for private and unsubsidized loans is in the 5–8% range. If your loans are above $200,000 or $300,000, which is pretty common, this can be a substantial sum. Unfortunately, this rate is much higher than many other kinds of loans, such mortgages, which are in the 3–4% range. This interest can dramatically add up over time. Even if you finish paying off your loans 10 years after graduation, this can represent well over half a million dollars, and the repayment amount goes up exponentially with each passing year.
If you repay your loans early, you can instead start earning a comparable rate of return for yourself. Of course, if you intend to do the Public Service Loan Repayment Program, the calculation is certainly more complicated, as you have to weigh your different career options more carefully.
3) For Most People, Boring Investments are the Way to Go
Most physicians possess skills that allow them to perform highly specialized tasks, whether it involves resecting a meningioma, treating schizophrenia, or managing Hodgkin’s lymphoma. However, being a financial expert is not a skill most possess, and it is certainly not taught in medical school.
The danger comes from taking your confidence in your field and applying it to the investment world. The reality is that most professional fund managers fail to beat the market, and the odds are even more dismal once investment fees are taken into account. Moreover, it’s difficult to know whether beating the market in a particular time period represented actual luck or skill. If you were to buy random combinations of stocks in the S&P 500, the distribution of returns over time would represent a bell-shaped curve, so it would be easy to retrospectively cherry-pick certain stocks and claim that they represented the decisions of an investment genius.
Even Warren Buffett recommends investing in low-cost index funds as the investment of choice for most people.
4) Think About the Incentives of Financial Advisors
There are excellent financial advisors out there. However, there are also financial advisors whose primary role is in sales and who may care little about the financial products they are selling. Before the 2008 financial crisis, many were perfectly content in selling financial instruments that they knew were dubious. Moreover, the fees involved in financial investments can have a dramatic effect on your long-term returns, even if they at the surface appear to be relatively small. For instance, a 2% fee per year over the course of a career could take out roughly half of your investment portfolio. Finally, regardless of whether you choose to hire a financial advisor or not, it’s probably worth it to spend a little bit of time learning about the basics of finance in order to make informed decisions.
5) Set a Budget that Accounts for Your Long-Term Goals
Do you want to retire early? If you budget really aggressively and live well below your means, it is entirely possible to retire after even ten years of practice. Nevertheless, the benefits of reaching early financial independence are profound even if you seek to work into your eighties. For instance, if you want to spend a few days a week teaching medical students or participate in international work several months a year, you could do so without worrying about the stress that would place on your finances. Outside of the direct clinical practice of medicine, you would have the ability to do something riskier if you so desired, whether that involved writing a book, starting a business, or whatever else you wanted to do.
Overall, thoughtful financial decisions early in your career could help you pay down debts more quickly, get the most out of your income, and avoid costly mistakes.
Hersh Sagreiya is a Fellow at Stanford University and recently graduated from Radiology residency at the University of Pittsburgh Medical Center. He is a 2017–18 Doximity Fellow.