Your financial journey has a lot of milestones and junctures, starting your new medical career is the first of many. With young healthcare professionals, it’s important to understand the best way to handle your new income situation. While you may be used to living on Ramen noodles and now you have six-digit income, you'll quickly realize you have many places you'd like to focus your money with student loans to pay off, first home purchase, and retirement accounts to put money into, there are many factors that contribute to the decision on how to allocate your money resources. Here are five tips on how you can best use your new medical income.
Tip #1: Retirement Savings and Getting the Company Match
How much should I be saving for retirement? A dollar for every time a financial planner is asked that... It's a deeply personal question with a lot that goes into the actual number. Those that like rules of thumb would say 15% or more. I would argue those just starting out could get by with less, for now. Retirement is still a long way off and you may have other priorities that could be more pressing and give you more overall lifetime happiness. If you start with less, plan to review where you are and plan to increase your savings later, if needed.
If your employer offers a 401(k) or 403(b), make sure you understand if your company matches your contribution. Remember: any employer match is free money. If they match 50% of your contribution up to 6% and you put in that 6%, you get an instant 50% return on that contribution. Not always, but most of the time our recommendation is to put in enough to get your company match before worrying about other issues.
Tip #2: Student Loan Forgiveness & Pay Off High Interest Debt
Advance Practice Providers, Medical Doctors, Pharmacists... what do they all have in common after graduation with their degrees? Student Loans.
I have potentially good news for you. If you work for a government agency or a non-profit company, you may likely qualify for Public Service Loan Forgiveness (PSLF). That means that if you make a few changes with your loan servicer you may get a portion of your loans forgiven at the end of 10 years. Note: PSLF is a notoriously difficult program to qualify for, I strongly recommend you do your due diligence or work with a professional so that you don't waste 10 years just to have your loans not forgiven. If you do qualify and are on track for PSLF, you generally want to pay as little as possible on your loans while making the required 120 payments.
If you don't qualify for PSLF, rural area provider forgiveness, or some other form, you may start to treat your student loans like any other debt and work to pay it off quickly. The biggest trick to paying off debt quickly is to pay the minimum required on all loans, but the extra payments focus on a single loan until its paid off. That frees up cash flow and allows you to focus on the next and then the next until it’s all gone.
Interest rates are the biggest clue on how much you should focus on paying off debt first. Credit card debt is now infamous because of its approximate 20% interest rates. I cannot stress to you enough how important it is to pay those off in full every month. Student loans and other personal loans generally aren’t secured, and the interest could be 6%-10%. It's difficult to guarantee these types of returns in the stock market, my suggestion is to focus your efforts on paying these off before worrying about saving extra. Freeing up cash flow is never a bad thing and paying off debt still increases your net worth. Mortgages and auto loans are generally secured by your assets and you may see lower interest rates around 3%-5%. These are generally cheap, and you may be better off to get your retirement savings up than getting your new home paid off.
If you choose to pay off debt rather than save, make sure you keep it paid off so that you can eventually start saving. I've seen too often that we get one debt paid off only to replace it with a new debt.
Tip #3: Have Peace of Mind During Emergencies
Since you've likely just graduated you probably haven't had time to build an emergency fund yet. Nothing is worse than losing sleep because of an unexpected bill popping up that you cannot pay. Rule of thumb says you should maintain 3-6 months of expenses in an FDIC insured account. If you have high interest debt in the form of credit cards, it may be wise to keep just 1 month of expenses while you pay those off.
In most other cases it’s important that you work towards getting that reserve up. Ask yourself what you would do in the even you lost your job due to a medical emergency. Could you survive until your disability insurance kicks in? Would you be able to pay the bill? For your own peace of mind having adequate liquid reserves is more important than earning higher rates of return. Once you've got those reserves you can then start funneling more into your retirement funds.
Tip #4: Save for First Home Purchase
Burdened by student loans and trying to save for retirement, it’s no wonder so many have put off buying their first home. First time home loans generally only require 3.5% down but depending on your home budget that may still be more than you have. It is okay if you want to forgo additional retirement savings and paying off low interest debt while you save for your down payment.
Just remember once you buy your home you will have a mortgage payment, home repairs, property taxes, and insurance to account for. If you didn't overbudget on your home, you should have to ability to increase retirement savings after the home purchase. Note: A hidden cost to homeownership; if you don't plan to stay in your home long-term selling your home can take a large bite out of your equity with realtor fees and closing costs. Even for sale by owner (FSBO) can be costly with buying realtors and time it takes to sell.
Tip #5: Live Life Today Too
Financial freedom at a young age sounds incredible, retire when your 45 and never look back. If this is your goal, stay laser focused on getting your savings and investment contributions up. You're likely going to need to make a lot of sacrifices to achieve that goal. Is that what you really want?
I've heard too many stories where people sacrifice their health and forget to live in the pursuit of some financial dream. What if something happens when you turn 44 and you never get the opportunity to enjoy that financial dream? My advice to you is to make sure you enjoy life today! You're only young once; if you want to backpack across Europe, there is no better time. Plan for your future, but don't forget to live.
If you enjoyed this article, please consider following to our channel.
Storybook Financial is a financial planning firm determined to help those that believe in the betterment of the world around them. As a fiduciary, our service promotes unbiased financial planning with an emphasis on young medical professionals and their families. We are constantly pushing for new ways to give back to the Cystic Fibrosis community. We are based out of Iowa City | Coralville Iowa, but we serve clients nationwide with our robust virtual presence. This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.