The Day I Started with Nothing…

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For us medical school grads, the debt burden is easily 10 times heavier. On average, we owe 180k as class of 2015.  image curtesy of johnjay.digication.com

I will always remember how dreadful it seemed when I learned that my cost of attendance for 2010-2011 (first year of medical school) was about 90k… I’ve never made 90k a year prior to starting medical school (in fact, I still have not made 90k a year as a PGY2, 6 years after I started med school in 2010). I could not imagine borrowing 90k, only 8k of which was subsidized (interest free during med school), and rest came with 1-4% loan origination fee and 6.8% interest snow-ball starting day one of med school.

Along with this dread came one of my favorite memories of Mini Wise Money.

I was crying and complaining on the phone to my mom, feeling wronged by the fact that I had to get into so much debt to become a doc in the US, when the rest of the world pretty much made med school free appreciating what aspiring doctors already give up by embracing such an all-consuming and demanding career.

Then, the 2 year old Mini Wise Money, tried comforting me,

“Mommy, don’t be scared of monies. I am here. [MWM gave DWM a hug.] Don’t be scared of monies.”

Because of how expensive my medical school was, the day I started with nothing was March 2015, of internship year, when I was 30 years old.

I tried everything in my power, worked 7 jobs in college, 2 jobs in med school, to “start with nothing” at the age of 30; while my non-med friends already have a house, cars, fat retirement funds, kids college savings, annual family vacations to exotic places.

But I’m grateful to be starting at zero at 30, rather than 40, 50, or 60.

Here today to share one major reason why I was able to pay off my student loan within 1 year of graduating medical school.

Here’s my guest post on my financial mentor White Coat Investor’s blog, detailing how I minimized and delayed student loan interest.

Hope this helps!

Here is a flow chart that demonstrates how interest starting day 1 of medical school on the federal student loans we borrowed just for 1 semester of tuition snowballs… This is for the numerically inclined people, just so that every step of math is accounted for and the number I’m using has solid backing. Feel free to skip the flow chart if it’s dizzying. This flow chart itself warrants 2 posts to elaborate (which will be coming in the future…)

To summarize the chart:
15k borrowed on Day 1 of med school + loan origination fee + daily simple interest*
–> $17,816 @ graduation of medical school
–> deferred for 3 year residency
–> $21,756 @ when finishing 3 year residency
now imagine borrowing 15k every semester (3 times a year, totaling 12 times to finish medical school)
this is just tuition and fees… no living expenses. 
and the loan assumption is based on the cheapest (not grad plus) federal student loans.
*In my personal experience, there’s no subsidized loan anymore starting 2012. But a reader pointed out that he still had subsidized loan in 2013… Not sure if there is inter-school variation in federal loan offerings. Either way, during my first 2 years of medical school, there was a nominal amount of subsidized loans. It was up to 8k annually that I could borrow. The subsidized loans prevent 100% of the interest accrual during school and first 3 years out of school if one selects IBR payments. After PGY3, subsidized loans will receive 50% interest subsidy for negatively amortized portion of the loan like the unsub loans if one’s on REPAYE (Revised Pay As You Earn).

cc vs student loan

 

  • How did you pay for medical school aside from taking out student loans?
  • Did you work during medical school? Was working a plus or minus on your medical school academic performance?
  • If you are a med student (today or again), what would you do to minimize your student debt burden?
  • Do you think the credit card method is too risky? Why or why not?
  • Since you have the discipline and intelligence to make it into med school &/or survive med school, don’t you think you can apply 3% of your brain power to take advantage of credit card offers to help you build net worth?

please share your insights, questions, experiences below. We are here to help one another 🙂

Top 10 Ways Mini Will Pay for Her College… on Her Own (Mostly)

I just started funding Mini’s 529 this year with goal of maxing out first 2 years @ 14k each. I’m front loader in all things I deem worthwhile: studying, investing, or building businesses. Since Mini can be heading to college in 9 years (if she doesn’t decide to take a sabbatical from school to run a business venture), the investment that gets to be truly impactful/fruitful will be the dollars that gets to grow in the stock market for the longest.

If I max out in 2016 and 2017, the principle of 28k can grow for about 7-8 years, which means based on the rule of 72 (+ assumed annualized return of roughly 8-10%), the 28k gets a chance to roughly double by year 2025 when Mini starts college.

Ok, so that’s 56k for her college. Not a whole lot, considering some financial advisers are encouraging my attending radiologists in my residency programs to save >1/2 million for each of their kids’ college expenses. (I whole-heartedly disagree with advisers who recommend saving >1/2 million for each kids 4 year college, and think that it’s likely an Asset Under Management motivation on the adviser’s part, but that’s discussion for another post).

