Personal Finance for

Students & Residents

David T. Overton MD, MBA, FACEP

Professor & Chairman of Emergency Medicine
Michigan State University College of Human Medicine
Kalamazoo Center for Medical Studies

Introduction

Why?
We physicians have little business
training
We tend to be easy marks & bad
managers
And if we screw it up, nobodys going to
feel sorry for us

Purpose:

Simple, basic principles

Covers student years, residency & first few
years of practice
This will be The Basics:

This will NOT be fancy!

Some may be too basic for some of you
Some may be too advanced

Outline:

Introduction
Insurances:
Emergency fund
Health
Disability
Auto

Life
Homeowners
Umbrella
Malpractice

Outline (continued)

Retirement
College
Educational loans
Other suggestions
Summary

#1 - Absolutely Necessary

Absolutely
Necessary
(Survival)

L if
eP
lan

Insure Against What If

Insurance Protection Emergency Cash Fund
Debt Management Retirement Planning Estate Planning

Insurance:

Definition:

Insurance = Covering your rear

Overriding principle: When in doubt

Insure for the big stuff
Self-insure the small stuff

Insurance

Original Purpose: pool rare, non-withstandable risks, not first dollar coverage
Common Now: a vehicle for benefits &
entitlements
Differing Motivations: if youre an
employee vs. an independent purchaser

Emergency Fund

You need a Rainy Day Fund, even as a

resident
3-6 months after-tax income

Keep in a safe, liquid, accessible place

i.e., living expenses

Bank, money market fund, etc.

Be sure to get checking & wire privileges

Will take a while to accumulate

How about a VISA in the freezer?

Only a temporary answer

Health Insurance

Usually provided by employers

But make sure youre covered now as a

student!

Use Flexible Spending Accounts (when

employed)

Do NOT count on professional courtesy!

Has gone the way of the dodo

Malpractice Insurance (briefly):

Understand the difference between

Claims-made vs Occurrence coverage

Tail Coverage

When you go looking for a job, be SURE to

determine, up front, who pays the tail!

Life Insurance

Kinds of life insurance

Term (usually preferable)
Permanent:
Whole
Universal
Variable, etc.
Employee - often 1-3 x annual salary, group term
How much do you need?
It depends
Do you really need any at all? maybe not

Disability Insurance

Frequently neglected
Remember - dying is cheap (living is
expensive)
Issues:

How much? (as much as theyll give you)

Waiting period? (as long as you can afford)
Definition of specialty? (as specific as possible)

Employer may provide (but check the

details! You still may need your own policy)

Homeowners Insurance:

Including renters insurance

Includes personal liability

consider an additional umbrella policy:

make sure the umbrella limits dovetail with the

homeowners limits

Reduce premiums via larger deductibles

(ie, self-insure if you can afford it)

Auto Insurance:

Includes liability & hospitalization

Again, consider an umbrella policy

Reduce premiums via larger deductibles

again, make sure the limits dovetail

(again, self-insure if you can afford it)

Analyze coverage frequently

older autos usually need less coverage, esp.

collision

Personal Liability Umbrella:

Personal, not professional, liability

Highly recommended for physicians

litigious society & were the targets

Needs to dovetail with homeowner and

auto limits
How much? $1-3M+
Cheap

Retirement? Why now?

You cant afford not to!

You have something very valuable: Time

Time = the magic of compound interest

Compound interest is the

8th wonder of the world
-- Albert Einstein -

Rich? - It depends.

In order to retire at 65, and support the

average physicians lifestyle, you will need
a LOT of money

A million isnt was it used to be

You will all be millionaires (big deal...)

