After graduating from medical school, you likely already have significant student loan debt—don’t add to your financial load by incurring even more debt throughout your residency. A certified financial planner offers some ways residents can finish their training with cash to spare.
“What I see at the end of residency is just a need for cash—almost always,” said Chris Long, who specializes in financial planning for physicians. “Whether it’s preparing for boards, wanting to take a little time off before practice, relocation, all sorts of things …. If you don’t have a plan to accumulate some savings or have a savings target by the end of residency, you’ll probably go further into debt.”
So how do you get to that goal? Follow the system Long developed for residents who don’t have time to micromanage a complicated budget.
- Understand your cash flow using a monthly budget. You can use online budgeting tools and apps, but Long prefers a simple spreadsheet program like Excel (download Long’s template.) List your monthly take-home pay, fixed expenses and savings. Make sure you budget for things like car or home maintenance and clothing. Aim for a slight surplus at the end of each month.
- Establish separate accounts to keep track of your spending and saving. Set up two checking accounts and a savings account. From your budget worksheet, subtotal amounts for savings, discretionary, and fixed expenses. When you get paid, pay yourself first by putting an allocated amount of money into savings. Then transfer your allocated discretionary amount into your discretionary checking account. Leave the rest in the other checking account. Many residency programs will allow you to split your direct deposit into multiple accounts. The discretionary account should be your variable expense account, or what you use for groceries and the “fun” expenses, such as entertainment and dining out. Long said it’s helpful to use a debit card linked to an online bank account so you can quickly see how much you have in this account. Monitor your discretionary account balance and make spending decisions based on this balance until you get paid again. Don’t rob from the surplus in your primary account or savings, and avoid using credit cards.
- Use your other checking account for your “fixed” expenses and bills. Surplus should build-up in this account over time for things like house or car maintenance, clothing and seasonal variations in utility bills. The idea is to avoid using credit cards and invading savings for these expenses when they crop up.
- Don’t rush to start investing. If you don’t have a surplus at the end of each month without investments, then it’s probably not wise to invest right now. Start with managing your cash flow, then move into learning about investments.
“The first step always should be to create a budget that allows you to have some savings,” Long said. “People tend to underestimate how much they spend on eating out, groceries and those sorts of things. If they can actually save their target without dipping into their savings, then they can start discussing what they have access to in terms of IRAs and 401k's.”