So Mini gets optimistically 56k for college from the 529 I started this year; what else is she going to do to ensure debt-free-ness after her college degree?

johnjay.digication.com
I decided that the biggest gift I can give Mini is getting her educated & debt free after her bachelor’s degree. johnjay.digication.com
  • If she’s anything like her mom, she will work a job or 2, or 3, or 7…. Just kidding. While I in fact did work 7 jobs simultaneously for a few semesters in college, I do not think it is a healthy practice. Mini can work one or at most 2 jobs, but not 7.
  • If she’s nerdy like her dad or mom or aunt or grandfather, she can tutor and make a killing. I started with $10/hr at 16, up to $400/hr at age 28. In college, I charged anywhere between $20-$200/hr for helping others achieve academic excellence and further mastering my fund of knowledge.
  • If she’s jockey like her dad (who was a near-Olympic level rower at an Ivy League University) and she learn to negotiate with college financial aid offices, she’ll likely get a full ride sports scholarship.
put your money to work
Insert Mini Wise Money for Doctor instead. Mini is way ahead of DWM because she learns at the tender age of 8 that $ works for her; she doesn’t work for $.

 

If she continues her business ventures that she’s started as a mere 8, 9 year old, Mini’s money will work for her like no tomorrow (money invested doesn’t take a vacation, doesn’t get sick, doesn’t sleep.) Mini’s current money making ventures include:

  • “Walkie Dogie” when business blooms a little, Mini will hire help and take a cut from each dog-walker/pet-sitter. Mini will be in Hawaii scuba diving with her parents while her diligent employees walk 10x neighborhood dogs than Mini could do on her own.
  • Freelance Art: Mini has been selling (few, as DWM wants to hold on to her original art work) originals and replicas of her artwork, ranging from painting, sculpture, to photography. She will continue to apply herself as she’s naturally inclined to art; nicely the money follows when one does what she’s good at.
Ella pencil art
Newest art modality Mini’s added to her repertoire. Coincidentally, the youtube 20 some year old artist is a multi-millionaire from her popular instructional youtube videos & associated products. If Mini can draw like this self-made young millionaire-you tube-artist at the age of 8, & Mini’s equipped with an adventurous, fearless, entrepreneur spirit, sky is the limit 🙂
  • Investment: Mini has saved 95% of her gift money & has been investing in her mother, Dr. Wise Money, getting 10% guaranteed return at the DWM’s bank. As DWM and Mini discussed adjusting down the guaranteed interest rate to a more realistic range 2-3%, Mini has decided that she will buy a couple shares of a few companies she likes and hold her shares to see long term gain. Mini has no desire to be a day-trader; in her own words, “it’s too much work and the money is not guaranteed for the hard work.”
  • Summer camp business. DWM is starting a highly sophisticated summer camp for kids around mini’s age summer of 2017. Mini, mini’s dad will be DWM’s business partner. By the time mini starts college, she would have (helped) run the summer camp for 9 summers. She can continue and likely will take over the business ownership from DWM by then. This operation will likely bring Mini 10’s of 1000’s each summer after she pays her workers.
time is more valuable than moeny
Mini will take advantage of Time Value of $ and Cash is King principles. She will borrow $ from credit card companies @ 0 to negative interest rate to fund her education, while putting her cash flow where she can make the most tax-efficient return; like in index funds in her Roth IRA.
  • For everything, there’s credit card.
    • DWM’s credit card. DWM currently has 250k of credit limit in her credit cards combined. It would not be implausible to charge all of Mini’s college expenses on DWM’s credit, if it makes sense. Free flights to Hawaii, 5-30% cash back, lots of gift cards for dining, entertainment, & pretty much you can think of under the sun etc.
    • Mini Wise Money’s credit cards. Like I said before, if you don’t stretch or work your credit/borrowing muscles, it ain’t gonna grow. DWM has plans to provide Mini with a monstrously high credit score & large credit limits to start in her early 20’s (setting her up to purchase homes, left and right as soon as she gets her first good paying job. which may or may not be After college given that Mini has her money working for her at the tender age of 8.)
Mini pays for college herself
Instead of going to Mommy/Daddy bank for college $. Mini will have her own bank 🙂 She’s learned early to be on the right/money making side of banking… Leveraging time value of $ for rather than against herself.

 

  • Though least preferred by DWM, DWM can always step in and pay a bit of Mini’s college with her paycheck 🙂 DWM can afford to cash flow Mini’s college expenses as by the time Mini’s starting college, DWM would have already achieved financial independence (2023) for 2 years, which means, all DWM’s income after 2023 is NOT necessary for living but cream on the top.  Since DWM doesn’t plan to retire at age 40 even though she could at 38, DWM will have plenty of cash flow to make the green papers rain, for a worthwhile cause… Mini’s education.

Bonus!

If it makes sense, Mini can also take out student loans (i.e. federally subsidized student loans for undergraduate education, where the student loan has 0% interest rate while student is enrolled in school full time). Upon graduation, when the student loan starts charging 6+%, Mini can look into refinancing with banks, pay off with her own savings in brokerage account, or pay off with 0% interest credit cards, and off course, last resort, there’s mom Dr. Wise Money to help.

