1. Create a Budget and Live by It
With your limited income, it’s the perfect time to learn how to budget and live within your means, establishing good habits that will serve you well for the rest of your life.
Your budget should include your housing costs, utilities, transportation, food, phone, insurance, healthcare, student loan payments, entertainment, savings, investments and a buffer for miscellaneous expenses.
Once you’ve created your budget, you need to track it. To make it easy, you can use a budgeting app. By keeping an eye on what you spend versus your budget, you can find variances and correct them if necessary. For example, you may discover your grocery or entertainment spending is higher than expected. If so, you can cut back on some of the high-end food items and, perhaps, dine out less frequently. If you cannot reduce those expenses, you may have to figure out how to trim your budget somewhere else.
2. Start Saving to Meet Your Financial Goals
As noted above, your budget should include the amount of money you want to save. Put this money aside as your piggy bank for long-term goals, such as buying a home. Before you commit to a mortgage, you should have enough money to put 20 percent down. Despite what your realtor may tell you, a lower amount could put you in a shaky financial situation.
3. Build a Rainy-Day Fund
In addition to saving for the good things in life, you should build a liquid fund for potential life setbacks, such as a job loss or unexpected medical bills. Most experts recommend an emergency fund that can cover your expenses for a minimum of six months.
4. Pay Down Your Student Loan Debt
A large majority of medical residents have student loan debt. The average amount is over $190,000.[ii] For perspective, that is close to the average home mortgage taken out by millennials ($197,820 for men and $186,567 for women).[iii] Conquering your debt can play a significant part in your financial success.
Despite your moderate residency salary, it’s best not to wait to pay down these loans. After all, you have to pay interest on them which compounds every day, increasing the amount you owe. Try to pay off some of the principal. If you cannot afford to do that, to prevent the loan’s balance from ballooning, you should at least try to pay the interest.
5. Protect Your Loved Ones
Do you have any loved ones who rely on your income for their financial wellbeing? You may have a spouse, children or significant other who count on you today. Also, you might have a parent who could need assistance in the future. Finally, if anyone cosigned your student loans, they may be responsible for them should you pass away.
To protect your loved ones, it’s worth looking into term life insurance, which is inexpensive to buy when you are young. It will provide you with the peace of mind that should anything happen to you, the people you care most about will not suffer financially.
6. Buy Disability Insurance
Most people view their future with optimism. They tend to think bad things, such as becoming disabled, will not happen to them. However, more than a quarter of today’s twenty-year-olds will become disabled at some point in their career.[iv]
If you have disability coverage through your employer, find out whether it’s enough to cover your monthly budget. If not, consider supplementing your coverage. If you do not have any disability insurance coverage, think about purchasing some.
7. Invest for Retirement
Retirement is a long way away, but it’s best to start saving for it when you are young and can benefit from the compounded growth of your investments.
If you work for an employer that offers a 401K, you may want to commit to contributing the percentage of your income that the company matches. It’s an easy way to increase the amount you invest and to ensure you save. After all, your employer tucks the money away into your 401K account before you see it. If you do not have access to a 401K, you might consider investing in a Roth IRA.
When investing for retirement, you should save a higher proportion of your income than other professionals who start their careers earlier. If they have followed sound financial principles, they have been investing for a while. You have some catching up to do.
8. Get Financial Advice
While these tips can certainly help you, there’s nothing like personal financial advice. A financial planner can walk you through your decision-making process, helping you plan for a secure financial future. They’ll be able to show you how what you spend or save today will affect you in years to come. When you see the trade-offs in black and white, it will help you to adjust your budget, savings and investments while also ensuring you have all the necessary financial protections.
If you learn to budget and live within your means, start paying down your student loans, save, invest, and buy financial protection, you will be well on your way to a healthy financial situation. Also, to make sure you are managing your money as well as possible, obtain financial advice from a financial advisor.
[i] Chron, How Much Do Resident Doctors Get Paid?
[ii] AAMC, Medical Student Education: Debt, Costs, and Loan Repayment Fact Card