Finance & Investing
For many new residents, this is the first time you will be making a steady income. The average new resident has little to no savings, about 100k in debt, and little financial savvy. As medical students, you were probably accustomed to a frugal lifestyle. The new resident has made few financial decisions. Nowtithsatnading that we’re licensed to practice medicine and not dispense financial advice, here are our top tips for financial responsibility.
(1) Live within your means. You’ve got a steady paycheck coming in. The first order of business is to pay yourself. Sounds redundant, but if the money disappears before it ever makes it to your account, you haven’t actually gotten paid.
If you have any high-interest credit card debt, pay it off as fast as you can. Once that’s out of the way, set up an emergency fund and park the money in a safe place (like a savings or money market account). Aim to set aside 3-6 months worth of expenses (rent/mortgage, food, car payment, etc). With interest rates near zero, this money will basically sit, but having it will keep you from raiding your investment or retirement accounts if your apartment or car needs repairs, you have a health problem, or you need a last minute plane ticket.
(2) Save. Do it automatically so you don’t have to think about it. Set up a retirement account (you will likely have an option through work, but you can also just set up an account with any of the major brokerages and have money transferred there every month). Figure out whether a Roth or a traditional IRA is better for you (there are lots of tutorials on the internet which will show you). Try to maximize your contribution to your retirement account. Then save more. In addition to a monthly allotment into my retirement account, I automatically deduct a small percentage of each paycheck which deposits into my investment account. They money never appears in my checking account, so I have no urge to spend it. Pay yourself first.
(3) Ignore wall street. The last 10 years have only destroyed wealth for the vast majority of individuals holding equity and bond investments. That doesn’t mean that things won’t turn around, but there are a lot of very smart people who also believe that things will get far, far worse. I can’t prognosticate any better than anyone else. If you DO decide to invest, opt out of the wall street machine. Brokerage firms make money by investing your savings and taking a commission. But it’s unnecessary. Unless you've got a trust fund with a lot of zeroes, you probably don't need a money manager. Stick with cheap, reliable, transparent index funds. If you believe the market is worth investing in, you’ll NEVER beat it over the long term (even the pros can’t). Check out coffeehouseinvestor.com for more on this idea. They make a convincing argument for investing simply and getting on with your life. Vanguard is the leader in low cost index investing.
March 17, 2012: a new report this week from S&P found that 84% of actively managed US stock funds (versus passively managed "index" funds) underperformed their benchmark index in 2011. (from Standard & Poor’s 10th annual fund performance scorecard)
If you think wall street is too corrupt to park your hard-earned savings, consider investing in yourself. If you plan to have your own practice, start saving the seed money now. Invest in a friend’s small business venture. Start a small company of your own.
(4) If you do invest, DON’T invest in equities/funds/investment vehicles you don’t understand. The latest fads are commodities trading, highly sector-specific exchange-traded funds, inverse funds, managed futures, ETNs. We’re not saying there isn’t a role for some of these vehicles as a small portion in a well-balanced portfolio, but realize that most are expensive to hold and flush with risk.
(1) Build a good credit history – it helps when you go to buy a house, need a loan to start your practice, or want the most favorable terms when leasing a car. You can obtain a free copy of your credit reports once a year at Annualcreditreport.com
(2) Use credit wisely. That doesn’t just mean keeping your spending in line, but also paying off your balance every month. (Paying finance charges just makes everything you buy more expensive. Instead of a $3.00 latte at Starbucks, start thinking of it as a $4.00 latte).
You should only need 1 or 2 credit cards. If you pay off your balance in full every month, the interest rate shouldn’t matter. Nix any card with an annual fee (just not worth it for most people). There are lots of cash-back and rewards cards that don’t charge an annual fee. Ask yourself, if your card working for you? Our advice, spend some time and find a card whose rewards/perks/benefits fit your spending habits and whose rewards you’ll actually use.
(3) What card should I use? We like to travel and like the American Express Blue Sky card. No fee. You earn 1 point per dollar. The reason this card rocks is that you get a $100 statement credit (towards any travel purchase you’ve already made; any hotel, any airline, any car rental company, etc) after accruing 7500 points (that’s 2500 LESS points than with most cards). You don’t turn the points into hotel reservations or airline tickets directly – so there are no blackout dates or other hassles to deal with. You just get your reservation the way you normally would. Then you get $100 back. That’s why we use it. Before making any financial decisions, just read the fine print so you understand what you’re getting.
Another good card is the Chase Freedom VISA, which is a no fee cash rewards card with a good incentive structure. We don’t use it, but they usually offer a healthy sign-up bonus.