Good structures and habits can save you when life feels overwhelming and chaotic. And there will be few times in your life that feel more overwhelming and chaotic than dental school, medical school and residency. So, as financial planners, we’d like to share the 7 best things you can do now as a student to lay the groundwork for financial success in your life and career.
Please note, these steps do not guarantee future financial success, but we believe they put you in the best position to succeed.
As you’ll see, most of these are not rocket science. Financial planning can become broad and complex, but the basics are still very simple. Start there, and over time, grow your knowledge along with your wealth.
Have a place for every penny. Know exactly what you need for monthly expenses, savings, loan repayment, investing, and an emergency fund, just to name a few. Don’t worry if it’s only a few dollars in each place; the point is not to get rich this way, but to create habits that will be of significant benefit when you earn a higher income.
When you can, automate as much as possible so that you aren’t even tempted to deviate from the financial plan you establish. The second your income hits your checking account, distribute every dollar to the pre-determined accounts according to your plan.
2. DON’T SPEND MORE THAN YOU EARN
This is perhaps the most simple-but-not-easy concept that exists in finance. Everybody knows we shouldn’t spend more than we earn, but our culture is great at enticing us into things we cannot afford, and it is also good at duping us into believing we can afford it. How many commercials have you heard this week that say something like, “No credit? No problem!”
It’s such a temptation to look a few years down the road and think, “I’ll eventually have the money to buy something nice, so why not go ahead and do it now?” But you are not a few years down the road; you’re basically a poor college kid. Poor college kids don’t buy luxury cars, speed boats, or expensive houses. They shop at Goodwill and sometimes ride the bus.
It’s one thing to set a budget, but it’s another to stick to it. One of the most fruitful habits you can develop in residency is the discipline to live within your means.
3. START PAYING STUDENT LOANS NOW
You may think it’s better to hold onto all your cash while you earn a lower income, but that’s not the case. As we wrote about here, there are three good reasons to start paying off those loans now:
Student loan interest is tax deductible, and for the first few years that’s basically all you’re paying. Make the payment and take the tax deduction.
You’ll enter your full-time career with ~48 payments under your belt and only 72 to go.
It’s possible to make qualifying payments through an eligible repayment plan without making any payments during your first year of dental school or residency. The payment is based on your income and if your income was zero or very low during your last year of school, then you may have qualifying payments as low as $0.
It may sound like a temporary benefit to save the cash you would otherwise spend on student loan repayment, but the pros of paying off student loans during residency far outweigh the cons because there's a pretty good chance you'll end up being contracted with an eligible non-profit. If you are, you'll be glad you paid in the small amount required during residency.
4. INVEST, EVEN IF IT’S JUST A LITTLE
When it comes to investing, time really is money. For instance, if you wait even an extra year to start saving for retirement, the annual contributions necessary to reach your retirement goals increase by significant margins every year you delay.
Take a look at this chart:
Note the center column, "Annual Amount Saved." The annual contributions to your retirement account must increase if you delay savings and wish to reach your retirement goal. After just a few missed years, that number starts to increase at a steep rate.
A little bit of money invested early can benefit from compound interest over a longer span of time and has better earning potential than saving a larger sum of money down the road with a shorter time horizon.
5. HAVE AN EMERGENCY FUND
Contributing to an emergency fund is a great habit to establish because no matter how much money you earn, car tires will blow out, pipes will burst, pets will get sick, and trees will fall during thunderstorms.
Last-minute tickets to see your favorite band or an extravagant date night with your significant other does not qualify as an emergency. Emergency Funds are needed when a situation is urgent and not covered by insurance or otherwise subsidized. There is no way to accurately prepare for every emergency and your emergency fund may not cover all expenses when disaster strikes, but it relieves some stress to know that a cushion is there if you need it.
And, again, this is not about the amount as much as it is about the habit and the practice of setting money aside for minor (and sometimes major) inconveniences in life.
6. CONNECT WITH A FINANCIAL PLANNER
Time and time again, clients come to us as they exit training with family loans, personal loans, or credit card debt because they didn't set money aside for interview season, getting licensed was more costly than expected, or possibly due to the move for fellowship coupled with maintaining homes in two cities.
We find this unexpected debt to be crippling for so many coming out of training.
Though we encourage the minimum payment during residency to qualify for PSLF, we typically do not recommend contributions to a Roth IRA for this reason. Why save money in a savings tool that you cannot touch without penalty until 59 1/2 when you know you'll need cash on hand to pay for the cost associated with several transitions.
I'm not worried about the average resident or fellow having enough money when they're 60, but I am worried about whether or not they'll have enough money now given their incomes and potential expenses. I get it, you'll pay less in taxes now than you will in the future, but we are talking about avoiding taxes on the growth of $24,000 if you made contributions during each year of dental school or residency. The calculated benefit is small and commonly offset by compounding credit card balances or worse, the penalty for cashing out early because of one's need for the cash today.
7. MANAGE RISK
Disability Income insurance is a must for physicians and dentists, and it’s wise to purchase it even when you’re in training for your career.
A disability during dental school or residency could create a situation in which you are unable to enter into your career in medicine and earn the income you expected because of your condition, yet you would still be required to pay back your student loans. If you have federal student loans and no ability to work, you may be able to qualify for student loan forgiveness through Total and Permanent Disability Discharge (TPD).
However, if you're not permanently disabled and are partially injured or temporarily absent from school, you will still be required to repay your loans in full. That can be a difficult obstacle to overcome if you have limited or no income due to a disability.
Many disability policies for residents have student loan riders available that provide an amount over and above the typical disability benefits a dental student or resident would receive to help them cover their loan payments should you become disabled. That way, you can use your disability benefits to cover lifestyle expenses, and let the student loan rider cover the loan payment.
But this is not just about paying off loans. The primary need is to have an income source if you're not able to work in the future. As was said above, it is tempting to live as though you already earn a high income, but the reality is you currently do not. It’s wise to protect yourself and your future income with Disability Income insurance.
As for life insurance, it is wise to own a plan that covers total debt, future college expenses for your children, and ensures there is a lump sum large enough to create an annual income for your surviving spouse, enough so that it would allow them to maintain a consistent lifestyle.
As financial planners, we see the big picture in ways that many who are stuck in the starting gates cannot, and that’s why it’s a good idea to make that connection before debt and other factors cause you to spiral out of financial control.