As residents/ fellows, most of us student loans, personal loans, credit card debt, car payment, mortgage payments, our residency paychecks, potentially moonlighting/ side job income, and a future promising 4-6x of our current income.
Since training is a significant chunk of our professional career, it is important that we spend a little time and resources in building our net worth during this season of our lives. Time value of money is powerful and double-edged sword. It works against you on your student loan snow-balling at 7%; it works for your on your post-taxed ROTH IRA growing at average 8% over the long haul (infinitely as you can pass it onto your heir without minimum required distribution.)
I’m simply sharing my approach to net-worth building below. There are many ways to Rome; please share yours.
STEP 1:
Prioritize your debts by interest rates. Paying down the highest interest rate debt first gives you the biggest bang of your buck, as a greater proportion of every dollar is decreasing the principle. There are several ways of getting rid of your highest interest rate debt.
- Make it a priority, a budgeted item.
- Convert the high interest rate debt to lower interest rate. For the first time in history, residents/fellows can actually refinance their student loans to a lower interest rate without having to wait till attending-hood. DRB is the first to offer refinancing to us.
- Utilize credit cards responsibility and proactively. Credit cards offer 0% interest purchase for up to 21 months. If you charge all your chargelable living expenses onto such a card, you can easily free up 10s of 1000s of dollars per year to pay down your high interest debt (hint most student loans of our era is ~7%.) When it comes time that the interest rate is about to jump to 20%+, just balance transfer it to a new credit card. This will give you 21 months of 0% interest, followed by 2-3% interest in subsequent years when you balance transfer.
- Get a side job or ask your spouse to work a little. Put the additional income towards debt.
*Refinancing your student loan to a lower rate is probably the most important way of tackling your high interest debt. With refinancing, your new interest rate is likely 4%-4.5% for fixed rate (as low as 1.9% for variable rate). If your highest interest rate debt is 4%, you are in a good position to channel your cash flow towards retirement instead of paying down student debt. This leads us to step 2.
STEP 2:
If your employer offers an employer-sponsored plan such as a 401(k) AND matches contributions, put away up to the maximum matched in the 401(k)/403. Example: If you make $50,000 a year and your employer matches up to 4% of your income, then you should put up to 4% of $50,000 = $2,000 into the 401(k). (Our hospital is transitioning and residents/fellows will START getting a 4% match in 2016! Yay a free $2000 to our retirement savings.)
STEP 3:
After contributing up to the amount that your employer will match. Continue to contribute as much as you can. If your employer provides 403b ROTH, contribute to 403b ROTH instead of the 403/401 pre-tax contribution. Training years are likely your LOWEST tax bracket years. It’s like buying retirement nest eggs on sale. Pay your life time’s cheapest taxes now and let your contribution grow tax free and enjoy withdrawal from the ROTH accounts tax free in retirement. I prefer to contribute to the 403b ROTH my training program/hospital offers because they are able to get Vanguard funds at a cooperate-level, giving me the lowest expense ratio possible, a whopping 0.04% (the less I pay in fees, the more I get to keep for retirement.) When I go to Vanguard directly, independent of my hospital, the lowest expense ratio I can get is 5% admiral shares, which requires 10k minimum. Before I hit the 10k amount, I was paying 0.18% expense ratio.
STEP 4:
If you still have money after getting your employer’s match, maxing out your company’s 403b ROTH (18k), then it’s time to go for ROTH IRA. You can contribute up to 5.5k/year. Same idea: pay cheap taxes NOW, and let your nest egg grow for 3-6 decades or more (if your heir inherits it) completely free to taxes. So potentially you put 10 dollars at 25% taxes today, and you can take out 100 dollars in 3 decades (assuming average 8% annual return for 30 years) without paying any more taxes on the $90 growth from you $10 invesment. Alternatively, your heir can take out $1000 tax free in 6 decades. A pretty cool legacy fund!
You have come a long way by lowering the overall interests of your debt/liabilities (via refinancing and resourcefully managing your cash flow) and put way 23.5k/ year+ the 2k employer match for your retirement. If you have more money to save at this point, you are in an incredible shape!
Next post will discuss what you can do beyond this point 🙂
Do share your ideas and plans of building your net worth in training. For some of us our training years are a decade long (counting medical school).
Comment below!
