Financial success starts with making good choices. Whether you’re in your first year of residency or are an established attending, there are things you should do to build your own strong financial foundation.
Here are our Top 5.
A financial emergency is a life changing event that impacts your finances directly and severely. A tree falling on your car does not qualify as a financial emergency, since this is likely covered by your insurance. But losing your job and having to weather the transition between positions does.
Experts agree that you should set aside three to six months of living expenses for unexpected events. As a resident or an attending, you are in a more stable work situation than the average person. But your finances might not allow you to save that much right away. So, start with saving one month of living expenses and then build from there.
You’ve invested a lot time and money building your medical skills. You’ve made that investment because you’re passionate about helping people. But you also expect a financial return for the efforts you’ve made.
But what if some unexpected event prevents you from working? What if that prevents you from living the lifestyle you expected? How will you replace that income?
Disability insurance can provide a safety net if a qualifying injury occurs.
According to the AMA, experts typically recommend that you protect 60-65% of your take-home income with disability insurance. You can achieve this through individual or group policies. However, since a policy has the potential of a large payout, it isn’t cheap. In fact, many residents can’t afford to buy the amount of insurance they will need right away. That being said, it’s still advisable to get as much disability insurance as your budget allows. Then, you can supplement with additional policies as you progress in your career.
Of course, you want to live within your means, but you probably also want to be able to enjoy the money you’ve earned and have enough savings to retire when that times comes.
To strike this balance, it’s important to understand where you are spending your money now and how you want to spend it in the future. Remember, budgeting is not as much about being frugal as it is about being intentional.
To accomplish this, it’s important to create a budget. To start, you might want to consider a simple 50/30/20 budget. With this approach, 50% of your after-tax income goes toward your needs, like rent, food and utilities. Another 30% goes toward your wants, like taking a vacation or enjoying a meal out. The remaining 20% goes toward your savings, like retirement, emergency savings, making extra payments on debts you are trying to pay off, or any other unique savings goals you may have. Read more about it here.
Employer-sponsored retirement accounts, like 401(k)s and 403(b)s, allow you to set aside pre-tax income that can grow tax-deferred. Many employers offer the added benefit of matching a portion of your contributions, which benefits you even more. The sooner you start contributing to a retirement account the better, as earnings grow and dividends compound over the years.
Your employer-sponsored retirement account likely offers a group of mutual funds, which are vehicles that combine money from different people and institutions to buy investments, like stocks and real estate. You can choose to pick the individual funds you want, based on your specific goals and risk tolerances.
If you’re not sure about a fund or are curious about its costs, we recommend that go to one of many reputable sites like Morningstar.com to do some research.
Consider this: a $5,000 credit card balance at 19% APR with a 2% minimum payment will take you more than eight years to pay off. And during that time, you’ll pay almost as much in interest as you did in principal.
So, it’s a good idea to prioritize high-rate debt by making extra payments on it. It’s also important to avoid accumulating debt on credit cards. If you’re not building enough momentum to pay off your credit card, it may make sense to consider consolidating it to either a promotional rate credit card, or a personal or secured loan.
Your financial life will be filled with choices. Creating the right foundation, like the ones we outlined here, will put you on the road to long-term financial success.
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