Let’s take a break from ‘starting a medical practice series’. I will talk about what is personal finance and why medical residents should start taking financial responsibility ASAP. Here are the reasons:
Medical residency is a time when the salary is barely enough to make through the month. Hence medical residents are more prone to get into credit card loans. This can spell disaster and may take next few years of their physician job to recover from it.
It’s a good time to develop good financial habits such as developing the habit of saving, spending within budget, paying bills on time to maintain your credit ratings etc. It will help you later when you need a loan to buy a house or start your own medical practice.
One thing I will recommend is reading the book “Personal Finance for dummies" at least two times. It is a well written book about personal finance in a simple language. You will be surprised how it will change your outlook forever.
Financial responsibility is a habit and it has to be developed. Saving is difficult in the beginning but, as you see your money grow in your saving account, it can become very addictive.
So let me give you few recommendations on what you can do. However you need to do more research to find out if it suits your situation. I am not a finance specialist, I am just a doctor:
SAVE MONEY! Even if it means saving fifty dollars a paycheck. Ideally you should have 3 to 6 months of your post tax income in your saving account. Why? So as to avoid becoming homeless if you become disabled or you residency program shuts down. It may take few months before you can find another one.
WHERE TO PUT THE SAVED MONEY? Most of the Medical Residency programs provide 401K plan and they match up to certain percentage of your contribution to it (Usually 3 to 6 % of your paycheck). So if you don’t save money to put in your 401K, you lose that extra contribution from your program. That is lost money for you.
HOW TO FIND OUT IF YOU HAVE 401K or NOT? Call the Human Resources for the hospital and they can guide you and even set up the account for you. Ask them to directly deduct it from your paycheck.
HOW TO HANDLE YOUR 401K ACCOUNT? That’s a totally different topic but I will recommend you to read the book ‘Personal Finance for Dummies” at least TWO times.
BUT A FINANCE GUY TOLD ME TO OPEN A ROTH IRA BEFORE IT’S TOO LATE? Kick the finance guy out of your life. May be I should issue a FraudALERT on this. You can open your own IRA at www.vanguard.com or www.tdwaterhouse.com and save yourself lots of money. But 401K savings is better if your medical residency program matches your contribution.
SOMEONE IS SELLING YOU LIFE INSURANCE? Yeah they are probably asking you to buy ‘Whole life insurance’ instead of ‘Term Life Insurance” because they make more money in commissions if you buy it. The cost of whole life insurance per month is almost like a car payment. And if you can’t maintain the payment, you lose almost all of your money in penalties. Read the book on personal finance before making that decision.
FIDDLE WITH STOCKS: Open an online stock investment account such as www.scottrade.com and put about $200 to start investing in the stocks. Remember put only a little amount which you can afford to lose completely as stock markets are risky. Then research stocks, buy and sell them. Do you like going to Vegas? Well stocks are a legal form of gambling almost!! The good thing about following this piece of advice is that when you graduate from the medical residency program, you will already be stocks savvy. Even if you lose your $200 consider it well spent tuition fee for learning the fundamentals of stock investing. And then you can start investing the tripled salary coming from your first physician job effectively.
Learning to manage your finance is a process. You don’t have to be an expert in the beginning but you need to start it right away.
