Navigating the Financial Transition to Medical Residency

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On this week’s edition of the Thalamus Blog, we are excited to partner with Doc2Doc Lending, another physician owned organization with the mission to provide residents with access to problem-solving person loans at rates that give them credit for the promise of their financial future, rather than penalizing them for the circumstances (high-debt, low-income) that are the common reality of medical training.   As always, our goal at Thalamus is to provide the highest level of curated information to help applicants navigate through the UME and GME transition.  From ERAS to the NRMP and to the transition to residency, our goal is to provide insider knowledge from physicians like us, who have lived through these processes.  Take it away Dr. Hatch! 

Disclosure: Dr. Michael Hatch is a practicing anesthesiologist and the Chief Strategy Officer at Doc2Doc Lending – a novel lending platform created for doctors, by doctors, with the aim of facilitating fast access to personal loans at rates that make sense.  Doc2Doc was founded on the belief that doctors are a unique group that are more responsible in repaying debt obligations than the general population.  Doc2Doc employs a proprietary underwriting algorithm which takes into account physician-specific metrics to enable interest rates which are often more favorable than those found at traditional banks.  The above discussion should not be interpreted as financial advice. Dr. Hatch is neither a licensed financial nor investment advisor, accountant, or attorney. Any opinions expressed above are solely his own. 

For the last four years, your life has had a singular focus: learn medicine, discover the field to which you will devote your life’s work, and do everything in your power to land a residency position in that field.  On March 19th, with that goal behind you, you will begin a new journey – that of learning the ins and outs of your newly chosen trade . . . of becoming “a real doctor.” 

The transition to residency ushers in a host of additional changes: (likely) a geographic change of scenery, a longer white coat, a new professional suffix, a new set of colleagues with whom to work, and the transition from being a tuition-paying student to an income-earning resident.  While the PGY-1 salary and the arrival of a paycheck in your account each month will be a welcome change, it is one which prompts some necessary planning.  As you make the move to a new city and settle into a new program, consider also taking the steps below to get your financial house in order.   

Having lived through this experience of residency just a few short years ago, it is not lost on me that personal finances may not be at the top of your to-do list as you navigate this transition.  Undoubtedly, the next several years will be some of the most stressful and challenging of your life, but also some of the most rewarding. 

