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, nobody’s 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
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Life
Homeowners
Umbrella
Malpractice
Outline (continued)
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Retirement
College
Educational loans
Other suggestions
Summary
#1 - Absolutely Necessary
Insure Against “What If”
Absolutely
Necessary
(Survival)
• 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 you’re an
employee vs. an independent purchaser
Emergency Fund
 You need a “Rainy Day Fund”, even as a
resident
 3-6 months after-tax income
 i.e., living expenses
 Keep in a safe, liquid, accessible place
 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 you’re 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 they’ll 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 “renter’s 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
 again, make sure the limits dovetail
 Reduce premiums via larger deductibles
 (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 & we’re the targets
 Needs to dovetail with homeowner and
auto limits
 How much? $1-3M+
 Cheap
Retirement? Why now?
 You can’t 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 physician’s lifestyle, you will need
a LOT of money
 A million isn’t was it used to be
 You will all be millionaires (big deal...)
Retirement – Basic Principles
1) Take maximum advantage of matching programs
2) Take maximum advantage of tax-advantaged
programs (401-k’s, 403-b’s, IRA’s, Roths, etc.)
3) Don’t count on Social Security
4) If you’re 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 ½ !
#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 ½!
#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:
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Moonlighting
Consulting
Honoraria
Royalties
Etc.
#2 – “Must Do”
Children’s 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
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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”)
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Give after-tax $ to child
Saved in special joint account
Proceeds taxed at child’s 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
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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 don’t go to college, go to private college, go out of
state, etc.
Pays tuition only - not room, board, books, fees, etc.
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Verdict: Limits choice, but guarantees against runaway inflation
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Probably Best - 529 Savings Plans
 Like Roths for college
 All public/private
university/college/professional schools
 Tuition, fees, room, books, supplies
 Can choose any state’s program
 but, tax advantages often best in own state
 Verdict: This is what I’d do
 www.savingforcollege.com
Children’s 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:
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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 you’ve got to live somewhere
 Both pros & cons of buying during
residency
 Regardless, don’t 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 – Overton’s 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
else’s 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 can’t 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 don’t 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:
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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?
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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!!
 don’t feel entitled, or allow your
significant other to do so
 Don’t become “house poor”, “car poor”, etc.
 Avoid having to work longer and harder to
keep up with your lifestyle:
 Alice in Wonderland – you’re running as fast as
you can just in order to stay in one place!
Summary
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Emergency fund
Health insurance
Disability insurance
Auto insurance
Malpractice insurance
Life insurance
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Homeowners ins.
Umbrella insurance
Retirement
College
Goal setting
Questions?
Advice for Emergency Medicine Applicants:
www.kcms.msu.edu