Category: Resources

The Amazing Leverage Residents Have That No One Realizes

Alright, so you’re working at least 80 hours a week and get four days off a month, woohoo! Doesn’t sound like a whole lot of leverage, does it?

What I want to talk about today is the Physician Mortgage, and why it’s such a great tool, not only to allow flexible purchase of a home, but also to help newly minted MDs have a shot at the American Dream before they become attendings a decade later (again, looking at you, general surgery & IM residents with future fellowships).

What’s a Physician Mortgage and How Does it Work?

There are a few key differences from a Physician Mortgage vs. traditional mortgages. Namely:

  • Can have a very high (up to 100%) loan to value ratio. This is the amount borrowed over the cost of the home. If you finance 100% of a purchase, you have the potential for zero down on your home.
  • Typically, banks charge borrowers PMI (an additional monthly fee called Private Mortgage Insurance) to protect the bank in case a borrower defaults when the loan to value ratio is above 80%. This is why you often hear of “20% down” when purchasing a home. With a Physician Mortgage, there isn’t any PMI payment, even if you bring less than 20% of the cost of the home to the transaction.
  • Borrowers are evaluated based on a number of factors, from credit score to employment, and in particular, what’s their monthly income to debt ratio. Since many residents graduate from medical school with large loans – these loans would normally be considered when determining a borrower’s income to debt ratio. For Physician Mortgages, student debt isn’t typically included in the calculation, making it easier to qualify for a home loan.

That’s the list! In short, a Physician Mortgage allows residents to leverage their future (hopefully high) income and secure a loan for a home mortgage at rates quite similar to a conventional (non-physician) 30 year term loan with little to nothing down. You can use your meager residency income (and high student debt) to get banks to give you a loan with favorable rates – how’s that for a physician benefit?

If you’re curious, the other loan product that’s quite similar to physician mortgages are VA Home Loans – available to those that have served in the armed forces. They’re very similar to physician loans, and they also have good refinance terms – I haven’t found a refinance product for physicians that avoids paying PMI. If you’re a veteran, check out this option as well. The WSJ (paywalled, sorry) recently published an article about VA Loans no longer having loan limits – good for high cost of living areas.

This Sounds Great, How do I Get a Physician Mortgage?

There are a number of banks that offer this specific product – The White Coat Investor has a great resource to find physician mortgage providers in your state. Make sure you shop around and get a few different quotes – it doesn’t take a terribly long time, and getting the lowest interest rate you can will help you save over the life of the loan.

From the experience The Surgeon & The SurgeonSpouse had with the physician mortgage, it worked quite well for helping us to purchase a home. We ended up putting 0% down and keeping our savings in our investment accounts. What I haven’t mentioned but also is critical – what’s the cost of living where your residency is?

Photo by Scott Webb on Unsplash – If the white picket fence is your thing…

I Live in a High Cost of Living Area – Help!

I hate to break it to you, but you might be SOL in this case. There are a number of factors to consider when evaluating whether it makes sense to buy a home while in residency.

  1. How long is your residency?
  2. How expensive is your area?
  3. Do you want to own a home?

The New York Times has a great tool that can help you compare the cost of renting vs. the cost of buying to see which makes the most financial sense. Of course, if you want to buy a house and you’re dead set on it – use the physician mortgage to help you out!

We were fortunate that The Surgeon’s residency is in a relatively affordable market, and could purchase a home within a year of The Surgeon starting her residency. My plan is to live in the house through residency and then ideally rent the home out in fellowship and beyond, turning our first home into an income generating investment.

With Great Power Comes Great (Financial) Responsibility

There are some great benefits at your disposal, like the Physician Mortgage, now that you’re a resident. Before you buy a house, you’ll want to make sure you get your financial house in order. There are a number of great tools that can help you get a holistic view of your financial health. If you have a lot of credit card debt, for example, you’ll likely want to address that first before making the plunge and buying a home, which adds another large monthly outlay to your balance sheet.

Use the physician mortgage to buy a home and build equity while also being able to deploy your funds to other areas with higher potential return – like a retirement account!

Did you buy a house while in residency? How did it go? Drop a note or ask a question in the comments!

-SurgeonJourney

What’s a ROTH Account and Why Does it Matter?

There are few inevitabilities in this world, certainly death and taxes. We’re going to skip the former and talk about the latter: Taxes, and why it matters when decided which type of retirement account to choose.

A Tale of Two…Accounts

In the world of tax advantaged retirement accounts, there are two main types that you can have: Traditional or ROTH. The big differences between the two are when taxes are recognized on the accounts. The great feature that both types of accounts share is that earnings recognized (dividends, capital gains) in the account aren’t taxed.

