Ten
Financial Tips for Residents
The opinions
expressed in this article are provided as guidelines. Kaplan Management and
Medical Management disclaims any liability or responsibility for the
consequences of any actions taken in reliance on these statements or opinions.
The duties of
residency rarely allow time for pleasure reading, much less in-depth research in
any subject other than medicine. Little time is available to learn about
subjects such as investing, budgeting, or financial planning. The following
list should help you to understand which activities you may want to consider as
a House Staff Physician
1. Consider buying a
house
Interest
from a house mortgage can be a substantial tax deduction. Keep in mind however
that a house includes upkeep expenses that an apartment or rental house does not
incur. Additionally, you may have to sell your home after the completion of
residency. Housing markets and mortgage rates can vary drastically, and three
to five years often does not return even the best planned home investment.
Consider this
option carefully before choosing a home as an investment tool.
2. Start a moonlighting business.
Many
programs allow residents to moonlight both as a source of extra income and as an
educational opportunity. The income earned from this experience can often be
taken as an "independent contractor" from which no taxes are deducted.
The independent contractor status allows you to open a moonlighting business and
report your income on a Schedule C for tax purposes. This means that you can
subtract business expenses such as scrubs, textbooks, car mileage, and office
supplies used exclusively for your business. However, you must put aside money
yourself for the dreaded end-of-year income tax. This includes a hefty
self-employment tax. To compound the matter, after the first year you will be
responsible for payment of taxes quarterly. Look into this carefully before
becoming an independent contractor.
3. Get a copy of your credit report
and study it.
Your
credit report is the document that will make or break your application for
virtually any type of credit—mortgage, car loans, and credit cards. See the
reference list for addresses to obtain your report. If you do find incorrect
information, you can request that the credit-reporting bureau investigate the
information. Even if the negative information proves correct, you have the right
to insert a brief commentary about the entry.
4. Make a budget.
New
residents revel in the one thing they have been denied for so long: a salary.
However, it is often far from a bonanza, and financial management is a key to
surviving this rough period. Start with a list of your fixed expenses—mortgage
or rent, utilities, loan payments, car payments, insurance, savings, etc. Then
add in your "luxuries"—credit card payments and other
non-necessities. The total is what you need to earn. If what you need to earn
exceeds what you bring home, now is the time to pare down expenses.
5. Build an emergency fund.
An
emergency fund is just that, a fund only to be used during genuine emergencies
of the family. When you enter private practice, the common figure is between
three months to one year of net salary. For residents, a more reasonable figure
is three months. If you have disability insurance, your minimum savings should
be whatever living expenses you would incur until the policy payments start
otherwise your elimination period of your policy.
6. Purchase
an Own-Occupation "Specialty Specific" disability policy.
Training for
a career in medicine or dentistry takes a big commitment. Long hours,
personal sacrifices and right now planning for your financial future may
seem overwhelming. If you are just starting its not to early to
start thinking about protecting your future income. In fact, there
is no a better time for you to purchase a disability policy then
now. Since disability policies are based on your situation at the
time of your application, you have the opportunity to put yourself in
the best position and lock in a policy based on your current age, health
and you obtain many other benefits.
7. Choose mutual funds rated five
stars by Morningstar.
Morningstar
Reports (www.morningstar.com) is one
of several respected mutual fund-rating companies. It ranks funds from one star
(the worst) to five stars (the best) based on return. Several other rankings can
also be found elsewhere on the web, including Value Line (www.valueline.com).
For your IRAs and investments (with all that extra money you are saving),
highly-ranked mutual funds are the way to go. Rarely do residents have the time
to thoroughly research companies and monitor them if they directly invest in
stocks, so take the advice of the experts.
8. Open an IRA for both yourself and
your spouse now.
An
IRA (Individual Retirement Account) is an account to which you may contribute a
small amount each year and allow it to grow tax-deferred. Perhaps one of the
best places to set up an IRA is in a mutual fund company. One flavor of IRA is a
Roth IRA, established in tax year 1998. Unlike a traditional IRA, which is
usually tax deductible initially (subject to limitations) but later taxed when
the funds become retirement income, the Roth IRA is NOT initially tax
deductible. So why bother? When you retire, the Roth IRA money is tax-free. This
translates into thousands of tax-free dollars when you retire. You can
contribute up to $2,000 for each spouse for each tax year (total of $4,000 a
year) to your IRA. You have until you file taxes for a particular year to make
an IRA contribution. Unfortunately, the Roth IRA has specific income limitations
that you will undoubtedly exceed after residency. Therefore, save now for
maximum return later. You may also want to obtain a HSA qualified health
plan so you may put more money away for your retirement.
9. Purchase a term life insurance
policy.
A
quick way to get confused is to visit an insurance agent and try to learn about
the different types of insurance. Try to reduce things to the simplest
terms. Most residents need life insurance, but not an investment vehicle. This means a
simple term policy. If you die, your beneficiaries get paid. Term is usually the
least expensive, but this can vary based on the options you add. Be sure to obtain
quotes from several companies. You may want to use a broker who represents
most or all insurance companies thus you will obtain a survey of the least expensive
companies based on financial rating and size.
10. Carefully consider forbearance
on your student loans.
Some
loans allow repayment to be deferred until after residency, but lenders are
increasingly requiring repayment to begin during residency, even in internship,
due to federal constraints. This puts a huge drain on already limited financial
resources. Some lenders allow borrowers to forbear their loans while in
residency. This means they take the interest you are accruing and add it to the
principal. You do have the option to pay off the accruing interest monthly. If
your loans do go into repayment during residency, you may qualify for a tax
deduction of the interest paid on your student loans.
Taking control of
your finances is a large task, made worse by the limited salary and lack of free
time during residency. Residency is often the first real job many physicians
have, and the financial habits developed during this time can have a huge impact
on future financial actions. Taking the time to learn the basics of money
management and sticking to them can pay off handsomely in the years to come.
You may also want to choose unbiased advisors who will present you with solutions
to your problems and not just sell you a product or service. It is always
best to find advisors who specialize in their particular field such as; an
attorney, an accountant (CPA), an insurance broker, and an investment advisor.
Credit Report Information:
www.tuc.com
- Trans
Union Reporting Company
www.equifax.com
- Equifax
credit reporting
Books:
Ernst & Young's
Personal Financial Planning Guide by Robert Garner, et al. ISBN 0471-16484-4
Kiplinger's Practical Guide to Your Money by Ted Miller. ISBN 0-938721-54-2
Personal Finance for Dummies by Eric Tyson. ISBN 0-7645-5013-6
Magazines:
Your
Money
Smart Money
Kiplinger's Personal Finance
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