Written by: Corey Janoff
A physician experiences a different set of financial life stages than the average person. Due to the education and training requirements, physicians get a much later start to their careers than most people. Many physicians begin their careers saddled with a six-figure student loan debt balance which is a giant hole they have to dig out of. If they are fiscally responsible, most physicians earn an income that will enable them to make significant financial progress.
Being fiscally responsible is important, because money doesn’t discriminate. Due to above average incomes, doctors have a societal expectation to, well…live like doctors. The catch is, if you start living like a doctor before you can afford to, achieving financial independence will be an uphill battle.
Today we will look at the six financial life stages of a physician and how to approach those stages for optimal financial success.
Stage One: Survive
The first stage of a physician’s financial life is survival. These are the medical school years. Income is zero. Unless you have scholarships, generous parents, or sell your soul to the military, you are likely borrowing a boatload of money to pay for four years of medical school education. You must live like a college student for another four years, even though your college roommates are all earning incomes and enjoying that adult life.
The less you borrow, the better off you will be in the future. You can borrow money for tuition and living expenses. The living expenses are the area you will have the most control over. Get roommates. Live in a crappy apartment. Eat top ramen for breakfast, lunch and dinner. Pick up a part-time job tutoring pre-med students, driving an ambulance, or something that earns you a couple of bucks. Every little bit adds up. Minimize spending, minimize borrowing and you will have less to repay in the future.
Stage Two: Average American
The joke for residents and fellows is they’re “broke residents.” They all laugh at how poor they are and how little they get paid. If you measure their wealth by their net worth (assets minus debts) residents and fellows truly are the poorest people on the planet. The homeless person sleeping on a park bench doesn’t have a negative $250,000 net worth. Damn student loans.
Given their education and number of hours residents and fellows work, they are grossly underpaid. However, depending on geographic location and PGY year, most residents and fellows earn between $50-80k/year. That is in line with the median household income in America. Compared to attending physicians, residents and fellows earn peanuts. Compared to the rest of America, residents and fellows earn average incomes. And the average American finds ways to make ends meet.
During the residency years, it is important to learn to live like an average American. Don’t count your chickens before the eggs hatch. Yes, you are technically a doctor with your medical degree, but you’re not a real doctor yet. Spend less than you earn. Don’t take expensive vacations. Pay off your credit cards in full each month. Max out your Roth IRA each year.
Make income-based payments on your student loans. If you are potentially going to work at a hospital or non-profit entity when you are done with training, all of your student loans payments in residency/fellowship can potentially count towards the 120 required payments needed to be eligible for Public Service Loan Forgiveness (PSLF). Every $300 income-based payment you make in residency is a $3,000 payment you don’t have to make based on your attending level income. Start paying your student loans ASAP and make sure you are following the PSLF requirements.
Live within your means during residency and you will be setting yourself up for future success.
Stage Three: Delayed Gratification
This is where we reach a fork in the road. Stage three and four can be reversed. Ideally stage three and four are reversed. However, in my ten years of working with physicians, most physicians put stage three before stage four. And I’m OK with that, to some degree. The key is to keep stage three under control so you can quickly progress to stage four. Once stage four has been accomplished, then you can go back to stage three and you’ll feel much better about yourself. You’ll see what I’m talking about in a minute.
Since graduating high school, you have spent the last 12-15 years (or more) of your adult life in school or training. Most of your high school friends spent 0-5 years in school after high school graduation. Some spent 6-7 years total if they got a master’s degree or went to law school in addition to their undergraduate degree. You spent double that in additional formal education and training. Painful.
As a physician finishing residency, all of your friends you went to college with are buying homes, sometimes second homes, driving nicer cars, and going on fun vacations. They have money, they’ve paid off their student loans. Life appears to be good for them. You have had an itch on your back that you have been dying to scratch for the last decade, and now that you finally have your attending contract, you can afford to scratch the hell out of it if you want.
You can go out and buy the expensive house and finance 95% of it. You can buy or lease the fancy car. You can go on the lavish vacation that you have been wanting to do. You can start a family and have your spouse stay home from work. Or you can afford to hire a nanny. Or have your spouse stay home and hire a nanny – you can afford it with the new salary.
Be careful though, because if you do all of those things, you are going to wake up after a year or two in practice and realize you are in a really tough spot financially. You will have allocated every dollar of your income towards bills and expenses and will be living paycheck to paycheck like you were in residency. The difference is, you will feel worse than you did in residency. In residency, you knew your income would rise and you would be able to afford a bigger lifestyle. Now, it’s more challenging to increase your income, so you don’t know how you are going to afford everything and save for retirement, college for the kids, etc.
I am all for splurging a little to scratch the delayed gratification itch. Go on a vacation to Hawaii to celebrate completing residency. Maybe buy a nice bottle of wine or scotch or whatever you like if you drink. Spend a couple hundred dollars on a nice steak dinner at Morton’s. Add the guacamole to your burrito at Chipotle for the extra $2. You deserve it.
Try, though, to keep the splurging to a minimum so you can get yourself on track to achieving your financial goals. The more you start spending now, the more difficult it will be to achieve your goals.
All those years you didn’t get the guac because it was too expensive
Stage Four: Catch-Up
Again, ideally you leapfrog stage three and go straight to stage four. Once stage four is accomplished, go back to stage three. However, I can support tackling stages three and four simultaneously.
Stage four is the catch-up stage. Mentioned in the previous section, when you get into practice most of your college friends are 8-12 years ahead of you when it comes to financial progress. The sooner and more aggressively you can play catch-up, the quicker you will be on track to reaching financial independence.