Retirement Basic Principles

1)
2)

3)
4)

Take maximum advantage of matching programs

Take maximum advantage of tax-advantaged
programs (401-ks, 403-bs, IRAs, Roths, etc.)
Dont count on Social Security
If youre planning early retirement, budget a
flexible cushion (to avoid early W/D penalties
prior to age 59). Better budget for health care,
too

Three Basic Kinds of Retirement Investments

DEPOSIT
#1 401(k)s & 403(b)s
TRADITIONAL IRAs
SEP & SIMPLE IRAs
KEOGH, PSP & MPP

Tax Deductible
(Before Tax $s)

ACCUMULATION

Tax Deferred
(Funds not Available)

DISTRIBUTION

Taxable
(Income & Estate)

ESOPs
IRS penalties for retirement withdrawals prior to age
59 !
#2 LIFE INSURANCE
ANNUITIES
MUNICIPAL BONDS
ROTH IRAs
529/COVERDALE IRAs

Not Deductible
(After Tax $s)

Tax Deferred
(Funds Available with
Municipal Bonds)

Can be Tax Free or

Taxable
You Choose

Possible IRS penalties for withdrawals

prior to age 59 !
#3 CDs, SAVINGS,
MUTUAL FUNDS
STOCKS, BONDS
PARTNERSHIPS

Not Deductible
(After Tax $s)

Partially Tax
Deferred
and
Partially Tax Free

Partially Taxable
And
Partially Tax Free

Retirement Options

401-K or 403-B from employer, common

Roth IRA (see next slide)
Roth 401-K or Roth 403-b new, see if
employer offers
Long-term investment focus

Where? I suggest you start with no-load,

index, stock mutual funds

Roth IRA for Residents / Students

Residents have a 3-5 year window to cash in

(maybe even as students, if you have a job)
(unless your residency offers a Roth-401k)

Can invest $5,000 each year of residency

($10,000 if married)

Roth 401-k or Roth 403-b

A new option
Some (not many) employers offer
A great option if they do better than a
Roth IRA

SEP IRA

Good choice if you have additional

moonlighting type income:

Moonlighting
Consulting
Honoraria
Royalties
Etc.

#2 Must Do

Childrens College Education

Like retirement, but sooner

Some of you may need to start saving
during residency!

Compound interest works here, too

Long-term investment focus

Various Options:

College Expenses One option:

Simply save in parents own name

Simple
Flexible
You maintain control
Lots of investment options
But, no tax advantages

Verdict: not bad to supplement other plans

College Expenses Another option

Uniform Gift To Minors (UGMA)

Give after-tax $ to child

Saved in special joint account
Proceeds taxed at childs rate, within limits
But, child gets control at age of majority

(a Porsche and a trip to Europe)

Verdict: there are better options now

Another Option - Pre-paid State Plans

AKA 529 Prepaid Plans

After-tax $ paid to state fund
Guaranteed to pay tuition when time comes
Accumulates and taken out tax-free
State-specific

Usually state public institutions

In-state tuition only

Penalties: If dont go to college, go to private college, go out of
state, etc.
Pays tuition only - not room, board, books, fees, etc.

Verdict: Limits choice, but guarantees against runaway inflation

Probably Best - 529 Savings Plans

Like Roths for college

All public/private
university/college/professional schools
Tuition, fees, room, books, supplies
Can choose any states program

but, tax advantages often best in own state

Verdict: This is what Id do

www.savingforcollege.com

Childrens College Education - Summary

#1 - 529 plans
#2 - Pre-paid State Plans (ie, MET)
#3 - Save in parents name
#4 - UGMA

Educational Loan Repayment

Complex subject AAMC is a great

resource
Common questions:

Should I prepay my loans?

Should I consolidate my loans?

Where are interest rates going?

Important in your decision to consolidate or not

Educational Loan Consolidation

Great for some, not for others

Motivations to consolidate

Convenience
Improve cash flow
Renew deferments or gain additional deferments

Bad for others:

May
May
May
May

lose eligibility for deferment

lose eligibility for subsidies
lose repayment benefits
force you to capitalize deferred interest

Educational Loan Consolidation

Very complex be cautious of solicitations

Start with medical school financial aid
officer
Contact your current primary loan holder
Get info from the AAMC:

www.aamc.org/students/financing/

Buy a House:

Real estate may not always be a great

investment, but:

Mortgage interest is still a good tax shelter

And youve got to live somewhere

Both pros & cons of buying during

residency
Regardless, dont become House Poor!

