Personal Finance for Students

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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

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Introduction

• Why?
• We physicians have little business training
• We tend to be easy marks bad managers
• And if we screw it up, nobodys going to feel
  sorry for us

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Purpose

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

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Outline

• Introduction
• Insurances
• Emergency fund
• Health
• Disability
• Auto

• Life
• Homeowners
• Umbrella
• Malpractice

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Outline (continued)

• Retirement
• College
• Educational loans
• Other suggestions
• Summary

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1 - Absolutely Necessary
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Insurance

• Definition
• Insurance Covering your rear
• Overriding principle When in doubt
• Insure for the big stuff
• Self-insure the small stuff

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Insurance

• Original Purpose pool rare, non-with-standable
  risks, not first dollar coverage
• Common Now a vehicle for benefits entitlements
• Differing Motivations if youre an employee vs.
  an independent purchaser

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Emergency Fund

• You need a Rainy Day Fund, even as a resident
• 3-6 months after-tax income
• i.e., living expenses
• Keep in a safe, liquid, accessible place
• 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?
• Only a temporary answer

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Health Insurance

• Usually provided by employers
• But make sure youre covered now as a student!
• Use Flexible Spending Accounts (when employed)
• Do NOT count on professional courtesy!
• Has gone the way of the dodo

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Malpractice Insurance (briefly)

• Understand the difference between
• Claims-made vs Occurrence coverage
• Tail Coverage
• When you go looking for a job, be SURE to
  determine, up front, who pays the tail!

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Life Insurance

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

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Disability Insurance

• Frequently neglected
• Remember - dying is cheap (living is expensive)
• Issues
• How much? (as much as theyll 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)

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Homeowners Insurance

• Including renters insurance
• Includes personal liability
• consider an additional umbrella policy
• make sure the umbrella limits dovetail with the
  homeowners limits
• Reduce premiums via larger deductibles (ie,
  self-insure if you can afford it)

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Auto Insurance

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

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Personal Liability Umbrella

• Personal, not professional, liability
• Highly recommended for physicians
• litigious society were the targets
• Needs to dovetail with homeowner and auto limits
• How much? 1-3M
• Cheap

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Retirement? Why now?

• You cant afford not to!
• You have something very valuable Time
• Time the magic of compound interest

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

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Rich? - It depends.

• In order to retire at 65, and support the average
  physicians lifestyle, you will need a LOT of
  money
• A million isnt was it used to be
• You will all be millionaires (big deal...)

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Retirement Basic Principles

• Take maximum advantage of matching programs
• Take maximum advantage of tax-advantaged programs
  (401-ks, 403-bs, IRAs, Roths, etc.)
• Dont count on Social Security
• If youre planning early retirement, budget a
  flexible cushion (to avoid early W/D penalties
  prior to age 59). Better budget for health care,
  too

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Three Basic Kinds of Retirement Investments
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Retirement Options

• 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
• Where? I suggest you start with no-load, index,
  stock mutual funds

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Roth IRA for Residents / Students

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

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Roth 401-k or Roth 403-b

• A new option
• Some (not many) employers offer
• A great option if they do better than a Roth
  IRA

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SEP IRA

• Good choice if you have additional moonlighting
  type income
• Moonlighting
• Consulting
• Honoraria
• Royalties
• Etc.

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2 Must Do
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Childrens College Education

• Like retirement, but sooner
• Some of you may need to start saving during
  residency!
• Compound interest works here, too
• Long-term investment focus
• Various Options

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College Expenses One option

• Simply save in parents own name
• Simple
• Flexible
• You maintain control
• Lots of investment options
• But, no tax advantages
• Verdict not bad to supplement other plans

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College Expenses Another option

• Uniform Gift To Minors (UGMA)
• Give after-tax to child
• Saved in special joint account
• Proceeds taxed at childs rate, within limits
• But, child gets control at age of majority
• (a Porsche and a trip to Europe)
• Verdict there are better options now

