Managing Your Finances During Residency: A Physician’s Guide

November 18, 2022
After spending the last two decades in school, there’s nothing quite like that first paycheck in residency. Now that you make money, what are you going to do with it? You can treat yourself, focus on your loans and financial goals, or ideally, find a healthy medium. Being a financially responsible adult doesn’t happen overnight. Build good financial habits now in order to accomplish your financial goals in the long term. Read on for some tips every responsible medical resident should consider as you begin your career. 

*Disclaimer: This post is meant for educational purposes and should not be seen as financial advice. 

Manage Expenses

Transitioning from a medical student who is living off of loans to a resident who is actually earning a paycheck can be thrilling! It can be tempting to spend your earnings on things that make you feel good, especially as you endure the tougher rotations in residency. However, while the resident salary is decent (on par with the U.S. median income, which is approximately $70,000 in 2021), consider your salary within the context of student loan debt and other expenses, and adjust your spending accordingly.

Prevent lifestyle inflation

Preventing lifestyle inflation is especially important during residency because you’ve just started earning money. How you treat money now will pave the way for how you treat money in the future. Don’t fall into a habit of spending beyond your means early in your career. Additionally, be careful accruing more credit card debt or loans, as borrowers are eager to lend money to physicians.

Know where your money is going

A straightforward way to be financially responsible is to understand your expenditures. Start by creating a budget and take a survey of what you generally spend in a month. How much total do you spend on the cost of living: rent, groceries, transportation, entertainment, or loans?

If you compare your expenses to your monthly income, are you net negative or net positive? If you’re net negative, that will be untenable in the long run. You want to tackle your debt, not add to it! If you’re net positive, do you have a large enough margin for savings? Are you happy with your numbers for now, for the future, for a potential family? Consider your “income to expenses” ratio in the context of the future you’d like to have, and plan accordingly.

Adjust your budget

Moreover, having an understanding of where your money goes will allow you to hone in on what aspects of your spending could be modified. For example, are you paying too much for rent? A common guideline is that less than 30% of your gross monthly income should go towards rent. This may not be easy in a city with a high cost of living. Could getting a roommate be an option? Perhaps your program, like some programs on the East and West coasts, subsidizes housing or offers food or transportation vouchers. Take advantage of these perks as well to shave down some expenses. 

Of course, the priority during residency is your training, and going out of your way to pinch a penny is not worth it if it interferes with your ability to evolve as a physician. Most programs know this and will try to give you a reasonable salary considering the cost of living in your city. Nevertheless, it does not hurt to be at least somewhat conscientious of how you are spending.

Pay Off Debt

If you are like most of us, then you’ve got student loans. During the early years of your career, it pays to be financially proactive. Avoid “kicking the can down the road” during residency with the mindset that you’ll take care of your loans with your attending salary.

Make payments early

Have the mindset that every dollar you put into your debt will save you more in future interest costs. You can likely make a dent with your residency earnings, which will prevent higher total payments in the long run.

Interest is ever-growing and ever-compounding (meaning interest grows and gets added to your principal loan amount, which causes the interest to grow even faster) during your residency. This sounds scary, but instead of sticking your head in the sand, get in the habit of paying off a reasonable amount of loans every month. Tackle higher-interest loans first.

Remember debt isn’t just student loans. Credit card debt, hard money loans, and high-interest mortgage(s) can all be financially crippling if left alone for too long. Any debt with more than a 5% interest rate is considered high, so consider paying these off ASAP. Equate paying high-interest debt as the equivalent of getting a 5% guaranteed return, which is no easy task.

Consider refinancing

Refinancing your loans with a private financier is a potential option to decrease your interest rate and your monthly payment. Having a cosigner may help you get your interest rate even lower. This path does come with its own caveats, however. Refer to this post to review your options for loan repayment during residency, including the pros and cons of refinancing.

Balance payments with your lifestyle

Lastly, consider the different payment options in the context of your entire budget. How much are you able to part with without significantly affecting your ability to live and work? No one is asking you to subsist on ramen packets in order to scrimp and save a few extra dollars. Make sure you’re still able to maintain a lifestyle you enjoy while making progress on your loans.

Fortify Your Emergency Savings

Most of us rarely think about needing an emergency fund, but it’s an unfortunate possibility that should be accounted for. As a rule of thumb, you should have three to six months of living expenses in a savings account that is readily available to you in the event of a rainy day, week, or month. It’s not expected that you have the full amount right away when you start residency, but it’s good to allocate some of your monthly income toward your fund with that end goal in mind.

There are various situations that could cause you to tap into an emergency fund. You may need to take a medical leave of absence during residency. Maybe your car breaks down and you have an unexpected expense. There have even been extreme cases when entire residency programs have closed down and displaced residents. It’s also not uncommon to have unexpected delays when you’re starting your job as an attending. All good reasons to keep some money stashed away, mitigate stress, and keep you afloat should something happen.

