Managing Personal Finances

Financial considerations are especially important for residents. Fortunately, there are a few simple and reliable financial rules that can help you make the most of each paycheck and establish good habits that can support financial well-being throughout your career as a physician.

Create a Personal Budget

Creating a budget will help you gain a clear understanding of where your money is being spent. You can make a budget worksheet that lets you track your expenses each month. By comparing your actual expenses in each category to the expenses planned in your budget, you can see if you are overspending. You can add categories or trim expenses to meet your financial goals, which might include buying a home or repaying educational debt early.

To construct a basic budget, you will need to estimate your monthly expenses.

These monthly costs could include:

• Housing
• Utilities—for example, electric, gas, internet
• Medical education loan payments
• Student loan payments
• Car loan payments
• Car maintenance and gas
• Insurance—such as disability, life, health, auto
• Groceries (including personal care and hygiene)
• Clothing
• Household maintenance
• Gym membership
• Entertainment
• Travel

If you own a home, you must also plan for annual expenses such as home insurance and property taxes, unless the lender has included them in your monthly mortgage as part of the escrow account. For many, income taxes are taken out of their paycheck automatically, so you will not have to budget for these. However, if you are self-employed or have supplemental income from other sources, you must budget for the federal and state taxes owed on that income. Short-term and retirement savings should also be part of your budget.

Start Saving

Develop a plan to save—even as you are just starting out. Learning to live on 75% or less of your income is a common rule of thumb to simplify decisions about how much to save. Divide your savings into an emergency fund, short-term savings and long-term investments that includes retirement savings.

Given the tax incentives for retirement plans, funding your retirement plan may be as important as paying off your medical education loans or buying your 1st house. The earliest years of retirement-plan funding are the most important because the investments have the longest time to grow.

You can make saving for retirement automatic by having your retirement contribution deducted from your paycheck and deposited directly into your retirement plan every pay period. Some examples of these types of retirement plans are 401K or Roth IRA. For many people, this makes saving easy because they never see—and don’t miss—the funds deducted each pay period. Remember that even if you are in solo practice, you can have retirement funds deducted from your pay.

You can also increase your savings through investments you choose in retirement or other accounts. This may be something you choose to do yourself. The Standard & Poor’s Index generally does better than 85% of financial planners and stockbrokers, so simply placing your investments there could bring you success. In addition, it can be cheaper to invest in many S&P Index 500 mutual funds than to buy managed funds. 

A savings calculator such as this one from Bankrate.com can help you figure out how much money you need to save each month to meet your goals. Other financial and budget calculators can also help you determine how savings will impact your finances. With this information, you can consider which short-term savings and investment vehicles will be the best fit for you.

Common Short-Term Savings Vehicles

Standard, money market and high-yield savings accounts are common short-term savings vehicles. High-yield savings accounts often earn more interest than a standard savings account. A money market savings account is similar to a savings account in that a money market account also pays interest on deposits. However, money market accounts differ in that they may offer more flexibility by allowing you to write checks, make electronic transfers and use ATM and debit cards. It is important to note that savings accounts are typically backed by the Federal Deposit Insurance Corporation (FDIC), which is the corporation that insures deposits in the United States against bank failure, whereas money market accounts are not.

When deciding which type of savings account works best for you, take into consideration the required initial deposit, the interest rate, how interest is compounded, the minimum balance required and your ability to access your funds. Interest rates can vary for each, especially between the high-yield savings accounts offered by online banks and those offered by traditional brick and mortar banks, such as JP Morgan Chase and Bank of America, for example. Free, consumer-based sites such-as-Bankrate.com make it easy to compare interest rates offered by multiple banks.

Intermediate-Term Savings Vehicles

Certificates of deposit are a common intermediate-term savings vehicle. A certificate of deposit (CD) is a specialized deposit made at a bank or other financial institution and held for a specific period of time. When you put your money in a CD, the bank lends out your money to earn interest. The bank pays you interest in exchange for the use of your funds. The interest rate of a CD is based on the specific terms and duration of the CD. Typically, the longer you commit to leaving your money in a CD, the higher the interest rate you’re likely to receive.

When the CD reaches the maturity date, or the end of the term, you have the option to withdraw the money you deposited plus the accumulated interest. The most important thing to know about certificates of deposit is that the initial deposit cannot be withdrawn before the maturity date without penalty.

Keep track of your CD maturity dates so that you are prepared to decide whether to withdraw your money on the maturity date or to renew the CD. If you decide to renew your CD, be sure to reevaluate the interest rate. You may want to compare current interest rates to determine if renewing the CD is the right decision for you.

The interest rate will remain constant for the term of a traditional CD. Bankrate.com and similar websites offer CD interest calculators to show how compounding interest increases a CD’s value.

Other Tips for Managing Your Finances

• Buy disability insurance first.
• Purchase term life insurance if you have dependents or co-signers on your educational loans or debts.
• Avoid or eliminate credit card debt.
• Make tax-deductible investments when possible.
• Consider buying a used car rather than a new one to avoid rapid depreciation in resale value.

Disclaimer: This information is provided for informational purposes only and should not be construed as financial or investment advice. Consult a professional regarding your specific situation.