A Physician's Guide to Building an Emergency Fund

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While a career in medicine is often financially rewarding, it also often comes with significant debt from student loans. Students in the process of becoming physicians must make substantial investments in their own education, but this should not come at the expense of saving for essentials and emergencies.

It is universally understood that having an emergency fund is crucial and has never been more important than this past year with the uncertainties presented by COVID-19. This is true even for physicians, some of whom have reported decreases in income as much as 50% as a result of changes from the pandemic. People with debt should not dismiss an emergency fund as a luxury—not even medical students, residents, and fellows—and everyone should consider their options. Undeniably, it will come with challenges to set aside an emergency fund that requires structure to balance a budget in congruence with debt repayment.

Convincing yourself that it is necessary to sacrifice and save for an emergency may be difficult at first, but it often makes more sense than racking up credit card debt in an emergency, which would likely have even higher interest rates than student loans. Just because doctors have more debt does not mean that they should save less until the loans are paid off. Rather, they should consider the 50/30/20 Rule that will serve them well through to retirement. Even young doctors with the bulk of their debt to pay off will benefit from saving early due to compound interest over time.

The 50/30/20 equation allocates 50% of income after taxes towards living expenses which includes housing, car or other transportation needs, food, and any other necessities. Student loan payments count towards this first category as well. The next 30% chunk of income should be set aside for savings, investments, or growing a retirement account. The final 20% portion goes toward a discretionary fund to be used for your wants. This can include eating out, travel, shopping, events, concerts, etc., but can also include growing your emergency fund or additional payments towards debt.

The only scenario it would not make sense to make additional payments towards student loan debt would be if those federal loans qualified for Public Service Loan Forgiveness (PSLF). If the long term plan is to work in non-profit institutions and your loans qualify for PSLF then it would be more logical to make smaller payments towards the debt to free up income for savings or other expenses.

Exactly how much should be saved for an emergency fund ultimately varies, but financial experts advise having enough money on hand to cover six months of expenses for essentials like rent, groceries, and other bills. While it might be easy to just keep saving the same way once you hit your goal, it is actually better not to let the emergency fund get too big. This is especially true when factoring how that money could go towards high interest loans or other growing debts.

When deciding where to put an emergency fund it is vital to ensure that it is easily accessible so as not to defeat the purpose of accessing it in a real emergency. Choosing what type of account to use should be narrowed down to ones that do not have penalty fees for making withdrawals of your own hard-earned money.

One of the best places to keep an emergency fund would be in an account with high interest rates so you can make your money work for you. These types of accounts usually have a minimum balance requirement that needs to be monitored, but is still providing a benefit that is worth the added step. Money market accounts will allow for the unlimited withdrawals and easy access, but will require larger deposits to open and could have an overall higher minimum balance requirement.

There are types of accounts that are decidedly poor locations for an emergency fund that should be avoided. Namely, that includes retirement accounts like 401(k)s, 403 (b)s, and Roth IRAs since they are better suited for long term savings plans and will carry steep penalties for making early withdrawals. In this case, the penalty for withdrawing from a retirement account before 59.5 years of age involves not only getting hit with income taxes on the withdrawal, but may also include a 10% penalty when it comes time to file taxes.

There will be inevitable unknowns and variables over the course of any career which is stressful no matter how stable a job may seem. Just because the last year has proven to be unpredictable does not mean you have to be unprepared. An emergency fund will at least grant peace of mind for whatever comes next and it is never too early to start saving for one.

 

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