Personal finance for new residents

As a new resident, I was recently put in the funny position of going from negative income to positive income for the first time.  And so, just before the start of residency, I took some time to set up a personal finance system from the ground up.  Since starting residency, I’ve helped a few fellow interns sort out bits and pieces of their financial infrastructure, so I thought I’d write up my system, in case it’s helpful to future interns.

As a note, this is not a fantastic path to riches, just a simple system that works.  My philosophy in setting all this up is to set it and forget it – finding the optimal tool for each function, and then leaving it alone to work its magic.  After all, as busy residents, we don’t have time to keep tweaking and adjusting.  So it makes sense to do the homework upfront, set it up right, and set it on autopilot.

  1. Bank

The purpose of a bank is not a holding area for savings (that comes later).  The purpose is for it to be a simple funnel between paychecks coming in and payments (for bills, credit cards, and savings) going out.

For that purpose, online banks are significantly better than brick and mortar banks.  They let you write and deposit checks and have ATMs, all the functionality that I actually use, and they’re equally FDIC insured, so your money is equally safe.  But because they don’t have to pay for all the physical locations and staff, they have lower costs and can pass along some of these savings to you.  This means two things: slightly higher interest rates, and more importantly, no hidden fees.  Many other banks have minimum deposits or hidden fees; online banks tend not to, which makes them less of a headache to deal with.

I use Capital One 360 as main banking account; there are other good options as well, such as Ally and GE Capital.  I direct deposit my pay there, and set up auto bill pay for everything possible, including rent, utilities, and credit cards.  It’s possible to supplement this with a local bank or credit union account if you want some of the old-school banking services; in practice I haven’t found that necessary.

  1. Credit cards

As long as you pay off your balance every month, credit cards can be a useful convenience.  They also provide a tiny slice of rewards back, which is a nice bonus.  Since we’re not carrying a balance, the main thing to look at is the rewards.  I ended up using the Sallie Mae Mastercard, which offers by far the best rewards among non-fee cards – effectively 5% back for groceries, gas, and Amazon purchases, albeit with a cap on each category.  There are cards with annual fees that offer a greater percent back, and if you spend a lot more than I do (you can do the math yourself; it generally runs around $15-20k/year) it may make sense to get a fee credit card with even better rewards.  It’s possible to get super nerdy with getting multiple different credit cards for different spending, but I haven’t gone to those lengths, keeping in mind that the difference will likely be less than $100/yr.

  1. Investments

If you have money left over, it’s worth thinking about where to put it.  Depending on your situation, it may be worth it to pay off loans quickly.  But it’s also well worth thinking about investing some of the surplus.

Before you even think about stocks versus bonds, think about taxes.  “Retirement savings” may not sound exciting, but there are two categories of retirement savings that are tax-exempt, which is a pretty big deal.  At a resident’s salary, that means an instant 25% bonus on your savings, which is well above what even the smartest Wall Street jockey can get you.  Briefly, in normal taxable accounts, you pay taxes when you receive the income, and you pay capital gains taxes when you withdraw it in the future.  With a Roth IRA, you pay taxes on your income, but you don’t pay taxes when you withdraw it.  With a 401k, you don’t pay taxes now, but you pay taxes when you withdraw it in the future.  Many hospitals offer a match to your 401k contributions; this is free money you’d be a fool to turn down.  So at the minimum you should set your contribution to your 401k such that you get the full employee match.  (For people working at nonprofits, which includes most hospitals, you have a 403b rather than a 401k; they work the same way.)

As residents, we’re in a unique position where we’re making fairly small amounts of money now, but have a solid expectation of making an attending’s salary in the future, which also means paying an attending’s tax rate.  So it makes sense to prioritize the Roth IRA, and pay the taxes now, while we’re poor and the taxes are lower, rather than in the future.  But both tax-deferred savings accounts are pretty good, and overall I’m maxing out my contribution limits in this order: Roth IRA ($5,500 limit) > 401k ($18,000 limit) > ordinary savings, after accumulating a small rainy-day buffer in my ordinary savings account.

It’s important to note that for the Roth and 401k, there are severe penalties for withdrawing funds early.  These savings are for retirement, not a buffer for immediate spending.  It’s possible to use the 401k money as backing for a loan for a mortgage, so you still get some value from the money stored in there, but it’s not meant to be touched until retirement.

Money in the retirement accounts can be invested, just like ordinary savings.  I won’t get too much into portfolio theory; I generally believe the efficient market hypothesis that it’s very difficult to consistently beat the market.  So, I’m a fan of low cost, broad-based index funds, such as those offered by Vanguard.  (The “low-cost” aspect is worth emphasizing.  Some funds have expense ratios of 1% per year or more, which can add up to enormous savings lost over a lifetime, even if the market is otherwise doing well.)  For early savings, a Vanguard target date retirement fund is a good option – it automatically rebalances a broad portfolio of stocks and bonds and shifts from aggressive to conservative as you get older.  Furthermore, and this is important for first-timers, it has a low minimum contribution; $1,000 compared to $3,000 or more for other funds.   From there, it’s worth exploring further and diversifying into things like international markets and REITs (real estate), but this is a good way to get started.

You’ll have noticed that I haven’t mentioned a savings account in this section.  That’s because in practice, it makes more sense to keep your rainy day fund in a taxable investment account, where it’s working for you at a much higher rate than your bank can offer.  You can still sell off some stocks in the account to cover your expenses if an emergency arises.

  1. Mint

Mint is a great piece of software.  You can link it to your credit card and bank accounts, and it passively reads your activity and compiles a snapshot of all the money you spend each month.  This lets you really see where all your money is going, and what you’ve been spending on.  Over time, you can develop a sense of where it makes sense to cut back, and where it’s okay to spend more money.

  1. Profit!

And that’s pretty much it.  With all this set up, your monthly pay is deposited into your (online) checking account, and your bills and credit cards are automatically paid off.  Your investment savings are also automatically funneled off, and the rest is yours to spend as you like.  With that, you can have your finances mostly set on autopilot, and just worry about getting through residency.

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