Personal Finance for Students Residents David T Overton

Personal Finance for Students & Residents David T. Overton MD, MBA, FACEP Professor & Chairman of Emergency Medicine Michigan State University College of Human Medicine Kalamazoo Center for Medical Studies

Introduction o Why? n We physicians have little business training n We tend to be easy marks & bad managers n And if we screw it up, nobody’s going to feel sorry for us

Purpose: o o o Simple, basic principles Covers student years, residency & first few years of practice This will be The Basics: n n n This will NOT be fancy! Some may be too basic for some of you Some may be too advanced

Outline: o o Introduction Insurances: § Emergency fund § Health § Disability § Auto § § Life Homeowners Umbrella Malpractice

Outline (continued) o o o Retirement College Educational loans Other suggestions Summary

#1 - Absolutely Necessary e. P Lif Absolutely Necessary (Survival) lan Insure Against “What If” • Insurance Protection • Emergency Cash Fund • Debt Management • Retirement Planning • Estate Planning

Insurance: o Definition: n o “Insurance = Covering your rear” Overriding principle: When in doubt… n Insure for the big stuff n Self-insure the small stuff

Insurance o o o Original Purpose: pool rare, non-withstandable risks, not first dollar coverage Common Now: a vehicle for benefits & entitlements Differing Motivations: if you’re an employee vs. an independent purchaser

Emergency Fund o o You need a “Rainy Day Fund”, even as a resident 3 -6 months after-tax income n o Keep in a safe, liquid, accessible place n n o o i. e. , living expenses Bank, money market fund, etc. Be sure to get checking & wire privileges Will take a while to accumulate How about a VISA in the freezer…? n Only a temporary answer

Health Insurance o Usually provided by employers n o But make sure you’re covered now as a student! Use Flexible Spending Accounts (when employed) o Do NOT count on professional courtesy! n Has gone the way of the dodo…

Malpractice Insurance (briefly): o o Understand the difference between “Claims-made” vs “Occurrence” coverage Tail Coverage n When you go looking for a job, be SURE to determine, up front, who pays the tail!

Life Insurance o o o Kinds of life insurance n Term (usually preferable) n Permanent: o Whole o Universal o Variable, etc. Employee - often 1 -3 x annual salary, group term How much do you need? n It depends… n Do you really need any at all? …maybe not…

Disability Insurance o o o Frequently neglected Remember - dying is cheap (living is expensive) Issues: n n n o How much? (as much as they’ll give you) Waiting period? (as long as you can afford) Definition of specialty? (as specific as possible) Employer may provide (but check the details! You still may need your own policy)

Homeowners Insurance: o o Including “renter’s insurance” Includes personal liability n consider an additional umbrella policy: o o make sure the umbrella limits dovetail with the homeowners limits Reduce premiums via larger deductibles (ie, self-insure if you can afford it)

Auto Insurance: o Includes liability & hospitalization n Again, consider an umbrella policy o o Reduce premiums via larger deductibles o o again, make sure the limits dovetail (again, self-insure if you can afford it) Analyze coverage frequently n older autos usually need less coverage, esp. collision

Personal Liability Umbrella: o o Personal, not professional, liability Highly recommended for physicians n o o o litigious society & we’re the targets Needs to dovetail with homeowner and auto limits How much? $1 -3 M+ Cheap

Retirement? Why now? o You can’t afford not to! o You have something very valuable: Time o Time = the magic of compound interest

“Compound interest is the 8 th wonder of the world” -- Albert Einstein -

“Rich”? - It depends…. o In order to retire at 65, and support the average physician’s lifestyle, you will need a LOT of money o A million isn’t was it used to be o You will all be millionaires (big deal. . . )

Retirement – Basic Principles 1) 2) 3) 4) Take maximum advantage of matching programs Take maximum advantage of tax-advantaged programs (401 -k’s, 403 -b’s, IRA’s, Roths, etc. ) Don’t count on Social Security If you’re planning early retirement, budget a flexible cushion (to avoid early W/D penalties prior to age 59). Better budget for health care, too

