Net worth building steps in residency

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.

  1. Make it a priority, a budgeted item.
  2. 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.
  3. 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.
  4. 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!

 

Mortgage payments, biweekly or refinance?

I wrote this post several months ago. As soon as I was liberated from the onerous 6.8% interest of my student loans, I turned my attention to my next most expensive (highest interest) debt. My then mortgage was a doctor’s loan taken out before I started pgy1 and its 4.375% 30 year fixed interest was quite high in hindsight.

So my options in saving money on my mortgage included:

  1. pay the mortgage more frequently (effectively lowering the principle more frequently.) the most common way people do this is to switch to a biweekly instead of monthly mortgage payment.
  2. refinance my mortgage to a lower interest rate.
  3. throw extra money at my mortgage whenever there IS extra money.  (ha, there is rarely any extra money. and if there’s any, I’d put it into ROTH IRA and ROTH 403b rather than paying down mortgage.)

The following post is my calculations when I was exploring option 1. convert my mortgage to a biweekly mortgage.

When all’s said and done, I went for a NO cost refinance (all I paid was appraisal fee, so it did cost me $400) and refinanced my doctor’s mortgage to a 7/1 ARM. It lowered my interest rate by 1%, which translates into lower monthly payment AND a greater amount of principle paid monthly.  But for those who like to keep their mortgage for longer, converting to biweekly CAN save you quite a bit in the long run.

Here’s some calculation comparing monthly vs. biweekly  mortgage payment given the same mortgage interest rate and starting principle debt.
Standard
(Am. Table)		 Bi-Weekly
(Am. Table)
Length : 30 Yrs 0 Mts 26 Yrs 3 Mts
Time Saved : 3 Yrs 9 Mts
Bi-Weekly Payment : – $459.93
Monthly Payment : $919.56 $996.51
Total Interests Paid : $123,041.64 $105,424.33
Interest Savings : $17,617.31
Tax Savings : $31,990.83 $27,410.33
Tax Saving Losses : $4,580.50
Total Benefit
(Int. Savings – Tax Saving Losses) :		 $13,036.81
Here’s the paraphrase of the above results.

When you set up your mortgage payment repayment plan, you can choose between a standard repayment plan or a bi-weekly repayment plan. With the standard plan, it would take you 30 years to repay the loan while a biweekly plan will take 26 years and 3 months. This will save you 3 years and 9 months. But, the savings doesn’t end there.If you took out a $208,000.00 loan with an interest rate of 3.375% and your federal tax rate is 26.000%, you can expect to pay $919.56 per month, while a bi-weekly payment plan will call for a payment of $459.93 every other week. As a result, you will pay only $105,424.33 in interest with the bi-weekly schedule rather than $123,041.64 with the standard payment plan. While this will result in a loss of $4,580.50 in tax benefits, you will still save a total of $13,036.81 with the bi-weekly plan.

For my particular case, I’d like to either pay off the entire mortgage in 7 years OR sell the house. So my potential savings is less compared to someone who will let their mortgage run for 30 years.  I ran the numbers and Iearned that after the fees of converting to biweekly payemnt, my savings over 7 years would be only a few hundred dollars. So I went for option 2 and started shopping around for mortgage refinancing.

 

On the other hand,

biweekly may make sense for you if the interest rate on your mortgage is much higher. Bi-weekly will allow you to pay down your principle more frequently and hence saving you money by lowering interests acrrued. biweekly also helps you if you keep your mortgage for longer. The earlier you convert to biweekly and the longer you keep your mortgage after convserion, the more you stand to benefit from a conversion.

But be sure to do your math and account for the conversion fee (there’s usually an upfront conversion fee. I got a quote of $150.) Some companes processing the biweekly payment will also charge a $2-3 fee per mortgage payment. These fees can add up and easily eat into your savings.

 

  • Are you happy with your current mortgage rate/terms?
  • Have you refinanced yet?
  • Did you try to conver to biweekly payment?
  • What mortgage product/move saved you money?

Comment below!

 

What should I do? 350k @ 6.8% interest rate, 3 more years of training.

death grip of debt

I recently met a colleague in the surgical field, who’s in his 4th year of training, with 3 more years to go. His numbers may apply to many at the same level of training. I figure I can take this opportunity to run some numbers for those in his shoes.