What’s the Deal with Traditional 401k’s or IRAs?

For a Traditional Retirement Account, contributions made to the account are pre-tax dollars, which means that these contributions aren’t taxed and also reduce your tax exposure for the tax year in which they are made. You can’t avoid taxes forever – when you do take a withdrawal from a Traditional Retirement Account, you will pay taxes on that as income.

Most suggest that when you are in your higher income earning years, you should contribute to a Traditional retirement account to defer taxes until withdrawal. This is based on the theory that you’ll have a lower overall tax burden in retirement than when you are working. For example, say you make $300,000 – your effective tax rate (taxes paid/gross income) will be higher than when you take withdrawals in retirement from your various accounts. This is very much based on your personal situation, but it can be used as a general guide.

How about a ROTH 401k or IRA?

ROTH account contributions are made with post-tax dollars, meaning that you’ve already paid federal taxes for that income. Because of this, the money in a ROTH account is never taxed again – however there’s always an outside chance that Congress might change the rules, though most consider this outcome unlikely. For ROTH IRAs, there are additional income limits – once you make a certain amount annually, ROTH IRA contributions aren’t allowed. (I have some suggestions for those who are above or near the income limits). For ROTH 401k and other employer sponsored plans, these income limits don’t exist.

It’s worth noting that there are two main ways to have a retirement account, through employer sponsored plans (401k, 403b, 457b/f) or opened yourself (IRA – Individual Retirement Account). The big difference between an IRA and employer sponsored retirement accounts are the contribution limits. An IRA is limited to $6,000 annually while an employee sponsored plan allows up to $19,500 of employee contributions annually. There is a big advantage to having access to an employer sponsored plan for the higher contribution limits. However, this is only valuable for those that make enough to comfortably contribute the full amount to their employer plans. The ideal situation is to make the max contribution to both your IRA and employer plan, to maximize tax advantages.

I Want to Start Investing, Which Retirement Account Should I Pick?

Though very much an individual decision based on your circumstances, I would generally suggest that if you are in your residency, fellowship, or early in your career, choose the ROTH option to maximize your tax-free account growth over decades. It’s the option that I choose for my 401k and I make contributions to The Surgeon’s and my (the SurgeonSpouse) ROTH IRA annually.

For some real numbers to understand the potential saving and investing opportunity, here’s how much The Surgeon and me can potentially save in tax-advantaged accounts annually:

Surgeon’s ROTH IRA$6,000
SurgeonSpouse’s ROTH IRA$6,000
SurgeonSpouse’s ROTH 401k + Employer Match ($6k)$25,500
Total in retirement accounts for tax year 2020:$37,500

If we take that $37,500 and invest it in the market for the next 30 years, (even if we don’t add any more to the initial investment) and account for an 7% annual increase in the market (not including inflation), this will be worth $285,000. If you make consistent annual max contributions (of $37,500 in this scenario), this could potentially grow to $3.8 million in 30 years.

Given the recent tax cuts and overall tax environment in the US currently, many speculate that this is the lowest tax rates we might see in our lifetimes (as a card carrying millennial here). If we’re basing our investment decisions on this theory, then it’s definitely a wise choice to pay taxes now and invest in a ROTH account.

What’s the TL,DR?

In summary, choose ROTH accounts (if available) early in your career to put away as much money as you can post-tax into tax advantaged retirement accounts. If you don’t earn enough to comfortably make maximum contributions to all accounts (don’t worry! life is a marathon, not a sprint), contribute what you can to your ROTH IRA first.

I know I just threw a ton of information at you – what questions do you have? Leave a note about your retirement account investing strategies in the comments! Whether you’re just starting out, or a seasoned investor, taxes are always an important component to consider when saving and investing.

-SurgeonJourney

How To Save Money When Your Program Doesn’t Offer a 401k or 403b Match

Working like a dog, Eight days a week?

You’re working those 80 hour weeks (at least), and stoked to be putting some money on the positive side of the ledger after years of studying and taking out loans. Hooray!

Talking with your non-medical friends, you hear about employee sponsored retirement plans like a 401k or 403b (for tax-exempt organizations) and are looking forward to getting a match on your hard earned contributions – BUT WAIT.

NO SOUP MATCH FOR YOU!

In most cases, residency programs do not offer a match for retirement contributions. While conducting research for this post, I reluctantly stowed my righteous indignation (for all residents) after learning more about the regulatory process for 401k and 403b programs.

