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Med Student to PGY 1:  What do you mean I’m not making bank?!?

Med Student to PGY 1: What do you mean I’m not making bank?!?

March 22, 2017
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First off, congratulations on matching with a program. That is great!  Over the next few months as you finish your final rotations, you will begin to look for places to live for your residency. So, what to do?  Do you buy or rent?  I heard doctors can get 100% financing on their homes, should I buy and put 0% down?  What about PMI?  I heard that it’s better to own a home so you build equity and don’t throw away rent payments.  Let’s consider a few things here…

First, how long is your residency?  3 years?  More than likely it will make sense to rent.  4 years?  Again, might make more sense to rent.  5 years?  Alright, now we are getting into it potentially making sense to buy a home.  As a rule of thumb, if you are going to stay at a place for 5 years or less, rent.  If you will be there 5 years or more, might make sense to buy.  Here’s how we figure that…

Let’s say you are looking at buying a $250,000 home (by the way, if you are doing your residency in California or New York, forget about trying to buy.  You will kill yourself trying to make those payments.  The average home price in Cali is about $400,000, however in some places it is $1.5 Million).  And let’s say you take advantage of the “doctor only” loans that many banks offer meaning up to about $417,000 you don’t have to put any money down.  Your $250,000 mortgage will cost you around $1,500 per month.  Now compared to some of the rental prices you may be seeing, that might not sound too terribly bad; HOWEVER, there are other things that come along with a mortgage payment that are not considered here – Homeowner’s insurance (if your house burns down, you need to rebuild it), Homeowner’s Association Dues (you may or may not have that depending where you live), Closing costs (usually can be rolled into the mortgage), other miscellaneous fees, and utilities – cable, internet, trash, water, gas, heating and air, landscaping, etc.  This could easily push you over $2,000 per month.  Now the good part (unless you buy in 2007) is you own an asset and you will build equity over your time in residency and that is equity that you can use for a down payment once you finish up and start as an attending or in private practice somewhere else.

Now if you rent, you have a fixed payment each month that may or may not include utilities, and if something breaks in your townhome, home, or apartment… not your problem.  That’s the owner’s problem, unless of course you intentionally destroy something, then we are getting into bigger issues.  If you want to focus on getting through residency with little moving parts, just rent.  If you want to be a little more aggressive, sit down with a real estate professional and have them help you look at places in the area to see if it makes sense to buy.

When all is said and done, you want 15-20% of your monthly gross income to go to rent/mortgage, or less of course.  And if you can do less and lock it in for a few years, even better.

That means as a PGY 1 resident making somewhere in the ballpark of $42,000, you should try to find a place for $1,000 or less.  Yes, you are right, $1,000 is more than 20%.  I am also realistic. For example, it will be very difficult to find a place near Emory University in Atlanta for $1,000 or less.  Find roommates, maybe you have a spouse who works also, negotiate, do whatever you can to keep it as close to $1,000 per month as possible.

So, let’s break this down. As a PGY 1 resident here is about how your income will be disbursed:

Gross Income = $42,000

(Have you met Uncle Sam yet?) Net Income ~ $30,000

Your monthly spending, (and these are just average numbers), might look this:

$2,500 hits your checking account

$1,000 goes to rent

$300 goes to food and groceries (eating out all the time will kill you – physically and financially)

$300 goes to utilities – cell phone, cable (do you need it?), internet, gas, etc.

$400 goes to your student loans (maybe less)

That leaves $500 left in your checking. But wait, there’s another expense I haven’t accounted for yet that is very important to get in the early years of your residency and that is disability insurance. Getting disability insurance is important in the early years of your residency for two reasons: 1) It is cheaper.  You can wait until your last year of residency like many do, however you may not be able to get it and there is a 100% chance you will be older which causes the price to be higher.  2)  Your lifestyle addiction hasn’t overtaken your finances yet (hopefully) and you can afford the $100-$300 monthly payment.  (I will discuss more on disability insurance in later articles as well).  So now you’re down to $300 in your account and if I told you to save that whole $300, you would probably never ready another thing I post. But if you can just save $100-$150 per month you are ahead of a large majority of other residents. Seriously, when you start PGY 1, ask a PGY 2-5 resident if they are saving money and after they laugh at you for 45 seconds they will respond with a big, fat, “NO.”

“But Blake,” you say, “residents DO save a lot of money because they offer us this great thing called a 403(b).  We just save all our money in that.”  Ok, but what happens if you need it?  Then you must take out a loan against your 403(b) or take an early withdrawal and get hit with taxes and penalties. And you BETTER make sure you pay it back before you leave employment at the hospital.  “But we get matched on the money,” you respond, which is true IF your employer decides to contribute the match, (which is never guaranteed see 2008).  “But Blake, we get a tax break.  It lowers our taxable income,” you finally refute, and that is very true, however, do you really?  Let’s think about this for a second.

Historically, are taxes high or low?  Do you think you are going to be in a higher tax bracket today, or when you are a practicing physician making hundreds of thousands of dollars?  Are taxes going up or down for people who make a lot of money (regardless of political affiliation) in the future? Does it make sense to put money in to a retirement plan and avoid the lower tax today, in order to pull the money out at a higher tax in the future? And don’t forget in the future you’re going to be used to living your life in the style of a $100,000+ a year doctor so will you really want to go back down to the budget of a broke college student/resident? I will let you come to your own conclusions (more on this in future articles).

But for most of you, you are about to be making more money than you ever have in your lifetime.  If you can live smart during residency, build good habits early on, be intentional on saving and spending, you will build a foundation that allows you to springboard to success once you finish residency and fellowship.  Don’t waste 3, 4, or 5 years and say I can do it later.  Start now and get ahead.

If you have found this article helpful, please pass it along to others who you think would find these points helpful.  Other people are thinking of these things and they are waiting for someone like you to show them the light.  Comment, like, and share!

Joie de Vivre!