VIEWS: 8 PAGES: 52 POSTED ON: 7/4/2011
Personal Finance for Students & Residents David T. Overton MD, MBA, FACEP Department of Emergency Medicine Michigan State University Kalamazoo Center for Medical Studies Introduction Why? • We physicians have little business training • We tend to be easy marks & bad managers • And if we screw it up, nobody’s going to feel sorry for us Purpose: 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 Outline: Introduction Insurances: Emergency fund Life Health Homeowners Disability Umbrella Auto Malpractice Outline (continued) Retirement College Educational loans Other suggestions Summary Insurance: Definition: • “Insurance = Covering your rear” Overriding principle: When in doubt… •Insure for the big stuff •Self-insure the small stuff Insurance Original Purpose: pool rare, non-with- standable risks, not first dollar coverage Common Now: a vehicle for benefits & entitlements Differing Motivations: if you’re an employee vs. an independent purchaser Emergency Fund You need a “Rainy Day Fund”, even as a resident 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 student! Use Flexible Spending Accounts (when employed) 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 not… Disability Insurance Frequently neglected Remember - dying is cheap (living is expensive) 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. collision 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? Wrong! 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 plans 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 www.savingforcollege.com Educational Loan Repayment Complex subject – AAMC is a great resource 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 officer Contact your current primary loan holder Get info from the AAMC: • www.aamc.org/students/financing/ 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 residency Regardless, don’t become “House Poor”! Buying Cars Another necessary evil Huge life-long expense Cars are depreciating assets (unlike houses) 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 payment 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 pay: • Health care premiums • Unreimbursed health expenses • Dependent care expenses (!) ...with PRE-TAX dollars - a deal! If your employee offers, take advantage! • A no-brainer Moonlighting A potential source of income during residency 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 exceptions) Limit total number of cards (2?) Credit Report Obtain, study & correct every year (for free) & in advance of major loan applications: • www.annualcreditreport.com * • Lots of errors & old accounts Too much available credit hurts your credit score Debt 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 paycheck! 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 intervals 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 high Automate it Learn More: Personal finance magazines / books Magazine worksheets Computer programs Web: • www.quicken.com • www.smartmoney.com • www.kiplinger.com 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 setbacks • 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! Summary Emergency fund Homeowners ins. Health insurance Umbrella insurance Disability insurance Retirement Auto insurance College Malpractice insurance Goal setting Life insurance Questions? Advice for Emergency Medicine Applicants: www.kcms.msu.edu
"Personal Finance for Young Physicians"