5 STEPS TO GETTING YOUR FINANCES TOGETHER AFTER RESIDENCY After four years of undergraduate school, four years of medical school, and three to five years of residency, you’re finally done. You’re making more money than at any other time in your life, but you’ve also accumulated student loans and personal debt in the hundreds of thousands of dollars. You know it’s time to begin focusing on your personal finances, but where do you start and how do you figure out which steps to take toward a solid financial future? We’ve come up with several tips to assist you in getting your finances in order after residency.
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Effectively manage your accumulated debt.
Focus
on paying down your debt by targeting your most expensive debt first. Your most expensive debt tends to have the highest interest rate and is not tax deductible. Your guiding principle should be to pay down any non-tax deductible debt with rates above 5 percent before allocating income towards investments and leisure.
Beware of lifestyle inflation.
Once you’ve graduated from a residency program your income is likely to increase tenfold. That big house and fancy car will suddenly seem within your reach. Financial firms with dollar signs in their collective eyes will start soliciting you as a client. “Lifestyle Inflation” will become a big temptation. Avoid it at all costs.
Lifestyle inflation happens when you increase your spending as your income grows. It’s easy to get caught up in lifestyle inflation. After all, you worked hard for 12+ years, you deserve the finer things that money can buy. Two words of caution: Slow down. Take a deep breath and keep this in mind: If you spend all the extra money you make, it’s going to be very hard to get out from under your debt. Why? Well, for one thing, that big percentage increase in income isn’t really what it seems. Remember: Up to one-third of your earnings will go to the IRS. Combine this with the fact that you already have some catching up to do when it comes to saving for retirement and suddenly you’re looking at an increased spending potential that is less than half of what it originally seemed. Plus, consider this: Lifestyle inflation right after residency can prevent you from paying down your student loans faster. And, the longer you drag out your student loan payments, the more interest you’ll pay over time. So don’t let pent-up deferred gratification entice you to expand your lifestyle to match the extra zeros in your paycheck. It’s a trap and it can reduce the amount you can save while increasing the amount you need to get out from under debt and eventually achieve financial independence.