Invest Wisely

There is a common debate about whether you should aggressively pay off your student loans or invest in your future while still being in debt. Cases can be made for both options, but you would not be wrong to pursue a reasonable balance of both. If you have a high-interest credit card or personal loan debt, however, that would be a different story, and you should prioritize that debt.

Contribute consistently to your retirement account

At orientation, you’ll likely learn about which benefit and retirement account options you have at your program. It’s wise to take advantage of these benefits and contribute consistently to them.

Contributing to your 403B not only allows your money to grow over time, it also decreases your total taxable income amount. This means that you’ll owe fewer taxes that year, and the money you contribute is not taxed at the time of contribution.

Some programs also offer a Roth 403B, which allows you to put post-tax money in, while growing tax-free with tax-free withdrawals. Certainly, something to consider, especially in your low earning AKA low tax bracket years.

Take advantage of your program’s “match”

If you’re lucky, your program may provide a “match” for your retirement contributions. The industry standard is usually a 4% match but commonly ranges from 2-5%.

For example, if you contribute 4% of your paycheck (let’s say $100 every pay period), then your program will contribute or “match” that same amount, up to 4% of your paycheck. It’s usually worthwhile to take advantage of this match because essentially you are getting free money from your program.

Something to look out for regarding the 403B retirement account is a “vesting period.” This is the period of time you have to work for the company in order to keep the amount of money that they “match.” Additionally, though your money is not taxed at the time of contribution, it will be taxed as income tax at the time when you withdraw your money.

A good rule of thumb is to put away money so that you receive the maximum match from your employer as this is essentially extra money they are paying you, just saved for later.

Max Out Your Roth IRA

You’ve slimmed down your budget, built a reliable emergency fund, figured out a workable student loan repayment plan, and taken advantage of your program’s 403B match. What’s next?

A great account to consider is a Roth IRA. If you’re one of the unlucky ones who does not have access to an employment-sponsored retirement plan, you still qualify for retirement savings via a Roth IRA. 

What is a Roth IRA?

A Roth IRA is a tax-advantaged retirement savings account that you can contribute to if your income as a single filer is less than $144,000 in 2022 ($153,000 in 2023). If you are married and filing jointly, the income limit is $214,000 in 2022 and $228,000 in 2023. With a resident salary, you will most surely qualify, unless your spouse makes bank.

You contribute post-tax income, but at the time of withdrawal, you will not owe any taxes. The benefit from this is that as a resident, your tax bracket should be at its lowest in your career, closer to ~20% as opposed to ~35% as an attending physician. Try to reach the maximum yearly contribution limit during your residency years, as it’s likely you will no longer qualify as an attending physician (yes, I am aware of the backdoor Roth, but that’s for another time)!

A good rule of thumb for investing is to first pay off high-interest debts and build your emergency fund. Then, invest in tax-advantaged accounts, especially those with an employer match, and finally, invest in a taxable brokerage account should you have any money left over.

Seek Other Sources of Income

You worked hard to obtain the coveted MD or DO degree, and having it will open many doors for you. Unfortunately, during residency, your time will be severely limited, as most residents work well over 40 hours per week. However, if you have the time, perhaps on an easy rotation or during a research year, consider using your time and skills to make a decent chunk of change. 

The most common route to make extra money during residency is to moonlight. Moonlighting is a secondary job, a side gig. It may mean you are working as an independent contractor, outside the scope of your training program, so make sure you are properly insured against any possible malpractice. Most moonlighting gigs I’ve seen pay in the range of $100 to $130 per hour, some even provide tail-end malpractice insurance. The lower-paying ones might have easier workloads, though this is not always the case. Ask around, especially classmates who have worked there previously. 

These opportunities are typically found at urgent cares, community clinics, or county clinics. There are a variety of side gigs available for physicians. However, be sure that you are in good standing with your program and realize it is a delicate balance to work extra shifts in residency.

Never Stop Learning 

There are plenty of great financial resources and communities for medical professionals. A good place to start is The White Coat Investor book. It might seem like just more to read, but knowing more about your finances will ultimately benefit you. Besides, it’s an excellent break from reading medical textbooks and journals!

Finances are deeply personal and vary vastly depending on personal circumstances. The recommendations above are merely building blocks and suggestions for creating a strong financial foundation. It does not mean that you cannot have fun and spend your money! The aim is to spend how you want and save enough to meet your goals in the long run. Think about it like this: if you cover your financial bases, you can spend what’s left over freely knowing that you’ve already done the work to position yourself in a beneficial way.

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By Mike Ren, MD

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