There is so much to learn about medicine and ophthalmology, but as you wade through this sea of new information, be careful not to neglect your financial health. The average medical student begins residency with a negative six-figure net worth.
Even if you are fortunate enough to be in a better financial position from the get-go, taking the following steps can help build good financial habits for the future and safeguard your finances for your entire medical career.
1. Maximize Your Savings Rate
First things first. The initial step toward financial independence is to focus on maximizing your savings rate (in other words, how much of your paycheck you can save). To accomplish this requires an understanding of your income, which is likely very steady, and expenses, which you should minimize as much as comfortably possible. There are many apps and websites that can safely link to all of your accounts to help you monitor and manage your budget. My favorite is Personal Capital (personalcapital.com). Others include Mint (mint.intuit.com) and YNAB (youneedabudget.com).
Pay down debt or invest? The next step is to figure out what to do with that extra cash. First, build an emergency fund to cover a couple of months of expenses. If you have student loans, continue making the minimum payments your lender requires. The decision to further pay down loan debt versus investing is personal. There is no wrong answer here. You can do both, as long as you continue to maximize your savings rate.
Student loans. Think of this as an investment with guaranteed returns. Your student loans will likely have an interest rate ranging from 2% to 7%. To decide how aggressively to pay off your loans, you have to examine the rate versus the marginal rate of return for other investments. For example, if your interest rate is high, even after refinancing, paying them off faster makes more sense. Other investments may perform better financially, but are also riskier. Overall, these loans are a safe investment in your future.
Investing. Investing your money is also an excellent option. Even small investments can compound and grow rapidly over the years. Contribute to retirement accounts, whether they’re offered through your hospital or a personal retirement account like a Roth IRA. Then set up a taxable brokerage account and create a simple portfolio of investments that will form the backbone of your financial growth.
As you invest, it’s easy to get caught up in hype stocks, but try to leave emotion out of it. The S&P 500, which includes around 500 of the largest and best-known companies in the United States, has returned an average of approximately 8%. Remember the reality is that more than 85% of professional fund managers fail to beat their benchmarks (like the S&P 500) consistently over the long term. Save yourself unnecessary fees and invest in a foundation of low-cost index funds. If you want a truly hands-off approach, consider investments like Betterment (betterment.com/) or WealthFront (wealthfront.com/), both of which automatically create portfolios of low-cost index funds based on your risk tolerance. Once you have that established, feel free to roll the dice with stocks.
2. Protect Your Future Earnings
As you’ve learned all throughout your medical career, life is precarious, and it’s best to be prepared. There are two main insurance types you should consider prior to finishing your residency, because these costs will increase significantly as you get older and graduate.
Disability insurance. It’s important to have your own disability insurance to replace some of the lost income should you ever need to stop operating due to health issues.
Term-life insurance. In the event of an untimely, unexpected death, you also want to make sure that your current (or future) dependents are cared for, as they too rely on your income. The lifetime earnings of an ophthalmologist are likely around $5 million (assuming a $250,000 salary and no raises for 20 years), so consider covering yourself for around this much, and gradually decrease as you build more wealth.
Avoid whole-life insurance products for now, as these are complex investment vehicles that are overly expensive for what they offer to residents.
3. Educate Yourself
The most important thing you can do to safeguard your finances is to educate yourself! Most physicians get very little financial education, so learn as much as you can to avoid costly mistakes. There are many resources available to get started. Here are some of my favorites:
- Physician on Fire (physicianonfire.com/). An excellent blog and good starting point to find even more resources geared toward financial independence.
- The White Coat Investor (whitecoatinvestor.com/). This is another great blog full of resources for all things related to personal finance. The book, which goes by the same name, offers a basic overview of finance relevant to physicians.
- Bogleheads (bogleheads.org/wiki/Getting_started). This is a site for learning how to invest that advocates for low-cost index funds in particular. This is again based on the fact that most professional, active investment managers do NOT beat the market over the long term.
- Portfolio Visualizer (portfoliovisualizer.com/backtest-portfolio). Once you have an idea of how you want to invest, this website can back test your investment plan and compare it to other investments to help you decide what works best for you.
- The Only Investment Guide You’ll Ever Need by Andrew Tobias. For those that prefer books, this easy read is filled with personal finance tips. It’s ideal for those looking to learn the basics of saving and investing.
- American Academy of Ophthalmic Executives (AAOE) has great resources on personal finance and more at aao.org/practice-management.
You Don’t Have to Become a Financial Wizard
If you prefer, there is nothing wrong with having a complete hands-off approach. However, learn some financial basics so that you have a rudimentary understanding of what is recommended by professionals.
Start your search for financial help with a certified financial planner, a professional designation that demonstrates an ethical standard and fiduciary obligation to put your financial interests first. (Find one at letsmakeaplan.org.)
Residency is an exciting time with so much to learn. Focus on medicine and ophthalmology, but begin to think about your financial future, so that once you are an attending, you have good habits and a plan in place!
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Viraj J. Mehta, MD, MBA,
is an oculoplastics surgeon at Washington Eye Physicians and Surgeons in Washington, D.C., and joined the YO Info
editorial board in 2020.