These employer sponsored investment options are means-tested, specifically meaning that there are onerous regulatory requirements to ensure that an adequate distribution of employees across income ranges are taking advantage of the programs. If there are a disproportionate amount of high-wage earners using employer sponsored retirement program relative to the rest of the workers, the employer can be penalized.

If your employer doesn’t offer a match, particularly for a 403b, it’s likely this is because there will be less administrative fees associated for the plan as it doesn’t need to be means-tested. In this case, you won’t get a match, but you also aren’t hit with more management fees.

For comparison, at the SurgeonSpouse’s non-medical employer, I pay $12/quarter in management and regulatory fees to Fidelity – not that bad, really. The company also shoulders some of the fees, and the choices I have for investment are not amazing – more target funds and less passive-indexing ETFs. Nevertheless, I do get up to 6% salary match on my contributions, so not complaining.

I Don’t Get a Contribution Match, What Should I Do?

While in residency, take a look at you income holistically – I’m going to take an educated guess that (if you’re a resident) you’re in the $55,000 to $70,000 range, depending on your Post Grad-Year. Based on this, you’re going to want to be thoughtful about how you deploy your income from housing to food to entertainment to savings. I get it, you gotta eat – and you should.

Here’s my recommendation – focus on personal retirement plan options, specifically the Individual Retirement Account, or IRA, as it’s usually known. This plan is similar to a 401k/403b in that it provides pre-tax (traditional) or post-tax (ROTH) contribution options, though that’s where many of the similarities end.

The contribution limits for an IRA are lower ($6,000 in tax year 2020) than an employer sponsored plan ($19,000 in tax year 2020) – but you have more flexibility for investment options. Nearly all well-known brokerage houses offer IRA accounts. I use Vanguard and recommend them for their low fee ETFs. Fidelity, TDAmeritrade, and others offer IRAs as well.

How Much Should I Contribute?

This is a very personal question and very much depends on your situation. Say you’re making $60,000 a year. If you do make the maximum IRA contribution, that’s 10% of your pre-tax income – and we haven’t even talked about taxes, housing, loan payments, and living costs.

My advice is that it’s important to begin saving and investing as soon as you can, but don’t eat less so you can save more – you can be thoughtful about how often you choose to eat out and take more affordable vacations, for example.

If you’re looking for a specifically number, set a goal per year and break that up into a contribution each month. Perhaps you want to save $2,000 or $4,000 a year – that’s $167 or $333 a month – not bad! Every year that you save, even something, will grow for the decades to come. Over the long run, the US market grows roughly 8% per year.

Why Contribute at All?

With a high-income on the horizon, it can be tempting to delay saving, but the power of time and compound interest is potent – even Warren Buffett noted it. There’s an apocryphal tale of Einstein & compound interest as well, either way – it’s not wrong. Basically, the more time your money has to grow, the more you will have years from now – with less work. Remember, IRAs don’t allow non-penalized withdrawals until you’re 59 and 1/2 – this is putting money away for the long term.

Image result for einstein compound interest

Additionally, getting into the habit of saving now will help set you and your family up for a comfortable, less-stressful future – particularly as you get closer to retirement.

Questions?

While a seemingly simple question, there are lots of things to consider between employer sponsored and employee retirement accounts. Let me know what questions you have in the comments!

How The Surgeon and The SurgeonSpouse Managed Medical School

This originally was included inside the post about how to manage loans and finances while in medical school. Though the summary advice of that particular post is: don’t spend too much, get a roommate, and manage your finances closely – perhaps some of you were looking for more salient advice. Given that, I wanted to break out what we did into it’s own post for more detail.

What Did YOU Do During Medical School?

Before Med School

For some personal background about the SurgeonSpouse (tm) here at SurgeonJourney, I worked for a healthcare software company (with a solid 401k & benefits) right after undergrad. Though I had great benefits, I totally didn’t know it at the time. Knowing what I know now, I was lucky I decided to throw a bunch of money into my 401k – I didn’t know about suggested investment strategies and I didn’t know what resources to use on the web.

While I was working at the healthcare company – The Surgeon was doing research and preparing for medical school. At this time we lived in different cities and correspondingly kept our finances separate. To her immense credit, the Surgeon is a frugal BOSS and knows how to stretch the dollars when she needs to.

Med School – The First Year

Fast forward a year or two and the Surgeon is in her first year of medical school. We’re still in separate cities and I visited with my hard earned consulting airline miles (I’ll have to do a post about some frugal travel tips in the future. Would certainly help for residency interviews). The Surgeon, being the frugal badass that she is, lived with a fellow grad student and had a carefully planned weekly food budget and menu. She packed all her own lunches and cooked dinner at home.