  1. Prioritize healthy financial habits:  With the demands on your time and attention soon to be required by residency, it can be tempting ignore your finances during this next several years.  We get it, and we’ve been there.  However, the decisions you make in the next several years can make a significant difference in setting you up for financial success in the over the next several decades of your career.  Accordingly, step 1 in navigating this transition is to pay attention, care about the wellbeing of your finances, and make it a priority. 
  1. Deal with your student debt:  The average medical student will graduate with $241,600 in student loans.  Without proper planning, servicing this debt can be one of the most potent demands on your finances throughout residency.  Consult with your medical school’s financial aid advisor, or with your personal financial advisor (another possible step to consider), as soon as possible to understand the options around income-based repayment (IBR), student loan refinancing, and public-service loan forgiveness (PSLF). The acronyms here can be dizzying and endless (ICR, PAYE, REPAYE, etc.), but dozens of online resources can quickly guide you through the decision that suits your situation.  Make this a near-term priority and take your student debt off the list of items to think about through your PGY years. 
  1. Deal with other debt:  Medical students and residents often wear their student debt like a badge of honor; we’re regularly unafraid to let people know that we had the audacity to take on a six-figure liability in the noble pursuit of a career spent caring for people.  The OTHER debts we take on are, however, much less frequently discussed.  The reality is that a relatively high percentage of med students transitioning to residency will also have accumulated debt beyond just student loans.  Those of you who live in New York City, Boston, or San Francisco can attest to just how challenging it can be to meet one’s living expenses with the living budgets established in your medical school’s prospective students pamphlet.  For many, credit cards become the easy means to close the gap, but credit card debt can fairly quickly spiral out of control.  If you are among the significant number of med students currently servicing credit card debt, consider consolidation of that debt into a personal loan, which can offer the following benefits: 
  • If you are currently carrying a balance on multiple credit cards, a personal loan can help you to consolidate multiple payments into one, thereby simplifying your financial record keeping. 
  • Most often, a personal loan can help to significantly lower your interest rate.  Refinancing credit card debt to a personal loan almost always leads to a lower interest rate.  While credit card interest rates are often high as 19-23%, personal loan interest rates, such as those offered through Doc2Doc, can start as low as  5.99%. 
  • With credit card debt, you are charged a (typically variable) interest rate on any balance carried through the end of the month, and the minimum payment required is typically just a fraction of your balance (around 1-2%), plus interest charges and fees that might apply.  While this is good news for being able to make the minimum payment, the result is a vicious cycle: the less you pay towards your balance due, the more interest you’ll owe as the interest compounds.  Your interest accrues interest and the debt becomes more and more imposing.  Refinancing credit card debt with a personal loan allows you to secure a fixed rate, and a fixed term over which you repay the loan – a process known as amortization.  This enables you to more effectively plan for the paying down of your debt, and to know exactly how much you’ll owe each month. 
  • Often, the paying down of credit card debt may serve to significantly improve your credit score – a change to one’s financial profile that can have profound impacts down the road (such as in securing an advantageous rate on a mortgage).  What many fail to recognize is that 30% of one’s credit score is comprised of your credit utilization profile – that is, how much of the credit extended to you are currently using (so if you have a $10,000 limit, but have a $9500 balance, that can significantly your credit score).  Paying down one’s credit card balances is a way to quickly move the needle on that metric. 
  1. Create a budget: This is one of those fundamental steps of personal financial management that most of us just don’t have time to tackle during medical school.  Over these next few months, while preparing for the start of residency, take the time to sit down and analyze your income vs. spending.  The average PGY 1 salary nationally is ~$57,000/year.  You won’t be taking up yachting or globetrotting on that kind of coin, but you can absolutely live comfortably with careful planning.  Grab your monthly bills, download one of the many budgeting software tools currently available for free (Mint, YNAB, Personal Capital) and lay out a basic plan. 
  1. Automate your financial life:  One of your primary goals over the next 4-6 years should be to spend as little time as possible contemplating your personal finances.  To that end, set aside time during the first weekend of residency that you are NOT on call.  Gather each of your monthly bills (rent, electric, gas, water, trash disposal, Netflix, Peloton . . . you get the idea) and make sure that each of them are on autopay.  If you utilize credit cards for the purpose of convenience, ensure you are set up to pay the balance in full each month, automatically.  If you have taken the step (described above), of consolidating outlying debt under a new personal loan, ensure that this loan is set to pay on ACH withdrawal — most lenders will offer a small (0.125 – 0.25%) discount on the interest rate just for doing so.  By never missing a payment, and never missing a bill, you’ll ensure your stellar credit rating remains intact . . . and that your water and heat stay on for when you return home from a 24-hour shift J  
  1. If at all possible, start saving now:  It’s no mystery to those of us in medicine that we are (financially speaking) relatively behind our non-medical peers, financially speaking, during the residency years.  While we have our heads buried in books from age 21-30, most of our college friends are progressing through the corporate ranks, with corresponding compensation increases each year.  As you make the transition to making money, consider developing good savings habits now; savings put away during residency can equate to real gains over the 4-6 years of residency, and the habits you develop now will serve you well into the future:
  2. Set up a Roth IRA:  One benefit of the relatively meager resident salaries is that most of you will fall below the income limits which permit you to contribute to a Roth IRA (MAGI < $139K for single filers, and $206K for those married-filing-jointly).  As such, you can contribute up to $6,000 in post-tax funds away and then enjoy tax-free income in retirement.  Most attending physicians will not qualify for this benefit (except through a backdoor Roth, as described here), so it’s a no-brainer to take advantage of this while you can (assuming it fits into your budget). 
  3. Check to see if your program offers 401K participation / matching:  One of the principal items of financial advice most gurus will offer is to never “leave money on the table.”   To that end, check to see if your program offers 401K participation and – even better – if they offer a match.  If so, consider participating, even if you need to move other pieces of the budget around to make it work.
  4. Consider automated after-tax savings: For many residents living in high cost of living areas, additional savings may be a pipe dream.  However, if you’ve contributed to a Roth IRA, taken full advantage of your 401K match, and still have some extra money on hand, consider creating an automated savings plan, if only to develop these habits early. Even if its just $20 or $50 per month, consider designating an account into which you contribute a preset amount each month.  This could be a high-yield savings account to serve as your “emergency fund,” or could be an index mutual fund at a broker of choice.  The point here is to build the system and develop healthy habits.  That way, when the “doctor salary” arrives just a few years down the road, you can add a zero or two to that monthly contribution and keep on keeping on. 

In summary, the guidance above aims not to create stress by adding to your list of “to-dos,” but rather to empower you to take control of your financial life and eliminate money woes as a source of stress during training.  In the years ahead, the demands on your time may seem almost limitless; some careful planning now to set yourself on the right financial footing will help to relieve some of that burden.   In the weeks ahead, take some time to celebrate the friendships you’ve forged in the halls of your medical school, and to anticipate the momentous experience you are now poised to take on.  Good luck – that long white coat looks good on you. 

Michael Hatch, MD

Chief Strategy Officer, Doc2Doc Lending