We just got back from the most glorious vacation. God, it has been a long year of lockdown! Some sunshine and indulging was much needed to feed this soul. I even ran into one of you at the pool (Hi, Amy!). Now, we’re back to real life rejuvenated and ready to go!
While I was away, someone in The Frugal Physicians Facebook group asked a great question.
Given that we are in the time of year where bright-eyed new interns arrive at their training positions and new attendings start their first jobs, what advice would you give them regarding their finances?
I thought the question was so good I’d turn it into a couple of posts.
Vacation faces!
What financial advice would I give an incoming Intern?
Let’s assume Suzie is a typical fresh, new intern, that has just finished medical school with $200k of student loan debt.
She is eager to excel at her first real job and get going in her medical training. This is the first time she’ll get a real paycheck and she is so excited to finally become a real adult!
But, she has the looming specter of her debt in the back of her mind and she wonders what she should do about them. Investing is really kind of far from her mind. It seems like a far-off goal meant for attendings and others who have ample disposable income.
She is a coronavirus era trainee, so student loans are at an all-time low 0% interest rate at the moment and her loans are placed on administrative forbearance until at least September 30th, 2021. She doesn’t have any consolidated loans.
8 Financial Moves for an Incoming Intern
1. Log into the student loan site
One day when you have down time, just log in and take a look at your student loans. Do you have consolidated loans? Those don’t have a grace period so you should know that. If you don’t have consolidated loans, you will have a 6 – 9 month period where your loans will not require payment (see illustration below).
2. Focus on studying for the first couple of months.
Suzie has the rare opportunity to only focus on her studies and the loan debt will not grow. What an opportunity! It’s ok to focus on studying and doing a good job being a real doctor for the first time. Just make sure to read the next paragraph and set up your lifestyle so you’re meeting the 50-30-20 rule.
3. Don't inflate your lifestyle to your full salary
I would advise Suzie NOT to grow into her full salary. While her student loans are currently in the grace period or administrative forbearance, they will eventually go into repayment and she will need the room in her monthly budget to pay them.
Follow the 50-30-20 rule. 50% of her take-home pay should go to today’s needs, 30% for today’s wants, and 20% should be set aside for tomorrow.
If she’s getting an average resident salary of $63,400 and she lives in Georgia, she’ll take home $1,789 biweekly, or $894.5 weekly, or $3578 on most months (don’t forget about those 3-4 long months where she will get an extra paycheck!)
So, she should aim to put $178.9/ week or $715.6 in a 4 week month into her “tomorrow” 20% bucket. For the first few months or so, she will not have a student loan payment. So, I’d advise her to use 20% of her take-home monthly salary to build up an emergency fund of at least 3 months of monthly mandatory expenses (so 50% of her weekly take home (447.25) x 12 weeks= $5,367).
At $178.9/week, she should be able to get up to the goal emergency fund in 30 weeks, or about seven and a half months. That’s good because that’s right about the time that her loans will go into repayment after her grace period/forbearance.
4. Get into an income driven student loan repayment plan
Towards the end of the grace period/forberance, I’d advise Suzie NOT to forbear loans during residency and instead get into an income-driven repayment program that would qualify her payments for PSLF (Public Service Loan Forgiveness).
REPAYE is a good choice for most residents (unless they have a super high earning spouse). That way, if she chooses to go to work for a not- for profit organization when she graduates, she’ll have 30 months of payments already under her belt for the 120 payment criteria for PSLF.
If she goes to private practice and needs to pay off her loan, her balance will still be a lot better than if the interest had accrued the whole time she was in residency. Plus, half her accrued interest would have been forgiven during residency.
5. Do paperwork like you’ll go for PSLF
No matter what she chooses in the end, I’d advise Suzie to get the employer paperwork done for PSLF every year from her HR. Much easier to walk down the hall and get it done during residency than try to do it on the back end after leaving.
6. Start contributing towards retirement
I know retirement seems far off as an intern. But, if Suzie can start making some Roth contributions now while her salary is low, that money could be really valuable for her later.
Under REPAYE, her payment would be $378/month or $94.50/week (calculated using this calculator). She has $715.60 dollars per month allotted for “tomorrow” in her budget. So, now that her emergency fund is built up and her student loans are getting paid, I’d advise her to take the rest of her tomorrow fund ($337.60/month) and put that into a Roth IRA (since most residencies don’t offer a 401k). If they do, I’d advise her to make Roth contributions there to get the match.
So that’s $4388.8 a year. Plugging that into a compound interest calculator real quick (assuming 7% average returns and monthly compounding), that would yield $13,480 in retirement savings when she graduates and another $109,410 in tax-free Roth money when she’s ready for retirement in 30 years. Sure, she’ll contribute a lot more when she’s an attending, but every little bit counts.
I’d tell her to invest most or all of the Roth money in a low-cost, broad-based stock ETF, like VTI.
7. Get the appropriate insurances
She should get life insurance if she has a family or kids. Disability insurance should be coming from the residency initially. Before graduating, I’d advise her to get an own occupation policy, as well, and maybe consider adding an umbrella policy later.
8. Relax and maintain
Now that Suzie is used to living on 80% of her income, saving 20%, and all her accounts are now on autodraft, she can relax about her financial situation. She just has to make sure not to overspend and focus on her studies.
Remember this is advice for a hypothetical person and not tailored specifically to your situation, so always do your own research, run your own numbers, and maybe even consult a financial professional before making major money decisions!
Stay frugal, y’all!
Disha
Standard Disclaimer: Not meant as individualized financial or medical advice.