Personal Finance for Students & Residents

David T. Overton MD, MBA, FACEP

Professor & Chairman of Emergency MedicineMichigan State University College of Human MedicineKalamazoo Center for Medical Studies

Introduction

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

Purpose:

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

Outline:

Introduction Insurances:

Emergency fund Health Disability Auto

Life Homeowners Umbrella Malpractice

Outline (continued)

Retirement College Educational loans Other suggestions Summary

AbsolutelyNecessary(Survival)

Insure Against “What If” • Insurance Protection • Emergency Cash Fund

• Debt Management • Retirement Planning • Estate Planning

Life

Pla

n

#1 - Absolutely Necessary

Insurance:

Definition: “Insurance = Covering your rear”

Overriding principle: When in doubt… Insure for the big stuff Self-insure the small stuff

Insurance

Original Purpose: pool rare, non-with-standable 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 i.e., living expenses

Keep in a safe, liquid, accessible place Bank, money market fund, etc. Be sure to get checking & wire privileges

Will take a while to accumulate How about a VISA in the freezer…?

Only a temporary answer

Health Insurance

Usually provided by employers But make sure you’re covered now as a

student! Use Flexible Spending Accounts (when

employed)

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 Security4) 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 InvestmentsDEPOSIT ACCUMULATION DISTRIBUTION

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 orTaxable…

You Choose

Possible IRS penalties for withdrawalsprior to age 59 ½!

Not Deductible(After Tax $’s)

Partially TaxDeferred

and Partially Tax Free

Partially TaxableAnd

Partially Tax Free

IRS penalties for retirement withdrawals prior to age 59 ½ !

#1 401(k)s & 403(b)sTRADITIONAL IRAsSEP & SIMPLE IRAs

KEOGH, PSP & MPP

ESOPs

#2 LIFE INSURANCEANNUITIESMUNICIPAL BONDSROTH IRAs529/COVERDALE IRAs

#3 CDs, SAVINGS,

STOCKS, BONDS

MUTUAL FUNDS

PARTNERSHIPS

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

SEP 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 www.savingforcollege.com

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

www.aamc.org/students/financing/

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

Moonlighting

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: www.annualcreditreport.com * Lots of errors & old accounts

Too much available credit hurts your credit score

Debt

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 --down payment retirement --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:

Over the residency years, you want to:1. Pay off the credit cards, etc.2. Accumulate a Rainy Day Fund3. Save up a down payment4. Start saving for retirement5. Start repaying loans?6. Start saving for the kids’ education?

Financial Objectives During Residency:

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:

www.quicken.com www.smartmoney.com www.kiplinger.com

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!

Summary

Emergency fund Health insurance Disability insurance Auto insurance Malpractice insurance Life insurance

Homeowners ins. Umbrella insurance Retirement College Goal setting

Questions?

Advice for Emergency Medicine Applicants:www.kcms.msu.edu