PSLF eligible

Step I. Decide forgiveness or not.

If you are hoping for forgiveness and are willing to limit your job options to strictly 503c W2 (employee, not contractor) jobs, and are willing to take a pay cut working these jobs vs. working for non 503c jobs. Then go for forgiveness.

But if you don’t like the uncertainty of forgiveness program and you like to have more job options or 503c jobs are are in your field, then don’t go for forgiveness.

Step II. Refinance your student loans right NOW if you are not going for forgiveness.

Fixed interest rate goes as low as 3.5%, as low as 1.9% for variable 5-year term. This means one can save 350k*(6.8%-3.5%)= $12,250 per year in interest.  So 3 more years of training, one can save $36,750  in interest just by refinancing to a lower interest rate.

Alternatively, if you are willing to take the risk of the variable interest rate. You can potentially save 350k*(6.8%-1.9%)= $17,150 per year in interest, that’s $51,450 potential savings over the next 3 years.  This is not a guarantee since rates are variable, but you can run the numbers to see what’s the worst case scenario if the rate adjusts higher (there’s a cap on the max rate and the max number of times it can adjust up or down. read the fine print if you are considering this route.)

To refinance with DRB and get a $300 bonus when your loan close, use this link.  (If you want to research more about the company and others, be sure to use a different window. keep this link for the loan application so DRB can track your application and give you the bonus. You will be supporting DFD through this link too.)

Refinance Student Loans:

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Apply to Earnest by clicking here, you will get $300 cash bonus and DWM will get a referral fee when you sign your contract. Win-win!

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Apply to Common Bond by clicking here, you will get $300 cash bonus and DWM will get a referral fee when you sign your contract. Win-win!

One of the only 2 companies that will refinance residents and fellows (PGY income) during training. The other companies only refinance a typical attending (high income) with typical student loan burden.

Dr. Wise Money Image - DRB

Apply to DRB by clicking here, you will get $300 cash bonus and DWM will get a referral fee when you sign your contract. Win-win!

Email drwisemoney@gmail.com to get personal referral & $200 bonus when your loan closes. DWM gets a referral bonus too.
Email [email protected] to get personal referral & $200 bonus when your loan closes. DWM gets a referral bonus too.
image courtesy of baybusiness.com.au
image courtesy of baybusiness.com.au

 

Step III. Prioritize your cash flow: where to put your dollar

Student loan vs. Roth IRA vs. mortgage vs. brokerage investing

With the limited income you have right now (50-80k in training vs. 300-500k as attending), where you put your dollars matter quite a bit. Rank your debts/investments in decreasing order and tackle the highest interest debt or fund the highest return investment first.

Personally, I didn’t feel comfortable investing (when return is not guaranteed) when there’s outstanding student debt (my student debt was snow-balling at 6.8% interest rate). Since I figure interest I save from paying down student loan is a GUARANTEED and TAX-free return. I channeled all my cash flow towards paying my student loan off first.

However, if you can refinance your student loan to a lower rate, it may not be as high a priority as funding your ROTH IRA.

Let’s say you refinance your 350k of student loans to 3.5%. Adjusted for inflation, this is a pretty low interest debt. You may then want to fund your ROTH IRA rather than paying your debt down faster than the minimum payment. (But you do need to pace yourself and be ready to pay off the entire student loan by the term’s end, be it a 5 year or 10 year term.)

A vanguard ROTH IRA index fund will give you conservatively 7-9% over the long run (30 decades). Plus, with ROTH, you pay taxes now (in the lowest tax bracket you will ever be because you make way more than now as an attending physician AND you probably have more annual income in retirement than now.) So you get to put in a post-tax dollars into ROTH, allowing it to grow at average 7-9% for the next 30 years (longer if your heir inherits it.) If you put $5,500 in this year. It gets to be $55,345 in 3 decades (assuming 8% average return) and you can enjoy this money tax-free!

