Personal Finance for Young Physicians by liaoguiguo


									Personal Finance for
Students & Residents

David T. Overton MD, MBA, FACEP

 Department of Emergency Medicine
     Michigan State University
Kalamazoo Center for Medical Studies
   Why?
    • We physicians have little business
    • We tend to be easy marks & bad
    • And if we screw it up, nobody’s going to
      feel sorry for us
   Simple, basic principles
   Covers student years, residency & first
    few years of practice
   It will be The Basics:
    • This will NOT be fancy!
    • Some may be too basic for some of you
    • Some may be too advanced
   Introduction
   Insurances:
      Emergency fund    Life
      Health            Homeowners
      Disability        Umbrella
      Auto              Malpractice
          Outline (continued)

   Retirement
   College
   Educational loans
   Other suggestions
   Summary
   Definition:
    • “Insurance = Covering your rear”

   Overriding principle: When in doubt…
    •Insure for the big stuff
    •Self-insure the small stuff
   Original Purpose: pool rare, non-with-
    standable risks, not first dollar
   Common Now: a vehicle for benefits &

   Differing Motivations: if you’re an
    employee vs. an independent purchaser
              Emergency Fund
   You need a “Rainy Day Fund”, even as a
   3-6 months after-tax income
    • i.e., living expenses
   Keep in a safe, liquid, accessible place
    • Bank, money market fund, etc.
    • Be sure to get checking & wire privileges
   Will take a while to accumulate
   How about a VISA in the freezer…?
    • Only a temporary answer
                Health Insurance

   Usually provided by employers
    • But make sure you’re covered now as a
   Use Flexible Spending Accounts (when
   Do NOT count on professional courtesy!
    • Has gone the way of the dodo…
    Malpractice Insurance (briefly):

   Understand the difference between
    “Claims-made” vs “Occurrence” coverage

   Tail Coverage
    • When you go looking for a job, be SURE to
      determine, up front, who pays the tail!
                  Life Insurance
   Kinds of life insurance
    • Term (usually preferable)
    • Permanent:
         Whole
         Universal
         Variable, etc.
   Employee - often 1-3 x annual salary,
    group term
   How much do you need?
    • It depends…
    • Do you really need any at all? …maybe
           Disability Insurance
   Frequently neglected
   Remember - dying is cheap (living is
   Issues:
    • How much? (as much as they’ll give you)
    • Waiting period? (as long as you can afford)
    • Definition of specialty? (as specific as possible)
   Employer may provide (but check the
    details! You still may need your own policy)
          Homeowners Insurance:

   Including “renter’s insurance”
   Includes personal liability
    • consider an additional umbrella policy:
         make sure the umbrella limits dovetail with
          homeowners the limits
   Reduce premiums via larger deductibles
    (If you can afford it)
                   Auto Insurance:
   Includes liability & hospitalization
    • Again, consider an umbrella policy
          again, make sure the limits dovetail
   Reduce premiums via larger deductibles
          (if you can afford it)
   Analyze coverage frequently
    • older autos usually need less coverage, esp.
      Personal Liability Umbrella:
   Personal, not professional, liability
   Highly recommended for physicians
    • litigious society & we’re the targets
   Needs to dovetail with homeowner and
    auto limits
   How much? $1-3M+
   Cheap
        Retirement? Why now?
   You can’t afford not to!