Much of this meal planning and living arrangement takes discipline and a healthy amount of delayed gratification. Skills that apply not only to finances, but to a variety of things in life – like staying the course to becoming a doctor. Luckily, the Surgeon has an abundance of both! If you’re reading this blog and have made it this far, you, too, likely have these attributes.

Second Year and Beyond

Through her first year, The Surgeon kept to her budget and did a really good job of limiting expenses. At the start of second year of med school, I left my healthcare consulting job and moved to be in the same city as The Surgeon. We looked around and found an affordable apartment near the school and made the big decision to move in together!

Moving In with a Partner?

There are a lot of practical decisions to make when moving in together, it’s a great step in a relationship. We had to talk about and make decisions on things like:

  • Who’s paying for groceries?
  • Are we splitting rent? If so, how are we going to do that – evenly or based on income?
  • Are we putting both our names on the lease?
  • Which name(s) are we going to use for utilities?
  • Are we sharing streaming accounts?
  • What do we do with our furniture?
  • Which way does the toilet paper face? (FACT: there’s only one right answer to this and I’m sticking to it)

Sure, the questions can go from the more practical and reasonable to slightly more esoteric – but you’ll encounter every aspect of a partner when living together. It’s important to have these discussions upfront – especially about the TP.

Some of the financial conversations can get sticky if not broached early, by talking about them ahead of time, it can save a lot of angst down the road. Alas, I digress, back to financial advice.

Being a Partner of a Med Student

I found a job in the same city as The Surgeon, which worked out well while she was in school. We were fortunate that her med school was in a larger metropolitan area but still relatively affordable – in the Southeast, I’m sure you can guess which city. There’s a vibrant startup community and I was able to get a great job while The Surgeon finished the remaining three years of med school.

Having an income really helped out our financial situation while The Surgeon was in school. Since we lived together, I tried to pick up expenses where I could to minimize loans. It should also be noted that we had been together for four years at this point (since senior year of undergrad), so sharing expenses and living together was the next ideal step for us.

Photo by Volkan Olmez on Unsplash

Fourth Year!

Until forth year, spending is fairly predictable. It is worth noting, amusingly, that generally med school tuition goes up for third and fourth year. Of course this is when you’re done with your didactic years and moving to clinical rotations. You’ll have sparing classroom time once clinicals start, though it was always strange to me that tuition goes up for your final years when you’re not really in a classroom.

What throws a wrench in finances for your forth year is residency interviews. Once you choose a specialty, you’ll start picking out residency programs based on your scores and aspirations. Depending on what you choose, you may end up applying to a few dozen programs. For every program that extends an interview, that travel is on your dime.

We also got married, which isn’t exactly cheap endeavor – but still file taxes separately! #PSLF.

Residency Interviews – Unavoidable Travel Expenses

For The Surgeon’s residency interviews, we used a combination of airline miles, low cost carriers, and creativity to keep costs low. But when you don’t have a lot of scheduling flexibility nor advance notice – flights can get expensive. To save on hotels when she could, the Surgeon would find a friend who lived in the interview city, if possible. Otherwise, it was AirBnB and hotels.

You might end up spending a few thousand dollars on interviews once you’re done. Between all the travel, and also the interview attire, it adds up. In the future, I’ll do a post on some credit cards I’d recommend to take advantage of all that travel spend, something I wish I thought of sooner.

Final Thoughts on Med School Finances

Overall, you’ll make it through! We did it with a combination of saving and careful planning, coming out with federal loans just shy of $200,000 (that interest was already adding up) – hooray! I made some loan mistakes that I definitely will cover in the rest of the loan and PSLF series.

What questions do you have about finances during med school? Questions for The Surgeon and The SurgeonSpouse?

-SurgeonJourney

During Medical School: Managing Debt and Living Costs

So you’ve chosen a medical school, enrolled, and are happily studying through first year and loving anatomy lab. How do you manage your expenses and loans while in school? Excellent question, dear reader, and this builds on the previous post in the series that provides a high level summary of securing student loans.

Every person has a unique financial and life situation – perhaps you have a partner and are sharing living expenses. Are they in school? Are they working? Do they make a comfortable amount and are you close enough such that they can support you while you’re in school?

What kind of loans do you have, private or public?

