Budgeting as a New Doctor
Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.
The member’s experience below is not a typical member representation. While their story is extraordinary and inspirational, not all members should expect the same results.
Dr. Christine M. has always been goal-oriented about her finances. That approach worked well when she decided to become a doctor. She stretched an annual salary of $55,000 during her five years as a resident and fellow. Once she became a new doctor in private practice on the East Coast, she made paying down her medical school loans her top priority. By being frugal, she was able to pay them off in three years.
The road to becoming a doctor is long — 11 years at a minimum — and the average cost of medical school is expensive. The median medical school debt for the class of 2021 is $200,000, according to the Association of American Medical Colleges. And that’s not counting undergraduate student loans, credit card balances, or other debt.
But the hard work can pay off. A doctor’s median annual salary is around $208,000. That’s a significant increase from the $60,000 average annual salary a first-year resident earns.
If you’re a doctor, the beginning of your career marks a new phase of your earning power. It’s also a prime opportunity to get yourself on sound financial footing, including paying off your medical school loans. That’s why budgeting is so important for doctors. These strategies can help you reach your financial goals.
Resist the Urge to Start Spending Right Away
After years of hard work and sacrifice, you may be tempted to treat yourself. But don’t go wild. “I think lifestyle creep is the biggest danger we see [among new doctors],” says Brian Walsh, CFP, senior manager, financial planning for SoFi. Leveling up early in your career can wreak havoc on your savings and financial health while setting unsustainable spending habits that are hard to break.
Automate your finances whenever possible. For instance, preschedule your bill payments and set up automatic contributions to your retirement account.
To encourage good spending habits, use cash or a debit card for purchases, Walsh suggests. You may also need to practice extra self-control. Because Christine was thrifty, she was able to triple her loan payments to $4,500 a month. She also made additional payments whenever she could. “You just have to keep reminding yourself what your priorities are because it’s easy to want more,” she says.
Get Serious About Savings
As a new doctor, you may not start your career until you’re in your thirties, which puts you behind the curve on saving for long-term goals. The good news: earning a higher income can help you make up for lost time.
Walsh advises early-career physicians to set aside 30% of their income for savings. Of that, 25% should be for retirement and 5% for other savings, like starting an emergency fund that can tide you over for three to six months. The remaining 70% of your income should go toward expenses, including monthly medical school loan payments.
The sooner you start saving and investing, the sooner you can enjoy compound growth, which is when your money grows faster over time. That’s because the interest you earn on what you save or invest increases your principal, which earns you even more interest.
Consider Different Investments
For investing your retirement savings, you may need to think beyond maxing out your 401(k) or 403(b), though you should do that as well. Walsh suggests new doctors tap into a combination of different investment vehicles. This strategy, known as diversification, can help protect you from risk. Here are some vehicles to consider:
• A health savings account (HSA), which provides a triple tax benefit. Contributions reduce taxable income, earnings are tax-free, and money used for medical expenses is also tax-free.
• An individual retirement account (IRA), like a traditional IRA or Roth IRA, can offer tax advantages. Contributions made to a traditional IRA are tax-deductible, and no taxes are due until you withdraw the money. Contributions to a Roth IRA are made with after-tax dollars; your money grows tax-free and you don’t pay taxes when you withdraw the funds. However, there are limits on how much you can contribute each year and on your income.
• After-tax brokerage accounts, which offer no tax benefits but give you the flexibility to withdraw money at any time without being taxed or penalized.
Two options to consider bypassing are variable annuities and whole life insurance. Walsh says they aren’t suitable ways to build wealth.
Regardless of the strategy you choose, keep in mind that there may be fees associated with investing in certain funds, which Walsh points out can add up over time.
Protect Your Income
There are a variety of insurance policies available to physicians, and disability insurance is one worth considering. It covers a percentage of your income should you become unable to work due to an injury or illness. If you didn’t purchase a policy during your residency or fellowship, you can buy one as part of a group plan or as an individual. Check to see if it’s a perk offered by your employer. Christine’s practice, for example, includes a disability plan as part of its benefits package. Monthly premium amounts vary, but in general, the younger and healthier you are, the cheaper the policy.
Recommended: Short Term vs. Long Term Disability Insurance
Develop a Plan to Repay Student Loans
No matter how much you owe, having the right repayment strategy can help keep your monthly payments manageable and your financial health protected.
To start, consider the types of student loans you have. Federal loans have safety nets you can explore, like loan forgiveness and income-driven repayment (IDR) plans, which can lower monthly payments for eligible borrowers based on their income and household size. The Biden Administration is currently working on revamping IDR and Public Service Forgiveness to make it easier to qualify and to accelerate forgiveness for some borrowers.
Once you’ve assessed the programs and plans you’re eligible for, determine your goals for your loans. Do you need to keep monthly payments low, even if that means paying more in interest over time? Or are you able to make higher monthly payments now so that you pay less in the long run?
Two approaches to paying down debt are called the avalanche and the snowball. With the avalanche approach, you prioritize debt repayment based on interest rate, from highest to lowest. With the snowball method approach, you pay off the smallest balance first and then work your way up to the highest balance.
While both have their benefits, Walsh often sees greater success with the snowball approach. “Most people should start with paying off the smallest balance first because then they’ll see progress, and progress leads to persistence,” he says. But, as he points out, the right approach is the one you’ll stick with.
Explore Your Refinancing Options
Besides freeing up funds each month, paying down debt has long-term benefits, like boosting your credit score and lowering your debt-to-income ratio. And you may want to include refinancing in your student loan repayment strategy.
When you refinance, a private lender pays off your existing loans and issues you a new loan. This gives you a chance to lock in a lower interest rate than you’re currently paying and combine all of your loans into a single monthly bill. Some lenders, including SoFi, also provide benefits for new doctors.
Though the refinancing process is fairly straightforward, some common misconceptions persist, Walsh says. “People overestimate the amount of work it takes to refinance and underestimate the benefits,” he says. A quarter of a percentage point difference in an interest rate may seem inconsequential, for instance, but if you have a big loan balance, it could save you thousands of dollars.
That said, refinancing your student loans is not be right for everyone. If you refinance federal student loans, for instance, you may lose access to benefits and protections, such as federal repayment and forgiveness plans. Weigh all the options and decide what makes sense for you and your financial goals.
The Takeaway
As a new doctor, you stand to earn a six-figure salary once you complete medical school and residency. But you’re likely also saddled with a six-figure student loan debt. Learning new strategies for saving and investing your money, and coming up with a smart plan to pay back your student loans, can help you dig out of debt and save for your future.
If you decide that student loan refinancing might be right for you, SoFi can help. Our medical professional refinancing offers competitive rates for doctors who have a loan balance of more than $150,000.
Photo credit: iStock/Ivan Pantic
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If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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