Best/Worst Financial Decisions in Residency
Walking on my tiptoes. Quietly closing each door. Avoiding the spots in the floor that I know will make a "creeeaaaaak." Anything I can do to keep from being discovered. What's my big secret you ask?
I was recently at a mall with the wife and infant son. Strolling about (with our stroller, naturally) I saw a young girl sitting in her own stroller sucking on a baby pacifier. The girl was five years old. Do five-year-olds need pacifiers? Maybe, maybe not. I am in the "maybe not" camp. Normally I wouldn't have given it a second thought upon seeing this little girl, but my wife and I are about a month into an ongoing, scattered conversation about when the best time is to cut off our son from his "nukie" (our word for pacifier). He loves using it, and it is quite helpful to have that mute button around. Nevertheless, it would be nice if we didn't have to send him off to preschool or kindergarten someday with his "nukie" clipped on his shirt. Also, have you ever looked at one of those things? They are incredibly dirty. Actually, on second thought, I would recommend you don't look at it. You'll wish you hadn't.
I recently polled a question on the wonderful White Coat Investor Forum, which I highly recommend, asking some of the fellow travelers along the path of physician careers, "What was the best or worst financial decision that you made in residency?" Of note, I have vested interest since I plan on starting residency this coming June/July. I think learning from others' mistakes is one of the best ways to learn and certainly much less painful than learning hard lessons yourself. A couple of themes emerged as people began comment, and we will examine those themes here.
One of the biggest themes found in the responses was taking advantage of retirement savings accounts. Full disclosure- I am quite green on this subject and have only begun to scratch the surface. That being said, what I have gathered is that if you're about to start residency, you should consider two things in terms of retirement savings. First, find out if your resident employer offers a contribution to your retirement savings. For instance, if you contribute 3% of your income to your 401k, will your employer match this contribution? This is very important because by choosing to not contribute to your 401k in this scenario would result in you basically giving up fre money. Your employer isn't going to cut you a check for the money they would have contributed to your 401k to match your contribution. It's either you contribute and they match (up to a certain amount) or you just don't get that money. Don't leave free money on the table!
Secondly, you should consider a Roth IRA (Individual Retirement Account). This is where things get a bit fuzzy for me, but what I can tell you is that someday, you're going to retire. When you do, you will have to take money out of your traditional IRA. Typically how this works is you put money in from each paycheck towards your retirement. When you retire, you can start withdrawing that money to live off of. If you do a traditional IRA, the money goes into your retirement account "pre-tax" meaning that no taxes are taken out of that money when it goes into that traditional IRA. Sounds awesome, right? The bad news is that it will eventually get taxed- when you go to withdraw it in retirement. Since you'll have a lot more money then (during retirement) than you do now (in residency), your money will be taxed in a higher tax bracket, so you'll lose more of your hard-earned money to taxes. No, its not the end of the world, I understand, but there are things you can do to help mitigate this heavier tax hit...
A Roth IRA is similar to a traditional IRA, except you pay taxes on your money upfront. So, during residency, you're taking after-tax dollars and putting them into a Roth IRA, where the money can grow and multiply until your retirement. Since you probably will be making more money during this retirement phase of life than you are during residency, you should take advantage of your lower tax bracket by paying the taxes upfront now. That is the whole point of using a Roth vs. Traditional IRA. I know I am not the best at explaining this.. check out this video.
Looking at the responses that I received from writers on WCI forum (you should join because being a nerd and talking about money is cool), housing seemed to be a big point of decision-making.
Surprisingly, I think more people said that buying a house "happened to be" one of the best decisions that they made during residency because of the certain scenario that they happened to be in and the housing market that they fell into. I think that by in large, these people are more the exception than the rule, and they would tell you that themselves. Everyone has a different life though. Trying to raise 3 kids with your spouse in a small apartment isn't exactly very doable.
If you are going to buy a house, I would caution you to tread lightly. After having gone through it myself in medical school, I wish that I would not have done an FHA loan to buy a house. Even though we have lived here for a few years, we just haven't moved our principal mortgage number very far, so if we have to sell, we won't walk away with very much money. I would encourage you to read more on the subject and start with this- 10 Reasons Why Residents Shouldn't Buy A House.
This is the last big theme that showed up as people responded to my question "What was the best or worst financial decision that you made in residency?" Some mentioned marrying the right person was the best decision that they made. Some mentioned that ending their marriage or relationship with the wrong person was the best decision that they made. Some mentioned gifts (assumed to be from family members) of cars or money that were both helpful and harmful. Interestingly, multiple people got luxury cars as gifts that seemed nice at the time, but ended up carrying with them expensive gas and maintenance bills.
I think the overarching theme for this one is that residency is hard, and the people that you allow to be in your life, the people that become your social support network, can have a significant financial impact on your residency experience. This could be a positive or negative impact. Reading these responses, this point in particular struck me as ironic. I knew that marrying my wife was one of 3 of the best decisions of my entire life, but I failed to realize that marrying my wife might also be one of the best financial decisions of my life. I guess we can say that we didn't marry for money!
We decided yesterday that we were going to cut off our toddler son from pacifiers. I went around the house and collected all of the pacifiers that I could find and then had to sheepishly ask my wife where the other ones were hiding so that I could dispose of them. You could say she wasn't as in love with this plan as I was. All that to say, putting down a toddler for a nap who has used a pacifier for his ENTIRE LIFE up until today to soothe himself to sleep can sometimes lead to problems. Thus, I sneak around upstairs because our little mister finally fell asleep without his "nukie" and I am resolved to not be the reason he is scream crying out of tiredness a few hours from now.
I think we all have seen those kids who are just a bit too old for a pacifier. At some point, our parents said that enough is enough. The "nukie" or "binkie" or "passie" has to go. You just have to learn to live (and sleep) without it. And so it is with our financial lives. Unfortunately, it seems like there are a lot of doctors out there who have refused to grow up financially, still sucking the proverbial pacifier of leaning into whatever whimsical financial idea comes into their heads. These destructive patterns don't form overnight. Don't be like that. Plan your financial future today, and commit to being one of the big kids by building strong financial habits in residency. As the saying goes, "he or she who can be trusted with little will be trusted with much."
There were some really insightful responses left by forum members at The White Coat Investor Forum. Here is a link (WCI Forum: Best/Worst Financial Decision in Residency) to read the thread yourself, and you don't even need an account to do so.