From the perspective of managing loans while in school, both private and public loans generally allow you to defer making payments while you’re a full time student. Note however, that your loans will continue to accrue interest whether or not you’re making payments. Because you’re fully focused on school, it doesn’t make sense to make payments until after you’ve graduated. I’ll go into detail about ways to manage your public and private loans once you’ve graduated from medical school in a future post.

Managing Expenses – Find a Roommate!

Here’s where having the discipline to focus on keeping a budget will save you in the long run. By using one (or more) of these tools, you can get a perfect picture of your monthly income and expenditure, and carefully plan out what you’ll need each semester.

If you don’t have a partner that you’d consider sharing expenses with, there are additional options you have to save on housing costs. Check with your fellow classmates to see if they’re looking for roommates – do make sure you’re compatible living together. If the idea of living with a fellow med student is like bringing work home with you, see if you school has other graduate programs. Like med students, students in other grad programs are typically focused, high achieving, and might make an ideal roommate or three.

Ultimately, shacking up with a roommate for a few years while in school isn’t the worst thing you can do. It’s a great way to save on your largest expense outside of med school tuition and can reduce your need for loans.

Budget for Larger Expenses

As you progress through medical school, remember the long game. By the time you become an attending, (if you’re in the US), your superlative education will include:

  • Four years of undergrad
  • Four years of medical school
  • at least 3 years of residency
  • TOTAL: 11 YEARS after high school

If you’re like the Surgeon and planning on a surgery sub-specialty, that’s a seven year residency (including research). Tack on roughly two years of fellowship. Say you’re interested in becoming a Thoracic Surgeon. That’s a 17 YEAR ride after high school – buckle up.

My point with this isn’t to scare you, but to realize that your high income years (at this point) are about a decade away, the decisions you make regarding finances early on can save you much later in the long run. Remember, life is a marathon, not a sprint.

During medical school, larger expenses might include mandatory testing (like STEP exams), vacation (responsibly), transportation (keeping your car alive), and in your fourth year: residency interviews. Loans are certainly one way to manage these expenses. But another, perhaps more prudent option, would be budgeting and planning for these expenses ahead of time.

What Should YOU Do?

In the end, I can’t tell you what to do. I know what worked for The Surgeon and me, and I’ve seen what can work for others. Ultimately, it’s about being responsible with your financial decisions, closely evaluating living arrangements and expenses, and keeping your mind and body healthy for the long run.

It’s also great to instill these habits early, so that once you are making a bit of an income (at least adding to the positive side of the ledger) in residency, you can work on saving. Keeping those habits into your attending years will have you set up to be debt free while maximizing your financial potential for your life time!

What questions about expenses and budgeting do you have while in med school? How to make ramen more tasty? Adding an egg and some leafy greens can really kick up a ramen pack on the cheap.

-SurgeonJourney

Resources for Managing Finances and Life Advice

It’s hard for anyone to get where they are without some help and guidance. With today’s resources available view the world wide interwebs, there’s never a better time to educate yourself about personal finance and student loans. The financial advice you might be seeking also likely ends up going along with some sage life advice – good gems to collect along the way.

I’ve Googled and searched more terms than I can count and stumbled upon these blogs and sites that I’ve found incredibly helpful while navigating med school loans for my spouse and researching different investment portfolios and tax strategies.

Without further ado, here’s the list of blogs I check at least weekly for new content, and have used their posts countless of times for research.

Mr. Money Mustache

One of the first FIRE bloggers I discovered – I started reading and talking about Mr. Money Mustache with colleagues when I worked at a startup a few years ago. MMM started out in software, similar to my own profession, and has now “retired” and pursues his own interests, many of which are quite lucrative.

While MMM’s frugalness takes it to the next level, it’s a great way to think about how your own life decisions affect your ability save and retire. I thought his post about commuting was particularly sobering.

The White Coat Investor

After I had been reading MMM, I started looking for more specific advice for those in the medical field. The White Coat Investor is an excellent resource for investing for more established physicians. Additionally, WCI also some great content regarding student loans and physician mortgages. Check it out!

Physician on FIRE

An anesthesiologist in the midwest, this blog is particularly focused on leveraging a high income profession to FIRE – financial independence and retire early. He has some great posts regarding investment portfolios, traveling, and how to successfully execute the back door ROTH contribution. With new posts all the time, I check out PoF nearly weekly for updates!

I’ll credit the above for helping navigate through decisions for med school loans and how to successfully stay on course for PSLF – Because there isn’t one great resource for medical students and early residents to use for financial decisions and PSLF, check out my guide to loans and PSLF!

There’s so much great content available on the web, leave a comment with your favorite resources and posts!

-SurgeonJourney