   You have something very valuable: Time

   Time = the magic of compound interest
“Compound interest is the
8th wonder of the world”

             -- Albert Einstein --
          “Rich”? - It depends….
   In order to retire at 65, and support the
    average physician’s lifestyle, you will
    need a LOT of money

   A million isn’t was it used to be

   You will all be millionaires (big deal...)
             Retirement Options
   401-K or 403-B – from employer, common
   Roth IRA (see next slide)
   Roth 401-K or Roth 403-b – new, see if
    employer offers

   Long-term investment focus
    • Where? I suggest you start with no-load,
      index, stock mutual funds
    Roth IRA for Residents / Students
   Residents have a 3-5 year window to cash in
    • (maybe even as students, if you have a job)
    • (Unless your residency offers a Roth-401k)

   Can invest $4,000 each year of residency
    ($8,000 if married)

   But, this is peanuts, right?
   If $4K x 4 years, at 10%: $408K+ at 65
   If $8K x 4years, at 10%: $816K+ at 65

   If $4K x 4 years, at 15%: $1.8M+ at 65
   If $8K x 4 years, at 15%: $3.6M+ at 65

   Morale: It pays to start early...
       Roth 401-k or Roth 403-b

   A new option
   Some (not many) employers offer
   A great option if they do – better than
    a Roth IRA
                     SEP IRA
   Good choice if you have additional
    “moonlighting” type income
    • Moonlighting
    • Consulting
    • Honoraria
    • Royalties
    • Etc.
     Children’s College Education

   Like retirement, but sooner
   Some of you may need to start saving
    during residency!
    • Compound interest works here, too
   Long-term investment focus
   Various Options:
    College Expenses – One option:
   Simply save in parents’ own name
    • Simple
    • Flexible
    • You maintain control
    • Lots of investment options
    • But, no tax advantages
   Verdict: not bad to supplement other
     College Expenses – Another option
   Uniform Gift To Minors (“UGMA”)
    • Give after-tax $ to child
    • Saved in special joint account
    • Proceeds taxed at child’s rate, within limits
    • But, child gets control at age of majority
         (“…a Porsche and a trip to Europe…”)
   Verdict: there are better options now
    Another Option - Pre-paid State Plans
   AKA “529 Prepaid Plans”
   After-tax $ paid to state fund
   Guaranteed to pay tuition when time comes
   Accumulates and taken out tax-free
   State-specific
     • Usually state public institutions
     • In-state tuition only
   Penalties: If don’t go to college, go to private
    college, go out of state, etc.
   Pays tuition only - not room, board, books, fees, etc.
   Verdict: Limits choice, but guarantees against
    runaway inflation
     Probably Best - 529 Savings Plans
   Like Roths for college
   All public/private
    university/college/professional schools
   Tuition, fees, room, books, supplies
   Can choose any state’s program
    • but, tax advantages often best in own state
   Verdict: This is what I’d do

      Educational Loan Repayment

   Complex subject – AAMC is a great
   Common questions:
    • Should I prepay my loans?
    • Should I consolidate my loans?
         Where are interest rates going?
         Important in your decision to consolidate or not…
     Educational Loan Consolidation
   Great for some, not for others
   Motivations to consolidate
    • Convenience
    • Improve cash flow
    • Renew deferments or gain additional deferments
   Bad for others:
    •   May   lose eligibility for deferment
    •   May   lose eligibility for subsidies
    •   May   lose repayment benefits
    •   May   force you to capitalize deferred interest
     Educational Loan Consolidation

   Very complex – be cautious of solicitations
   Start with medical school financial aid
   Contact your current primary loan holder
   Get info from the AAMC:
                  Buy a House:
   Real estate may not always be a great
    investment, but:
    • Mortgage interest is still a good tax shelter
    • And you’ve got to live somewhere
   Both pros & cons of buying during
   Regardless, don’t become “House Poor”!
                   Buying Cars
   Another necessary evil
   Huge life-long expense
   Cars are depreciating assets (unlike
   Ways to finance:
    • Pay cash
    • Get a loan
    • Lease
     Buying Cars – Overton’s Advice