Three Basic Kinds of Retirement Investments DEPOSIT #1 401(k)s & 403(b)s TRADITIONAL IRAs SEP & SIMPLE IRAs KEOGH, PSP & MPP Tax Deductible (Before Tax $’s) ACCUMULATION Tax Deferred (Funds not Available) DISTRIBUTION Taxable (Income & Estate) ESOPs IRS penalties for retirement withdrawals prior to age 59 ½ ! #2 LIFE INSURANCE ANNUITIES MUNICIPAL BONDS ROTH IRAs 529/COVERDALE IRAs Not Deductible (After Tax $’s) Tax Deferred (Funds Available with Municipal Bonds) Can be Tax Free or Taxable… You Choose Possible IRS penalties for withdrawals prior to age 59 ½! #3 CDs, SAVINGS, MUTUAL FUNDS STOCKS, BONDS PARTNERSHIPS Not Deductible (After Tax $’s) Partially Tax Deferred and Partially Tax Free Partially Taxable And Partially Tax Free

Retirement Options o o 401 -K or 403 -B – from employer, common Roth IRA (see next slide) Roth 401 -K or Roth 403 -b – new, see if employer offers Long-term investment focus n Where? I suggest you start with no-load, index, stock mutual funds

Roth IRA for Residents / Students o o Residents have a 3 -5 year window to cash in n (maybe even as students, if you have a job) n (unless your residency offers a Roth-401 k) Can invest $5, 000 each year of residency ($10, 000 if married)

Roth 401 -k or Roth 403 -b o o o A new option Some (not many) employers offer A great option if they do – better than a Roth IRA

SEP IRA o Good choice if you have additional “moonlighting” type income: n n n Moonlighting Consulting Honoraria Royalties Etc.

#2 – “Must Do”

Children’s College Education o o Like retirement, but sooner Some of you may need to start saving during residency! n o o Compound interest works here, too Long-term investment focus Various Options:

College Expenses – One option: o Simply save in parents’ own name n n n o Simple Flexible You maintain control Lots of investment options But, no tax advantages Verdict: not bad to supplement other plans

College Expenses – Another option o Uniform Gift To Minors (“UGMA”) n n Give after-tax $ to child Saved in special joint account Proceeds taxed at child’s rate, within limits But, child gets control at age of majority o o (“…a Porsche and a trip to Europe…”) Verdict: there are better options now

Another Option - Pre-paid State Plans o AKA “ 529 Prepaid Plans” After-tax $ paid to state fund Guaranteed to pay tuition when time comes Accumulates and taken out tax-free State-specific n Usually state public institutions n In-state tuition only Penalties: If don’t go to college, go to private college, go out of state, etc. Pays tuition only - not room, board, books, fees, etc. o Verdict: Limits choice, but guarantees against runaway inflation o o o

Probably Best - 529 Savings Plans o o Like Roths for college All public/private university/college/professional schools Tuition, fees, room, books, supplies Can choose any state’s program n o o but, tax advantages often best in own state Verdict: This is what I’d do www. savingforcollege. com

Children’s College Education - Summary #1 - 529 plans #2 - Pre-paid State Plans (ie, MET) #3 - Save in parents’ name #4 - UGMA

Educational Loan Repayment o o Complex subject – AAMC is a great resource Common questions: n n Should I prepay my loans? Should I consolidate my loans? o o Where are interest rates going? Important in your decision to consolidate or not…

Educational Loan Consolidation o o Great for some, not for others Motivations to consolidate n n n o Convenience Improve cash flow Renew deferments or gain additional deferments Bad for others: n n May May lose eligibility for deferment lose eligibility for subsidies lose repayment benefits force you to capitalize deferred interest

Educational Loan Consolidation o o Very complex – be cautious of solicitations Start with medical school financial aid officer Contact your current primary loan holder Get info from the AAMC: n www. aamc. org/students/financing/

Buy a House: o Real estate may not always be a great investment, but: n n o o Mortgage interest is still a good tax shelter And you’ve got to live somewhere Both pros & cons of buying during residency Regardless, don’t become “House Poor”!

