Personal Finance for Young Physicians by floofiedoo


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									Personal Finance for Students & Residents

David T. Overton MD, MBA, FACEP
Professor & Chairman of Emergency Medicine Michigan State University College of Human Medicine Kalamazoo Center for Medical Studies

 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

 Simple, basic principles  Covers student years, residency & first few years of practice  This 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  Health  Disability  Auto

   

Life Homeowners Umbrella Malpractice

Outline (continued)
     Retirement College Educational loans Other suggestions Summary

#1 - Absolutely Necessary

Insure Against “What If”

Absolutely Necessary (Survival)

• Insurance Protection • Emergency Cash Fund • Debt Management • Retirement Planning • Estate Planning

 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-withstandable 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

 Keep in a safe, liquid, accessible place  Will take a while to accumulate  How about a VISA in the freezer…?
 Only a temporary answer
 Bank, money market fund, etc.  Be sure to get checking & wire privileges

 i.e., living expenses

Health Insurance
 Usually provided by employers
 But make sure you’re covered now as a student!

 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 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 the homeowners limits

 Reduce premiums via larger deductibles (ie, self-insure 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
 (again, self-insure 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 – Basic Principles
1) Take maximum advantage of matching programs 2) Take maximum advantage of tax-advantaged programs (401-k’s, 403-b’s, IRA’s, Roths, etc.) 3) Don’t count on Social Security 4) If you’re planning early retirement, budget a flexible cushion (to avoid early W/D penalties prior to age 59). Better budget for health care, too

Three Basic Kinds of Retirement Investments
#1 401(k)s & 403(b)s TRADITIONAL IRAs SEP & SIMPLE IRAs KEOGH, PSP & MPP ESOPs IRS penalties for retirement withdrawals prior to age 59 ½ ! #2 LIFE INSURANCE ANNUITIES MUNICIPAL BONDS ROTH IRAs 529/COVERDALE IRAs



Tax Deductible (Before Tax $’s)

Tax Deferred (Funds not Available)

Taxable (Income & Estate)

Not Deductible (After Tax $’s)

Tax Deferred (Funds Available with Municipal Bonds)

Can be Tax Free or Taxable… You Choose

Possible IRS penalties for withdrawals prior to age 59 ½! #3 CDs, SAVINGS, MUTUAL FUNDS STOCKS, BONDS PARTNERSHIPS Not Deductible (After Tax $’s) Partially Tax Deferred and Partially Tax Free

Partially Taxable And Partially Tax Free

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 $5,000 each year of residency ($10,000 if married)

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

 Good choice if you have additional “moonlighting” type income:
     Moonlighting Consulting Honoraria Royalties Etc.

#2 – “Must Do”

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 

Children’s College Education - Summary #1 - 529 plans #2 - Pre-paid State Plans (ie, MET) #3 - Save in parents’ name #4 - UGMA

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 May May May lose eligibility for deferment lose eligibility for subsidies lose repayment benefits 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:

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 257,000 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
 Not very common these days  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

 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:
  Lots of errors & old accounts


 Too much available credit hurts your credit score

 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  retirement --down payment --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 the residency years, you want to:
1. 2. 3. 4. 5. 6. Pay off the credit cards, etc. Accumulate a Rainy Day Fund Save up a down payment Start saving for retirement Start repaying loans? 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:
  

 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!

      Emergency fund Health insurance Disability insurance Auto insurance Malpractice insurance Life insurance      Homeowners ins. Umbrella insurance Retirement College Goal setting


Advice for Emergency Medicine Applicants:

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