Medical residents and fellows have an enviable opportunity to build a path of confidence based on creating lifetime income sufficiency and accumulating wealth that will enable them to live a good life today and in retirement. While they may be living paycheck-to-paycheck, future medical practitioners can take some critical steps now that will form the foundation for financial success later.
While that may be stating the obvious for residents and fellows who struggle financially, actually learning how to budget and forming the habits that will enable you to adhere to it is probably the most important financial skill you will ever develop. When the six-figure income starts to roll-in, many new physicians abandon any semblance of a budget which is where most people get off track.
Living by a budget is important, but learning to live below your means is the key to achieving early financial success. Financial goals, at any stage of life, are expensive, and their cost only increases with each day you delay in saving towards them. With so many competing goals and a shrinking time horizon, the only hope one has of achieving them is by spending less so they can save more.
Face it, life happens and when the unexpected occurs costly – a major car or home repair, a big medical expense, an interruption in your income – it can be. The last thing you need is to go deeper in debt. The most fundamental priority of personal finance is to have a cash reserve equivalent to at least six months worth of living expenses saved for such emergencies.
Most residents and fellows have disability income insurance offered to them through a group or association plan. They’re inexpensive, but they’re not permanent, nor are they sufficient for long-term coverage. At some point you will need to purchase an individual disability insurance plan, and the cost will never be less-expensive than it is right now, while you’re young and healthy. The ability to lock-in the lowest cost disability income protection right now is priceless.
You may have heard about it, but, until you fully experience it, you may never truly appreciate it. Compound interest is the effect of interest on the money you earn that also earns interest on the interest. It is the deceivingly simple force that causes wealth to snowball. It’s why, assuming the stock market returns an average of 7 percent a year, a 25 year old resident can become a millionaire simply by investing $800 a month for the next 40 years.* Of course, the key is the systematic investment of $800, or whatever amount you can commit to.
Even though you are forced to delay the start of your career, you still have time on your side. By taking these steps, right now, you will not only lower the cost of achieving financial success, you will have the potential of achieving it more quickly.
*Assuming an investment of $800 per month earning 7 percent compounded annually. Although past performance does not guarantee a future result, the ten-year average rate of return of the S&P 500 index through April 24, 2014 is 7.23%.
*past performance does not guarantee a future result.