Buying Cars o o Another necessary evil Huge life-long expense Cars are depreciating assets (unlike houses) Ways to finance: n n n Pay cash Get a loan Lease

Buying Cars – Overton’s Advice o “Buy the most inexpensive cars you can stomach, pay cash for them, and drive them into the ground” n o (My car has 257, 000 miles on it & looks fine) Even better: Do the same thing, but buy them two years old, coming off someone else’s lease

Buying Cars - Leases o o Not very common these days Generally not wise financially n n n o o (But there are rare exceptions) Shoulders the highest amount of depreciation Limits the number of miles you can drive But, does get more car for a smaller monthly payment Better if you insist on driving a newer car n n Or can’t afford it otherwise Or you get a rare, really good deal

Flexible Spending Accounts o Once a resident, is a great benefit – can pay: n n n o Health care premiums Unreimbursed health expenses Dependent care expenses (!) . . . with PRE-TAX dollars - a deal! If your employee offers, take advantage! n A no-brainer

Moonlighting o o A potential source of income during residency A source of business deductions n o o avoids the 2% floor A potential source of retirement savings But, need to plan for end-of-year taxes

Credit & Credit Cards o o Be careful – everyone wants to give you credit! n But they don’t want you to use it properly! Cards are great tools, if used properly: n Convenient Provides consumer protection (credit, not debit) n Gets frequent flyer miles, discounts, etc. n Helpful for taxes and financial planning But, you must pay off every month (only rare exceptions) Limit total number of cards (2? ) n o o

Credit Report o o Obtain, study & correct every year (for free) & in advance of major loan applications: n www. annualcreditreport. com n Lots of errors & old accounts * Too much available credit hurts your credit score

Debt o o o Both a necessary evil & a valuable tool Overall, try to limit Consolidate into tax-deductible forms: n o mortgages, home equity loans Avoid credit card debt, auto loans, etc.

More Suggestions: o Stash away 10% of each paycheck, for: n n o o rainy day fund retirement --down payment --whatever Automatic investment plans Make a budget…

Make & Stick to a Budget o o Shortly, you will actually be getting a paycheck! You need to establish a budget so that you can live on a resident's salary, and also accomplish some other objectives during residency, like:

Financial Objectives During Residency: Over the residency years, you want to: 1. 2. 3. 4. 5. 6. Pay off the credit cards, etc. Accumulate a Rainy Day Fund Save up a down payment Start saving for retirement Start repaying loans? Start saving for the kids’ education?

Use Dollar-Cost Averaging o o Save a fixed dollar amount at regular time intervals Invest in variable price investments (stocks, mutual funds, etc. ) By default, you buy more shares when the price is low, and fewer when the price is high Automate it

Learn More: o o Personal finance magazines / books Magazine worksheets Computer programs Web: n n n o www. quicken. com www. smartmoney. com www. kiplinger. com Financial planners n but beware – how do they make their money?

Some Victorian Financial Advice: o o Marry, but marry very carefully Then stay married: n n n The never-married wind up with 75% less Net Worth of long-term married The divorced have 50% less The multiply-married have 25% less

Some Victorian Financial Advice: o The moral of the story: n n marry very, very carefully work hard to stay married

Some More Prudish Financial Advice o Keep your pants on: n n n Infidelity - a major cause of marriage failure Indiscretion - a major cause of career setbacks The financial risks are reason enough

Finally, ask what additional goals you have? o Ask “what do I / we want out of this life? ” n n o o Professionally? Personally? Financial goals? Material possessions? Prioritize - all goals have price tags Budget & plan

Further Advice o Err on the side of living modestly: n Avoid conspicuous consumption o o n n THE CLASSIC physician pitfall!! don’t feel entitled, or allow your significant other to do so Don’t become “house poor”, “car poor”, etc. Avoid having to work longer and harder to keep up with your lifestyle: o Alice in Wonderland – you’re running as fast as you can just in order to stay in one place!

Summary o o o Emergency fund Health insurance Disability insurance Auto insurance Malpractice insurance Life insurance o o o Homeowners ins. Umbrella insurance Retirement College Goal setting

Questions? Advice for Emergency Medicine Applicants: www. kcms. msu. edu