  • how will your kiddo pay for his/her college?
  • are you saving like crazy for them? (As you can tell, I don’t think you need to. Better save for your retirement first.)
  • did you know even doctor’s kids can get full-ride scholarship to small, pricey, private colleges? knowing what you are worth is an incredibly important skill.

Please share your insights, experience, & insights below.

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Mini’s College Fund, 529 Qualified Tuition Plan: Intro Part I

 

Free photo Saint Anselm College S Free Image on Pixabay 982688

Mini is finishing 3rd grade this year. In another short 9 years, she will be heading to college. I should have started her college savings yesterday, but like most PGY’s, I took care of my own student debt and retirement savings first. I’m excited to invest in my kid’s future by saving up for her college/graduate school expenses. To start saving for Mini’s college, I will set up a 529 plan for her.

We’ve always emphasized in our family the importance of education. Mini has learned to invest 95%+ of gift money for her future rather than buying toys and trinkets.

Stats like the following shows that education indeed is one of the most worthwhile investments any individual can make.

Earnings and unemployment rates by educational attainment bar graph

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Protect yourself, your ability to earn, and your loved ones.

529 “qualified tuition plan”

  • A tax-advantaged savings plan is designed to encourage saving for future college costs. This works very much like Roth IRA in that you contribute post-tax dollars and the principle can grow tax free and both principle and growth can be withdrawn tax free for college expenses.
  • Sponsored by states, state agencies, or educational institutions.
  • Authorized by Section 529 of the Internal Revenue Code.
  • There are two types of 529 plans:
    • pre-paid tuition plans
    • college savings plans.
  • All fifty states and the District of Columbia sponsor at least one type of 529 plan.
  • Some private colleges and universities sponsor a pre-paid tuition plan.

 

 

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Get the most important deal of your financial life right, the first time.

Are you ready to 529?

Instead of saving for future post-secondary educational expenses (for yourself or others), you may want to first tackle other financial goals:

  • paying off your own/ current educational debt, especially if it’s growing at a high interest rate
  • saving for retirement, especially you are in your lower income years and can really benefit from maxing out post-tax spaces.
  • buying a home
  • paying off high interest credit card bills. (Hopefully as DWM-readers, you are getting paid cash back by credit card companies, rather than paying them interest)

Remember that you may face penalties or lose benefits if you do not use the money in a 529 account for higher education expenses.

If you decide that saving for college is right for you, then you can determine what college saving options to pursue:

  • 529 plan
  • Coverdell education savings accounts
  • Uniform Gifts to Minors Act (“UGMA”) accounts
  • Uniform Transfers to Minors Act (“UTMA”) accounts
  • tax-exempt municipal securities, and savings bonds
  • a taxable account

Each college saving option may have a different impact on financial aid eligibility, so you should evaluate each option carefully. 

If you are ready, the rest of this post gives you the 1-2-3 on 529:

SEC.gov Introduction to 529 Plans

Dec2015_300x250_b
Pay off your own educational debt faster, then start funding your kid’s education.

529 plan effects on federal and state income taxes:

  • Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses.
  • However, you generally will have to pay income tax + an additional 10% federal tax penalty on earnings if you don’t spend the withdrawal on eligible college expenses.
  • Many states offer state income tax or other benefits, such as matching grants, for investing in a 529 plan. But you may only be eligible for these benefits if you participate in a 529 plan sponsored by your state of residence.
  • Just a few states allow residents to deduct contributions to any 529 plan from state income tax returns. (Arizona is one.)
  • If you receive state tax benefits for investing in a 529 plan, make sure you review your plan’s offering circular before you complete a transaction, such as rolling money out of your home state’s plan into another state’s plan. Some transactions may have state tax consequences for residents of certain states.

 

 

300x250_10_143Fees and expenses of a 529 plan:

Fees and expenses lower your returns; so know what you are paying for.

  • Prepaid tuition plans typically charge enrollment and administrative fees.
  • College savings plans may charge
    • enrollment fees
    • annual maintenance fees
    • asset management fees: depend on the investment option you select.
  • Some college savings plans will waive or reduce some of these fees if you:
    • maintain a large account balance
    • participate in an automatic contribution plan
    • reside in the state sponsoring the 529 plan.
USMLE I cover
Ace your USMLE with this short read. Biggest bang of your $ & time 🙂

To Learn More:

529 Plans: Questions and Answers (IRS)

An Introduction to 529 Plans (U.S. SECURITIES AND EXCHANGE COMMISSION)

529 fee study

IRS Publication 970: Tax Benefits for Education

Utah Educational Savings Plan

529-plan-contribution-deadlines-for-state-tax-benefits

The Experts: Are 529 Plans the Right Choice for All Families Saving to Send Their Kids to College?

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