You have a small-country’s GDP worth of student loans to get rid of. You have a decade of retirement savings to make up for. Time to play catch-up.
If you can continue to live like you were as a resident and aggressively begin paying down your student loans and saving for retirement, your future self will thank you. Begin saving at least 20% of your gross income for retirement and start throwing all of your extra money towards your student loans (unless PSLF is a viable option). Once the student loans are paid off, the money you were paying towards the loans is the money you now can allocate towards that doctor lifestyle you’ve always wanted.
If you were paying $6,000/month towards loans, once the loans are gone, you now have $6,000/month to improve your life with. Continue saving 20% (or more) of your income for retirement. Get a bigger house. Go on nicer vacations. Upgrade the car if you must. Save more for retirement. Save more for college for the kids. $6,000 a month to spend is a lot of money, but it’s not enough to do everything you want, so you still have to be judicious with it.
If you prioritize the catch-up stage early and often, you will breeze through it within a handful of years and can progress to stages five and six. If you allocate too many resources to satiating your need for delayed gratification in stage three, you will spend the rest of your career stuck in stage four playing catch-up.
Stage Five: Get Ahead
Once you have dug yourself out of the hole and paid back your student loans and are saving at least 20% of your gross income for retirement, stage five is where you can really get ahead financially. Make sure you enjoy your life a little bit, but you should be in a position to make significant strides towards financial independence.
Pay extra on the mortgage. Sock extra money away if early retirement is a goal. You can decide how far ahead you want to get. Your net worth should be growing rapidly at this point. There is not much else to add here other than to keep the foot on the gas pedal and you might surprise yourself at what you are able to accomplish financially.
Stage Six: Coast
This might be the point where you retire completely and enjoy life. Maybe you have reached a point where you can stop saving for retirement and scale back to working 2-3 days a week. Depending on your specialty, you might stop taking call. Oh how great it will be to not get called into the ER in the middle of the night ever again. You could decide to leave your regular practice and do locum tenens here and there.
You have officially reached financial independence and have the freedom to work (or not) on your own terms. This is the stage all physicians aspire to reach. Many are able to reach this stage. Few are able to reach it as soon as they would like.
If this is the end goal, it is important to take the necessary steps along the way so you can ultimately get here. It will not be given to you. You have to work hard and earn it. Being disciplined is key. If you can make your finances a priority early and often, you should be able to successfully reach the final stage.
As a physician, putting yourself on a path to financial independence really starts with decisions you make all the way back in medical school. Live frugally. Only borrow what is absolutely necessary to get through school.
The big Y in the road comes when you graduate residency/fellowship and enter practice. You could dive head first into the catch-up stage and put your financial goals at the top of your priority list. Get through the catch-up stage quickly and enjoy a life of financial success from there on out. If you choose to embrace spending instead of saving and paying off debt, you will be stuck in the catch-up stage for a prolonged period of time.
The decisions you make today will impact your life in the future. Think about that whenever you are faced with big financial choices. The correct decision depends on your personal preferences.
Most physicians will experience all six of these financial stages. When they occur and how long each stage lasts will depend on the financial decisions you make along the way.
and create a new loan with new loan terms for you.
Some lenders have restrictions and limitations. For example, some lenders will cap the amount they will refinance ($300,000 is a common limit). Other companies will not cap the amount.
Some lenders require a higher credit score than others. Certain banks are regional and you must live within a defined proximity to one of their branches in order for them to refinance your loans.
There are a handful of lenders who have special refinancing programs for residents and fellows where your minimum required payment is extremely low while in training ($100 or less per month!).
At the end of the day, there is no single student loan refinancing company that is the best in all scenarios. Depending on your financial circumstances, different lenders might be more attractive for you than they would for someone else.
Student loan refinancing is also a highly competitive industry, so odds are there are several companies that could offer competitive loan terms for you. If you need help getting pointed in the right direction, feel free to reach out to us.
What if I Die or Get Disabled?
One concern some people have with refinancing loans is what will happen to the loans if you die or become permanently disabled. Federal loans are forgiven if you die or become permanently disabled.
Most refinancing companies will also forgive remaining balances, but it is always wise to confirm and read the fine print. If there is a co-signer on the loans (maybe both spouses needed to do a joint loan in order to get it approved), you will want to make sure you understand the provisions. The surviving spouse may be on the hook if he or she was a co-signer.
Federal Loans Have Flexibility
One big advantage that federal loans have over privately refinanced student loans is flexibility. Once you refinance your loans, there is no turning back. You are now locked into a rigid loan with mandatory fixed monthly payments. If you chose a variable interest rate, your mandatory monthly payments may increase if interest rates rise.
The new bank doesn’t care if you have a change in income, decide to go back to fellowship, are in between jobs, or have a significant increase in household expenses because you just had triplets. You better make your full required monthly payment on time.
With federal loans, you have a lot of flexibility with your payments plans. You can go from a fixed standard 10-year repayment schedule to an income-based payment plan and back again. You can put your payments on hold during an economic hardship. The federal government (who can print their own money) isn’t as concerned about getting their money back in a timely manner as a for-profit bank. They’ll continue to accrue interest, so you owe even more money! Granted, it is unwise to let your loans accrue interest if you can afford to pay them, but that is a topic for another post.
The point is, your federal student loans are the most flexible loans you will ever have in your life. Refinancing can lower your interest rate, which enables you to pay off the loans faster. Or pay them off in the same amount of time but with lower monthly payments. So, before you give up that flexibility, make sure you are 110% certain that refinancing is the most prudent option for you.