Whether you are days, months, or years away from moving from residency or fellowship into your journey as an attending physician, it’s important to think about benchmarks for yourself financially.
Below, we’ve outlined some important considerations that should be part of your preparation.
Too many Americans – even physicians – tend to spend what they earn. Frugality is not a concept we generally embrace. Instead of saving our money, we focus on building our lifestyle, and as a result end up building debt. As a resident, it’s easy to fall into this “lifestyle trap” knowing that in the not-too-distant future, your income may more than triple.
But as you prepare for your first year out of residency, you should start to make choices about your financial priorities. As a guide, it’s best to stick to a 50/30/20 plan, in which 50% of your income goes toward your needs (housing, food and bills), 30% goes toward your wants (travel, entertainment), and 20% goes toward paying down debt and building your retirement and other savings.
As you transition out of residency – and begin to enjoy a nice bump in pay – it’s a good idea to maintain your resident lifestyle for at least the next two years. Why? Because your first two years as an attending physician represent the largest financial opportunity of your life. If you can hang on and live like a resident just a little longer and use your extra income to chip away at your debts, you can set yourself up for financial success the rest of your career.
Think of it as your financial residency.
As you finish your residency, you’ll incur a handful of unique expenses including certification costs and travel expenses. Hopefully, you haven’t had to dig too deeply into your emergency savings, but it’s likely you’ve used some.
Moving forward, we recommend that you maintain emergency savings equal to three to six months of your living expenses. On the way to this target, focus on smaller goals, like reaching $1,000 in savings, then one month of expenses, and eventually $5,000 in emergency savings. The benchmarks will give you a sense of accomplishment and progress.
As residency programs vary in length, it’s possible you’ve been contributing to your retirement account anywhere from three to eight years. So now that you’re moving on, where to go from here?
Let’s assume you’ve been making a salary in mid $50,000’s, have no employer match on your retirement and have been contributing 6% of your salary to your 403b or 401k. In a three-year residency program you should have about $10,000 saved up.
Is this where your retirement savings should be at this point?
Actually, it’s not about the amount you’ve accumulated, but the behavior you’ve established. If you made a habit of saving at least 6% of your gross income toward your retirement goals, then you’re in good shape and are on the path to reaching your financial goals.
Today, debt is a tremendous issue for many physicians graduating from med school. In fact, it’s not uncommon for new residents to have student loans of $200,000 or more. In the 2020 Medscape Residents Salary & Debt Report, 42% of respondents indicate their resident salary isn’t enough meet their cost of living needs. Sadly, that means they have to take on even more debt.
It’s no secret that debt is a huge stress point for young physicians. With balances so large, it’s easy to feel overwhelmed.
What can help ease this anxiety is to develop a concrete plan to bring down student loan debt. Set goals and prioritize which debt you’ll address first. While your student loan considerations are time sensitive, there are consolidation options that you might want to consider.
You’ve invested money and time into your education with the expectation of future earnings. Disability insurance will protect your income in the event that you can’t work.
During residency you likely purchased as much disability insurance as you could fit in your budget. According to the AMA, experts typically recommend that physicians protect around 60-65% of their net income with disability insurance policies. As you complete your residency, prepare to supplement this policy to maintain the same coverage percentage on your new income.
- Lifestyle is an intentional choice. Understand how you spend your money and assess whether that aligns to your priorities.
- Build toward your emergency savings targets, starting in $1,000 increments.
- Build the habit of contributing to your retirement.
- Prioritize your debts with a plan to pay them down and then pay them off.
- Be prepared to supplement your disability insurance coverages based on your new income.
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