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Another Option - Pre-paid State Plans

• 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
• Usually state public institutions
• In-state tuition only
• Penalties If dont go to college, go to private
  college, go out of state, etc.
• Pays tuition only - not room, board, books, fees,
  etc.
• Verdict Limits choice, but guarantees against
  runaway inflation

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Probably Best - 529 Savings Plans

• Like Roths for college
• All public/private university/college/professional
  schools
• Tuition, fees, room, books, supplies
• Can choose any states program
• but, tax advantages often best in own state
• Verdict This is what Id do
• www.savingforcollege.com

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Childrens College Education - Summary

• 1 - 529 plans
• 2 - Pre-paid State Plans (ie, MET)
• 3 - Save in parents name
• 4 - UGMA

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Educational Loan Repayment

• Complex subject AAMC is a great resource
• Common questions
• Should I prepay my loans?
• Should I consolidate my loans?
• Where are interest rates going?
• Important in your decision to consolidate or not

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Educational Loan Consolidation

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

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Educational Loan Consolidation

• Very complex be cautious of solicitations
• Start with medical school financial aid officer
• Contact your current primary loan holder
• Get info from the AAMC
• www.aamc.org/students/financing/

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Buy a House

• Real estate may not always be a great investment,
  but
• Mortgage interest is still a good tax shelter
• And youve got to live somewhere
• Both pros cons of buying during residency
• Regardless, dont become House Poor!

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Buying Cars

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

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Buying Cars Overtons Advice

• Buy the most inexpensive cars you can stomach,
  pay cash for them, and drive them into the
  ground
• (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 elses lease

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Buying Cars - Leases

• Not very common these days
• Generally not wise financially
• (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
• Or cant afford it otherwise
• Or you get a rare, really good deal

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Flexible Spending Accounts

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

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Moonlighting

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

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Credit Credit Cards

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

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Credit Report

• Obtain, study correct every year (for free)
  in advance of major loan applications
• www.annualcreditreport.com
• Lots of errors old accounts
• Too much available credit hurts your credit score

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Debt

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

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More Suggestions

• Stash away 10 of each paycheck, for
• rainy day fund --down payment
• retirement --whatever
• Automatic investment plans
• Make a budget

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Make Stick to a Budget

• 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

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Financial Objectives During Residency

• Over the residency years, you want to
• 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?

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Use Dollar-Cost Averaging

• 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

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Learn More

• Personal finance magazines / books
• Magazine worksheets
• Computer programs
• Web
• www.quicken.com
• www.smartmoney.com
• www.kiplinger.com
• Financial planners
• but beware how do they make their money?

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Some Victorian Financial Advice

• Marry, but marry very carefully
• Then stay married
• 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

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Some Victorian Financial Advice

• The moral of the story
• marry very, very carefully
• work hard to stay married

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Some More Prudish Financial Advice

• Keep your pants on
• Infidelity - a major cause of marriage failure
• Indiscretion - a major cause of career setbacks
• The financial risks are reason enough

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Finally, ask what additional goals you have?

• Ask what do I / we want out of this life?
• Professionally?
• Personally?
• Financial goals?
• Material possessions?
• Prioritize - all goals have price tags
• Budget plan

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Further Advice

• Err on the side of living modestly
• Avoid conspicuous consumption
• THE CLASSIC physician pitfall!!
• dont feel entitled, or allow your significant
  other to do so
• Dont become house poor, car poor, etc.
• Avoid having to work longer and harder to keep up
  with your lifestyle
• Alice in Wonderland youre running as fast as
  you can just in order to stay in one place!

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Summary

• Emergency fund
• Health insurance
• Disability insurance
• Auto insurance
• Malpractice insurance
• Life insurance

• Homeowners ins.
• Umbrella insurance
• Retirement
• College
• Goal setting

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Questions?

• Advice for Emergency Medicine Applicants
• www.kcms.msu.edu