As you can see, I limit the discussion to ROTH IRA vs. student loan because generally paying down mortgage ( 2-4%) or buying stocks OUTSIDE of tax-efficient vehicle (where you pay taxes on growth/return) usually are worth your money when there’s higher interest rate debt or ROTH space still available.

FullSizeRender_1

 

Step IV. Take advantage of interest free or negative interest money.

Open a citibank credit card (AFTER your student loan refinancing is done.) Citibank simplicity gives you 0% interest rate for 21 months! What would you do with interest free cash (I’m guessing you can get 10-20k credit limit if you have a resident’s income, remember to count moonlighting)?  I would all living expenses I can (I just charged my property taxes onto our credit card) onto the credit card, and funnel my paycheck towards my highest priority: be it 4.5% or 6 or 7 or 9% student loan or 20% credit card debt or funding ROTH).

Let’s say if you charge your 2k of living expenses onto your citibank card up to your 20k credit limit. Within the next 10 months, you would have freed up 20k of cash from your paychecks to throw at your student loan! And guess what, each time your throw that 2k at your student loan, the same interest rate is compounding on a smaller principle (for those with monthly interest more than 2k, at least your interest is compounded on a Less large principle). So after the initial 10 months of charging your card to the max and funneling 20k towards your student debt; you ride the credit card balance at 0% for the next 21 months. (Yes, you’ll likely be paying $200 monthly payment on a 20k revolving credit card debt.) So over the next 11 months, you will save $1,100 if your original student loan was 6%.  This is not accounting for what you save during the first 10 months.

This is pretty much effortless. You keep your current life-style, spending. You just charge your living expenses onto your credit card and put your cash towards debt/investment.

So imagine you have 2 cards. You’d easily saving a couple thousands on your student loan interest. Guaranteed tax-free savings.

What do you do when the 21 months of sweet 0% interest runs out? Read this other post.

In short, you can switch to another 0% interest or 2-3% interest deal on new credit card and ride this debt for another 1-2 years.

 

We work hard. Our money should at least work as hard as we do.

The easiest way to make our money work is to put it to work EARLY, like now, rather than wait till we become attending. Remember, once we are attending, we pay more taxes, a smaller proportion of our income will be truly ours to work for us. If you like the biggest bang of your buck, make a dollar work like 2 dollars for you, take advantage of the simple principle of time value of money.  Put your hard earn cash to where you get the highest return.

 

  • Have you refinanced your student loans? Why or why not?
  • Do you have a good credit card that’s helping you reduce your debt or fund your retirement?
  • Do you feel helpless with your finances as a resident/ fellow? Are you planning to take care of your finances AFTER you finish training? What are you doing NOW to address your debt/ savings?

 

 

Ways to save (more) without cutting back

When my resident peers learn that I’m putting 23.5k away annually as a resident or that I’ve already paid off my student loan, many people’s response is “I’d rather enjoy life now.”

I totally agree with enjoying life”always.” I also believe that saving NOW is not mutually exclusive with enjoying life NOW.  I would like to share a few ways to save and enjoy simultaneously.

