A dollar invested in PGY1 has nearly one more doubling time compared to that 6-10 year-later-invested dollar in your first few attending years. And if you invest this PGY1 dollar in post-tax vehicles such as Roth IRA or Roth 401k, the tax savings is incredible since you will be paying the cheapest taxes as a PGY1 as opposed higher tax brackets as attending physicians or retired physicians.
I hear you, money is tight as PGY’s. I know what it’s like, I made 50k in 2015. Without depriving myself or my loved ones, I was also able to stow away 23.5k of post-tax dollars in my Roth IRA (5.5k limit) and Roth 403b (18k limit) combined. Here are some tips on how to optimize wealth building as PGY’s.
1. Devise a student loan termination plan.
Sitting on 7% interest rate while you work 80 hrs/week training hard is not a good idea. Check out if REPAYE with federal interest subsidy actually benefits you, if not, consider refinancing your student loans ASAP.
Even just lowering your interest rate by 1-2% will save you a large sum over 6 years of training, on a 183k average student loan PGY1 graduate med school with in 2015.
Important bonus of refinancing is that the required monthly payment is $100/month with DRB, $0/month with linkcapital. This means you will free up some cash to invest and build wealth.
2. Set a goal. Pay yourself first.
How much do you want to save this year? Be realistic but add 10% to your realistic goal. Let’s say you decided that you want to max out your Roth IRA this year at 5.5k. Divide 5.5k/12 month and put this as the #1 expense on your budget. Set it as non-negotiable. Trust me, if you prioritize paying yourself first, you will find the money to do so.
3. Budget and automate accordingly.
Set up automatic withdrawal biweekly or monthly to invest the money into your Roth IRA, ideally in a low cost Vanguard index funds. This way, you don’t ever see that money in your bank, or not for long. You won’t miss it. It will go straight to work for you and will grow at a conservatively speaking 8% annualized rate when you buy and hold for at least 10 years.
After you’ve paid yourself by automating the regular investment into your Roth IRA, start making the rest of the budget. You may have to a little more creative and resourceful with your expenses, but it’s both and rewarding. Don’t see budget as a set of limitations, it’s tool to help you accomplish your financial goals.
4. Use credit to help you build wealth.
If you are a bit more adventurous, you can even use credit (cards) to help you build even more wealth. You can separate your budget into chargeable vs. non-chargeable expenses. Charge every dime you can onto a 0% APR credit card such as Citi Simplicity (longest 0% APR for 21 months), this way, every month, you have additional cash flow to invest. Credit cards lending me 0% to negative interest money allowed me to save 23.5k on 50k income in 2015. The balances I charged onto credit cards were paid off with additional income with the 2016 pay raises and some internal moonlighting and tutoring.
Point is, if you can borrow at 0% or negative interest (with cash rewards, etc.) and direct your cash flow towards investment earning 8% in the long run 18-21 months in advance of having to pay that debt balance back, why not?
5. Buy assets before buying liabilities.
Good job for paying for your education. Your degree, your mind, and your time are the 3 biggest assets you’ve ever invested in. Assets make you money; liabilities spend your money.
So before you buy new car with payments and interest rate of 3+%, be sure that you are saving as much money as possible in Roth IRA or Roth 403b. The retirement account dollars earning you 8% is an asset; the car costs you 3% to service, insurance (the more expensive the newer/the more costly the car), depreciate like crazy the moment you drive it off the lot is clearly a liability.
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