Resident or Fellow Priorities (No Dependents)
As a resident or fellow you must contend with long work hours and a stressful environment. Priorities include identifying household financial goals and formulating a comprehensive plan to achieve them. Effective planning requires a broad understanding of major financial planning topics including: debt management, insurance, saving, investing, budgeting, retirement planning, and dealing with advisors and brokers. Priorities also depend on family status: whether or not you have dependents.
If you’re single, with no dependents:
- Understand your loan repayment options
- Make at least minimum payments on your loans to avoid capitalization of interest. Capitalization is a process in which unpaid interest is added to your loan principal, making your mountain of debt even higher
- Decide whether you intend to pursue Public Service Loan Forgiveness (PSLF) for federal student loans. If yes, consider consolidating your loans (carefully, to avoid losing prior payment eligibility) and select an approved repayment plan (most likely PAYE or REPAYE are best). Carefully consider implications of electing forbearance or deferment during residency to avoid losing years of program eligibility
- If you don’t intend to pursue PSLF, consider refinancing your debt to lower interest rate(s)
- Save for a down payment on a home, while considering the implications for mortgage debt and real estate as an asset. Review typical Mortgage Loan Application Requirements
- Avoid buying a home if you’re not sure you’ll be staying in the neighborhood for at least 4 years
- Recognize that your ability to earn income is a crucial element of financial planning. Protect that income potential using disability insurance. There are short-term and long-term disability policies. If you maintain a rainy-day fund there is less need for a short-term disability policy. In any case, long-term disability is the more dangerous risk exposure. Select a policy that allows you to specify "own occupation" and is "non-cancellable and guaranteed renewable." It's also advisable to have an "automatic increase rider" that allows you to increase your monthly disability coverage as your base pay increases, without having to be medically tested again. These features are explained in the insurance chapter of e-book 1
- Make sure you have appropriate property and casualty insurance for your home and auto and consider umbrella insurance to increase personal liability coverage to at least $1 million
- Consider a term life insurance policy if you have dependents or plan to begin a family soon
- Set some money aside for a rainy-day or emergency fund
- Budget properly and develop healthy consumption habits—don’t over-extend or over-consume—live within your means!
- Understand the relationship between your budget and your net worth (your nest egg)
- If you have some extra cash, should you pay off debts or invest? Which debts should be paid off first?
- Understand the Time Value of Money; Recognize your most precious resource is time
- Understand the dangers of procrastination. Don’t put off financial decisions: There’s a real cost associated with delays
- If available, contribute to a qualified retirement account, (for example in 401(k) or 403(b)). Take advantage of any retirement plan match, in which your employer matches some of your contributions. Your own contributions help to reduce your tax bill each year, while matched funds from your employer are effectively free money. Set your account up to get the maximum available employer match. Ensure contributions go into investment funds with low fees and high diversification
- Fund a Roth Individual Retirement Account (IRA), if eligible, and understand the differences between Traditional and Roth IRAs
- Understand and embrace a passive investment strategy across all your investment accounts: Diversify investments across asset classes and minimize fees. Seemingly small annual fees on your investments, on the order of 1%, can cost you 15 to 20% of your nest egg after 30 years. 2% annual fees can cost you a third or more of your nest egg! (see time value of money section and the subsequent imperative to Reduce Fees)
- Recognize and resist the very human inclination to impulsively make investing decisions irrationally. More broadly, be aware of common decision making biases. Don't succumb to overconfidence or blindly copy others' actions due to FOMO
- Consider moonlighting and direct excess cash to your rainy-day fund, Roth IRA, paying back debt, or investing
- Understand the roles of various advisors/brokers/agents and decide whether you wish to manage your own investments (DIY) or whether you prefer to find an advisor to whom you can outsource some or all financial decisions. My recommendation is that you pursue as much self-sufficiency as possible as that gives you more control over your assets, reduces reliance on inept or dishonest advisors, and allows you to avoid paying some fees. If you opt to use an advisor, take a look at the Advisor Evaluation Template