The transition from a resident physician to a new attending can be a big one. It’s the first time that you’re “on your own” as a doctor. Also, you’re probably working somewhere new and trying to figure out a strange electronic medical record and new hospital system. But with all of this new doctor stuff comes a nice step-up in your pay. With an average salary of $56,500 in 2016, some residents can experience a four to five-fold increase in income once they graduate. Oftentimes, though, that increase in salary does not come along with sound financial knowledge.
Fortunately, there is a lot of educational information readily available to a new attending. All it takes is a little bit of motivation and initiative to get started. What follows is a play off of Dave Ramsey’s 7 Baby Steps but tailored more for physicians. Given their high incomes, doctors should be able to tackle a lot of these steps simultaneously. So without further ado, here are the 10 New Attending Physician Baby Steps.
Step 1: Learn About Personal Finance
One the most important things a new physician can do is learn about personal finance. Speaking from experience, we receive no exposure or instruction on this topic during our medical training. Having a high income won’t amount to much if you don’t really know what you’re doing financially.
To that end, every soon-to-be new attending should spend some time on The White Coat Investor and Physician On Fire web sites. There is so much valuable information there, and it’s all free!
Having a basic foundation of knowledge in personal finance can be helpful even if you decide to go with an advisor. At least you’ll know if you’re getting sound advice, or if it’s time to look for another financial planner.
Step 2: Refinance Your Student Loans
Unless you’re pursuing Public Service Loan Forgiveness, the next step should be to refinance all of your student loans. There is no reason to keep your Federal Loans sitting around with interest rates in the 6-7% range. The goal should be to get as low a rate as possible, so it wouldn’t hurt to shop around among the available options for refinancing. The decision to go with a fixed or variable rate is a personal one. I would opt for a fixed rate, but you can always go with a variable one and pay off the loans ASAP.
Step 3: Insure Yourself
The next thing you should do is insure yourself against catastrophe. While your employer generally offers malpractice insurance (unless you’re in private practice or an independent contractor), you may have to purchase your own individual disability and life insurance policies, especially if you weren’t able to do so during residency.
Life insurance is pretty straightforward. In general, you want to go with term life insurance and avoid other policy types such as whole life or variable life.
Disability insurance, on the other hand, is a bit more complicated and way beyond the scope of this post. In short, you want to purchase a policy that is specific to your occupation and specialty. For an in-depth discussion of purchasing disability insurance, check out these series of posts by The White Coat Investor.
Step 4: Contribute the Maximum to All Tax-Advantaged Accounts
I’m a big fan of paying yourself first. Some would recommend contributing to a 401k/403b up to an employer match (if any) and then focusing on other financial goals. I think that most physicians earn enough to max out all of their tax advantaged accounts, starting with pre-tax ones. This way you’re saving for long-term goals while simultaneously tackling short-term ones.
As an example, let’s consider a married doctor with a non-working spouse making $200,000 a year in gross income. Assuming an effective tax rate of 30%, they would be left with $140,000 a year after tax. Subtracting $18,000 in 401k/403b contributions, $11,000 for a Backdoor and Spousal Roths, and $6,750 for a family HSA would leave $104,250, or about $8,700 a month. That’s a lot of cash to work with, even after factoring in living and other monthly fixed expenses.
Step 5: Save Up a Small Emergency Fund
I am a big fan of emergency funds. The next step, after fully funding your tax-advantaged accounts, is to set aside a small stash of cash. This isn’t a full-fledged emergency fund. It’s just a small amount of savings that you can access for short-term, unexpected expenses. Dave Ramsey’s suggestion is $1,000. While some may find that adequate, I think it’s a bit too low. I would suggest somewhere between $2,000-$3,000, an amount which most physicians should be able to save in one to two months.
Step 6: Pay Off Moderate-to-High Interest Debt
I would put anything with an interest rate of 4% or higher in this category. Typical culprits include consumer debt such as credit cards and car loans. Depending on your credit score and refinance rate, student loans can also fall under this category. This step is all about the math as the chance of earning greater investment returns is small, especially compared with high-interest debt. Things get a bit more complicated with debt in the “gray zone” of 4-5%, but I’m still a fan of paying these off aggressively as well.
Step 7: Top Off Your Emergency Fund
At this point, I would recommend establishing a full emergency fund. I think two to three months of living expenses is enough. Others may feel more comfortable with three to six months. It all depends on your individual financial situation, family situation, and whatever lets you sleep better at night.
Step 8: Pay Off All Remaining Debt Except for the Mortgage
This would be any low-interest debt with rates of less than 4%. Refinanced student loans could fall under this category. While some would recommend leveraging low-interest debt and investing instead, I think that most physicians would be better served by paying down their student loans aggressively within a few years of graduating. This is one of the benefits of Step #4 and paying yourself first; you’re actually investing while simultaneously paying off debt. Also, student loan interest deductions are phased out at a modified adjusted gross income of $80,000 for single filers ($160,000 if married filing a joint return). So pretty much all physicians receive no tax benefits from paying student loan interest.
A mortgage is probably the only type of debt that I would consider keeping around for longer. Not only are the interest rates low, but you also enjoy a mortgage interest tax deduction if you itemize. This can be quite a benefit for physicians who are usually in the top marginal tax brackets. For instance, my mortgage is currently locked in at 4%. But since I itemize and receive the the full deduction on the interest, my after-tax interest rate is more like 2.8%.
Step 9: Invest in a Taxable Account
Now that you’ve made it this far, investing in a taxable account would be my next recommendation. While some would put this step ahead of paying down low-interest debt, I’m more a fan of decreasing your liabilities first. Don’t forget, because of step #4 you’re already investing money for the future. That being said, I think that most new attending physicians should be able to pay off their loans aggressively while still having some additional money left to invest.
Step 10: Pay Off Your Mortgage
The last debt you should pay off is your home mortgage. How quickly should you pay it off? Well, that’s a personal decision. Some would prefer to pay it off and be completely debt-free as soon as possible. Others might prefer to invest and just have their mortgage paid in full by the time they retire. There is no one correct answer, but I do think you should be completely debt free by the time you reach retirement.
Extra Credit: Save for Educational Expenses
This is an extra step for those inclined to save for their kids’ educational expenses. I would hold off on saving for your kids until you’re debt free (except mortgage) and fully investing for retirement. I’m using a 529 Plan for Little Random Guy, but there are a few other options available.
In Conclusion
The transition from resident to new attending can be a challenging one. Whether it’s starting a new job in a new city, or dealing with the feeling of being on your own, there can be a lot of things going on at the same time. Hopefully with these new attending physician baby steps, figuring out and taking control of your finances will be one less thing that you have to worry about.