  • Rain check: We have pretty high standards for what we eat, we strive for organic, non GMO, no processed, and fair trade whenever possible. This also means that our food cost much more than the alternatives. Because organic foods frequently cost 100% more expensive than it’s non-organic counterparts, we are always on the look out for sales. For instance, when organic cluster tomato goes on sale for 98 cents/lb at Sprouts (normal price 2.99/lb), we clear the shelf and ask for rain check. John will request a rain check and I will request one, which allows us to purchase organic tomato at the amazing discounted price in the future. But what do I do with 50 tomato? Brings us to the next point. Freezer
  • Freezer: I roast all the tomato, then jar and freeze them for chili, marinara sauce, and anything else needing a tomato base. Freezer is also very cost effective when you buy high quality meat in bulk on sale or diary products such as organic cheddar cheese, Ricotta cheese, etc.
  • Ibotta: it’s an iPhone app that allows you to get cash back on certain items you purchase. The categories are wide, ranging from grocery, apparel, electronics to home and office and more. I’ve earned $100 cash in 4 months.
  • Prioritize your savings: if you are going to save $100 dollars/month anyways, make sure you run the number to decide where to put it: student loan vs. home mortgage vs. car loan vs. credit card debt vs. retirement account. My order of attack is student loan, then ROTH (post tax) retirement account, then kid’s college fund 529. Make your $100 earn you the best return possible (be it a guarantee return of 7% on student loan or an average 8% over long term investment.)
  • Prioritize your spending: Figure out what brings you the most happiness and enjoyment. Research has demonstrated “experiences” usually render more lasting and more profound happiness than “objects.” This is why I rather spend $$300/mo on Mini Wise Money’s art workshops than buying her more clothes or toys. I don’t mind spending a couple thousands for her summer camps but I also don’t buy her little trinkets that cost $2 per piece.
  • Take advantage of interest free (or NEGATIVE interest) money. One reason that I am able to contribute 23.5k towards my retirement on a resident income is that I’m borrowing money from credit card companies at 0%. In fact, taking into account the 1-5% cash back and the $100-$500 bonus I get from credit card perks, I have been borrowing money from credit card companies at NEGATIVE 1-5% interest rate to pay off student loan at 7% AND THEN to fund my retirement. This sounds too good to be true, doesn’t it? The main caveat is that you need to be on top of this game. You need to know when you need to circulate your fund so you can pay off that 0% soon to be 16.99% credit card debt. But during the 21 months of 0% interest, enjoy watching ANY growth in your ROTH, 529, or even CD! When time comes to pay off the credit card, your options are plenty: money you saved that’s been growing in a brokerage, CD etc., balance transfer to another credit card with 3% transaction fee for 0% interest rate lasting 18 months (effective annual interest rate of 2%).
  • Employee discount: check your company/hospital’s HR / benefit website. There’s power in number. You get discount in as many categories as you can imagine. I get my movie tickets on employee discount and plan to get future cruise or Disneyland trips with employee discount too.
  • What do you do to save money beyond “make more and spend less?”
  • What are your non-negotiables? Have you found ways to maintain the quality you desire in these aspects of your life without breaking your bank?

Comment below!

Not going for PSLF? Why wait to lower your interest rate?

If you are quite sure that you will not go for PSLF, why not lower your interest rate TODAY and benefit form the savings now until the day you pay it off?

Reasons you decided to turn away from PSLF my include,

  • PSLF severely limits one’s job options. Not only do you need to work for 503 organizations, but also you need to be a W2 employee, instead of a 1099 contractor. (Most high paying doctors are contractors and not employees.)
  • To be a true 503 W2 employee, you are likely to take a 25% pay cut vs. private jobs.
  • 40% of our cohort are competing for these PSLF qualifying jobs. The greater supply of workers wanting these non profit jobs over the smaller supply of said jobs will surely drive the equilibrium price (ie. your compensation) DOWN.
  • Government is talking about capping the forgiveness (recently to about 57k, which won’t even cover the interest accrued on the Cost of attendance during medical school.)

 

Now if you are pretty sure PSLF isn’t for you, what are you doing to pay off your student loan ASAP?

  • increase your income
  • decrease your spending
  • decrease your interest rate
  • take advantage of 0% interest rate credit card offers

Do all of them to the best of your abilities.

But of the 4 things to do above, decreasing your interest rate is easier than ever. Less than a year ago, I was NOT able to to refinance my student loans because the refinance products were only meant for attending doctors.

DRB, is now offering refinancing student loans to residents and fellows. One can lower their interest rate to as low as 3.5% for fixed rate and even lower for variable rate. Once your loan closes, all your 400k will be compounding at half of your current lousy 6.8% interest rate (7% for consolidated fed loans).

I often think about opportunity cost. For instance, do I spend one hour with my family, or one hour tutoring (which makes me a couple hundred dollars), or do I spend one hour studying radiology, or do I write a blog post… In the grand scheme of things, the few hours it may take to get student loan refinanced is definitely the biggest bang of the buck.

Use this link to start an obligation free student loan refinancing application with DRB.  When your loan closes (the day you start 2% or 3.5% or a rate lower than 6.8% interest rate), you will get a $300 bonus and DFD will get a referral fee as well.

Why not lower your student loan interest rate and start saving 10’s of 1000’s until you pay it off?

DFD DRB