| March 24, 2022
Residency is replete with firsts: Your first patients, your first rounds, and your first paycheck. If your specialty lands among the top earners, you likely will make somewhere between $60,000 and $67,000 a year. On the surface, that may seem adequate. The average US salary stood at $55,628 in 2020, for context. However, the median medical school debt was $200,000 the year prior, stretching every penny of those residency wages.
Under the weight of that debt, a few missteps could lead to substantial financial setbacks early in a doctor’s career. A physician could miss out on investing opportunities, have to delay starting a family, or wait longer to purchase a home. But it doesn’t have to be that way. As you begin residency, you can add another first to your list: your first financial plan, which should include these priorities.
Whether they realize it or not, the average resident begins their career staggering under the weight of that $200,000 albatross. Unfortunately, the federal government hasn’t made understanding student-loan repayment easy. But you made it through medical school. You can master student loans.
First, determine whether you qualify for Public Service Loan Forgiveness (PSLF), which may wipe out a portion of your student-loan debt. Since many hospitals and healthcare organizations are nonprofits, residents are often PSLF-eligible if they meet the following criteria:
Employment with a federal, state, local, tribal, or nonprofit organization (federal employment includes the military)
Work full-time for that employer
Have direct loans
Are enrolled in an income-driven repayment plan
Make 120 qualifying payments under that plan
Qualifying payment plans include the following:
Revised Pay As You Earn (REPAYE): Payments are usually 10% of your discretionary income.
Pay As You Earn (PAYE): Payments are usually 10% of your discretionary income, but never in excess of the 10-year Standard Repayment Plan (SRP) amount.
Income-Based Repayment (IBR): If you’re a new borrower on or after July 1, 2014, payments are usually 10% of your discretionary income, but never in excess of the 10-year SRP amount. For those who aren’t new borrowers on or after July 1, 2014, payments are usually 15% of discretionary income, but not in excess of the 10-year SRP amount.
Income Contingent Repayment (ICR): The lesser of either (a) 20% of discretionary income or (b) the total on a 12-year, fixed-payment plan adjusted to your income.
Finally, a word of caution about loan forbearance. Forbearance is an authorized period during which you are not required to make loan payments. Residents can receive forbearance annually during residency. They just need to inform their loan provider that they are in a residency program.
For example, your discretionary income as a resident likely will be low, making your income-driven payments low as well. While it’s true that you won’t have to pay while in forbearance, you’ll miss out on years of low payments that could have counted toward that mandatory 120 payments for PSLF. Paying now may be more cost-effective than making higher, income-driven payments after residency.
Budgets are the blueprint of a resident’s financial life. They’re also somewhat controversial in the physician personal-finance space. For example, while some doctors thrive on hashing out the nitty-gritty spreadsheet details of a budget, others lose sight of the big picture, hit a setback, and return to budgetless living. The key is knowing yourself.
If you’re the type of physician who enjoys detail, you may benefit from a service like You Need a Budget (YNAB). YNAB is an envelope-based budgeting system in which every dollar you earn has a job. You set up your envelopes—which can include common budgetary categories such as groceries, dining, entertainment, or anything else for which you must account—and set spending limits for each of those envelopes. YNAB links to your bank accounts to automatically track transactions. Because you can only spend dollars that you already have, YNAB may be an ideal budgeting solution for residents.
For doctors who cringe at the thought of such a granular approach to budgeting, they can purchase a copy of Ramit Sethi’s I Will Teach You To Be Rich. Sethi’s budgeting method is more holistic. He suggests the following breakdown:
60%: Essentials such as rent, utilities, groceries
20%: Fun money for discretionary spending
10%: Cash savings for your emergency fund (more on that later in this article)
10%: Investments in your employer’s 401(k) or 403(b)
Note the 10% cash-savings goal in Sethi’s approach to budgeting. It’s there for a good reason, one which many physicians learned the hard way in 2020, when their earnings fell. At the height of the pandemic, the AMA surveyed 3,500 physicians to assess COVID’s impact on their bottom lines. The average doctor saw a 32% decline in revenue.
Cash is king when addressing life’s unpredictable moments, which can include pandemics or lesser concerns such as car repairs, veterinary or medical bills, an unexpected move, or legal fees. All of these scenarios are sufficiently stressful without incurring debt.
Traditional personal finance guidance calls for 3 to 6 months of expenses, set aside in a savings account. While this is a laudable goal, it may be difficult to achieve on a resident’s salary. Start small. Aim to have one month accumulated by the close of Q2 of your residency. If that was easy, scale up.
The less you have to think about saving, the more likely it will happen. Most bank accounts offer automated transfers. Set up a recurring transfer a few days after your pay dates. The transfer should send a percentage of your check to a savings account. If it’s Sethi’s 10% target, great. If that’s too steep, anything is better than 0%. Scale up as you can. Then, sit back and beam with pride as that money accumulates.