   “Buy the most inexpensive cars you can
    stomach, pay cash for them, and drive
    them into the ground”
    • My car has 220,000 miles on it & looks fine
   Even better: Do the same thing, but buy
    them two years old, coming off someone
    else’s lease
             Buying Cars - Leases
   Generally not wise financially
    • (But there are rare exceptions)
    • Shoulders the highest amount of depreciation
    • Limits the number of miles you can drive
   But, does get more car for a smaller monthly
   Better if you insist on driving a newer car
    • Or can’t afford it otherwise
    • Or you get a rare, really good deal
       Flexible Spending Accounts
   Once a resident, is a great benefit – can
    • Health care premiums
    • Unreimbursed health expenses
    • Dependent care expenses (!)
     ...with PRE-TAX dollars - a deal!
   If your employee offers, take advantage!
    • A no-brainer

   A potential source of income during
   A source of business deductions
    • avoids the 2% floor
   A potential source of retirement savings
   But, need to plan for end-of-year taxes
            Credit & Credit Cards
   Be careful – everyone wants to give you credit!
     • But they don’t want you to use it properly!
   Cards are great tools, if used properly:
     • Convenient
     • Provides consumer protection (credit, not debit)
     • Gets frequent flyer miles, discounts, etc.
     • Helpful for taxes and financial planning
   But, you must pay off every month (only rare
   Limit total number of cards (2?)
                   Credit Report
   Obtain, study & correct every year (for free) &
    in advance of major loan applications:
    •      *
    • Lots of errors & old accounts

   Too much available credit hurts your credit
   Both a necessary evil & a valuable tool
   Overall, try to limit
   Consolidate into tax-deductible forms:
    • mortgages, home equity loans
   Avoid credit card debt, auto loans, etc.
           …More Suggestions:

   Stash away 10% of each paycheck, for:
    • rainy day fund     --down payment
    • retirement          --whatever
   Automatic investment plans
   Make a budget…
         Make & Stick to a Budget

   Shortly, you will actually be getting a
   You need to establish a budget so that
    you can live on a resident's salary, and
    also accomplish some other objectives
    during residency, like:
Financial Objectives During Residency:

Over these years, you want to:
  1.   Pay off the credit cards, etc.
  2.   Accumulate a Rainy Day Fund
  3.   Save up a down payment
  4.   Start saving for retirement
  5.   Start repaying loans?
  6.   Start saving for the kids’ education?
        Use Dollar-Cost Averaging
   Save a fixed dollar amount at regular time
   Invest in variable price investments
    (stocks, mutual funds, etc.)
   By default, you buy more shares when the
    price is low, and fewer when the price is
   Automate it
                 Learn More:
   Personal finance magazines / books
   Magazine worksheets
   Computer programs
   Web:
   Financial planners
    • but beware – how do they make their money?
    Some Victorian Financial Advice:

   Marry, but marry very carefully
   Then stay married:

    • The never-married wind up with 75% less Net
      Worth of long-term married
    • The divorced have 50% less
    • The multiply-married have 25% less
    Some Victorian Financial Advice:

   The moral of the story:

    • marry very, very carefully
    • work hard to stay married
Some More Prudish Financial Advice

   Keep your pants on:
    • Infidelity - a major cause of marriage failure
    • Indiscretion - a major cause of career
    • The financial risks are reason enough
        Finally, ask what additional
              goals you have?
   Ask “what do I / we want out of this life?”
    • Professionally?
    • Personally?
   Financial goals?
   Material possessions?
   Prioritize - all goals have price tags
   Budget & plan
                   Further Advice
   Err on the side of living modestly:
    • Avoid conspicuous consumption
        THE CLASSIC physician pitfall!!
        don’t feel entitled, or allow your
         significant other to do so
    • Don’t become “house poor”, “car poor”, etc.
    • Avoid having to work longer and harder to
      keep up with your lifestyle:
         Alice in Wonderland – you’re running as fast as
          you can just in order to stay in one place!
   Emergency fund             Homeowners ins.
   Health insurance           Umbrella insurance
   Disability insurance       Retirement
   Auto insurance             College
   Malpractice insurance      Goal setting
   Life insurance

Advice for Emergency Medicine Applicants:

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