Buying Cars

Another necessary evil

Huge life-long expense
Cars are depreciating assets (unlike
houses)
Ways to finance:

Pay cash
Get a loan
Lease

Buying Cars Overtons Advice

Buy the most inexpensive cars you can

stomach, pay cash for them, and drive
them into the ground

(My car has 257,000 miles on it & looks fine)

Even better: Do the same thing, but buy

them two years old, coming off someone
elses lease

Buying Cars - Leases

Not very common these days

Generally not wise financially

(But there are rare exceptions)

Shoulders the highest amount of depreciation
Limits the number of miles you can drive

But, does get more car for a smaller monthly

payment
Better if you insist on driving a newer car

Or cant afford it otherwise

Or you get a rare, really good deal

Flexible Spending Accounts

Once a resident, is a great benefit can

pay:

Health care premiums

Unreimbursed health expenses
Dependent care expenses (!)

...with PRE-TAX dollars - a deal!

If your employee offers, take advantage!

A no-brainer

Moonlighting

A potential source of income during

residency
A source of business deductions

avoids the 2% floor

A potential source of retirement savings

But, need to plan for end-of-year taxes

Credit & Credit Cards

Be careful everyone wants to give you credit!

But they dont want you to use it properly!

Cards are great tools, if used properly:

Convenient

Provides consumer protection (credit, not debit)

Gets frequent flyer miles, discounts, etc.

Helpful for taxes and financial planning

But, you must pay off every month (only rare exceptions)
Limit total number of cards (2?)

Credit Report

Obtain, study & correct every year (for free) & in

advance of major loan applications:

www.annualcreditreport.com

Lots of errors & old accounts

Too much available credit hurts your credit score

Debt

Both a necessary evil & a valuable tool

Overall, try to limit
Consolidate into tax-deductible forms:

mortgages, home equity loans

Avoid credit card debt, auto loans, etc.

More Suggestions:

Stash away 10% of each paycheck, for:

rainy day fund

retirement

--down payment
--whatever

Automatic investment plans

Make a budget

Make & Stick to a Budget

Shortly, you will actually be getting a

paycheck!
You need to establish a budget so that you
can live on a resident's salary, and also
accomplish some other objectives during
residency, like:

Financial Objectives During Residency:

Over the residency years, you want to:
1.
2.
3.
4.
5.
6.

Pay off the credit cards, etc.

Accumulate a Rainy Day Fund
Save up a down payment
Start saving for retirement
Start repaying loans?
Start saving for the kids education?

Use Dollar-Cost Averaging

Save a fixed dollar amount at regular time

intervals
Invest in variable price investments
(stocks, mutual funds, etc.)
By default, you buy more shares when the
price is low, and fewer when the price is
high
Automate it

Learn More:

Personal finance magazines / books

Magazine worksheets
Computer programs
Web:

www.quicken.com
www.smartmoney.com
www.kiplinger.com

Financial planners

but beware how do they make their money?

Some Victorian Financial Advice:

Marry, but marry very carefully

Then stay married:

The never-married wind up with 75% less Net

Worth of long-term married
The divorced have 50% less
The multiply-married have 25% less

Some Victorian Financial Advice:

The moral of the story:

marry very, very carefully

work hard to stay married

Some More Prudish Financial Advice

Keep your pants on:

Infidelity - a major cause of marriage failure

Indiscretion - a major cause of career setbacks
The financial risks are reason enough

Finally, ask what additional goals you have?

Ask what do I / we want out of this life?

Professionally?
Personally?

Financial goals?
Material possessions?
Prioritize - all goals have price tags
Budget & plan

Further Advice

Err on the side of living modestly:

Avoid conspicuous consumption

THE CLASSIC physician pitfall!!

dont feel entitled, or allow your
significant other to do so

Dont become house poor, car poor, etc.

Avoid having to work longer and harder to
keep up with your lifestyle:

Alice in Wonderland youre running as fast as

you can just in order to stay in one place!

Summary

Emergency fund
Health insurance
Disability insurance
Auto insurance
Malpractice insurance
Life insurance

Homeowners ins.
Umbrella insurance
Retirement
College
Goal setting

Questions?

Advice for Emergency Medicine Applicants:

www.kcms.msu.edu