One of my big financial regrets is not having had a good plan for my money when I started my first attending job. My salary increased by about 150%, and I wanted to be sure I made the most of it. Finding the right balance of saving and splurging (or taking care of things I had put off for years because of I couldn’t afford it), was pretty stressful for me.
At the time, personal finance blogs, let alone physician personal finance blogs, weren’t nearly as easy to find as they are now.
I thought it might be interesting to apply a few of the doctor blogger financial rules of thumb to my first attending year, and see how I did. Since I did not have as much student debt as seems to be typical these days, I also will see how these numbers might look for a PCP just starting out with 6-figure student debt.
I have already done this for the 50/20/30 rule (proposed by Elizabeth Warren–yes, the one who is currently the Senator from Massachussetts) with all of my budget numbers from my first year of residency, the Live on Half Challenge (courtesy of Physician on Fire)and the Live Like a Resident rule (courtesy of White Coat Investor).
The financial Rule
The Physician Philosopher is a newer blogger, but came out with a “rule” that makes a lot of sense to me. His “10% Rule” advises that with each bump in income–whether from a raise, a bonus, or making the jump from residency to attendinghood–you allow yourself to spend 10% of the difference to inflate your lifestyle. The other 90% is applied to savings or debt repayment.
This encourages you to pay off your loans, save for retirement, save for other large items (houses?) while allowing you to stop deferring gratification totally for yet another 2-5 years. You get some treats for finishing residency!
I also like this rule because it seems, well, so reasonable. Save a lot, but have a little fun.
One issue I have (or would have had) is that this rule works better if you are already settled in at your lower salary. If you stay on after residency or fellowship, for example, and are living a sustainable life, all the extra income that comes in is just that: extra. It’s very easy to sock away the 90% more that you weren’t using a few months ago.
If you are moving for a new job, you have to figure out your budget before you get there, so you don’t lock yourself in to a housing situation which may or may not suit you and your budget.
Enter my new favorite toy, a paycheck calculator: you can put in your city, salary, filing status, expected retirement contributions, and it will tell you your paycheck. With this, you can figure out how much of pay bump you should get with your new job, and then see what the extra 10% will add to your projected budget.
reviewing my numbers
With this sort of information, had I known that I would be going from an income of $4016 a month (adjusted into 2019 dollars) to $7158 a month (also in 2019 dollars), I would have known that I could increase my monthly budget by just $314 a month [(7158-4016) divided by 10]. I’m sure that would have all gone to my rent. And I still would have needed to find a cheaper apartment than what I ended up with, as my monthly expenses (not counting student debt) increased by $1340, for a total of $5356 per month.
That would also have meant putting away $2828 a month to savings. At that time, I was saving $878 in retirement funds, and paid off (on average) $598 to my student loan. Which means I would have had another $1352 saved each month, to go towards a house fund, or investments (which would be worth a pretty penny by now).
Running the numbers for a new graduate
I was quite lucky to have a limited amount of debt, which I was able to pay off quickly.
However, if the median medical school debt in 2017 was $192,000, then paying off that much money would represent quite a burden.
Using an online calculator, I see paying down that loan over 10 years at 6.8% (the standard rate) means that a doctor would have to shell out $2209 each month to pay down the median debt. Refinancing to a 3.0% loan would reduce that payment to $1854. Deciding to pay off the loan in 5 years would require a monthly payment of $3450 at 3%.
Reviewing my numbers, had I graduated with today’s average debt, following the 10% rule would have looked something like this:
- Limit monthly expenses to $4330 a month. That would have meant paying less on rent (maybe getting a roommate), less on cable/phones, less travel, less shopping.
- Save for retirement with the 403(b). My inflation-adjusted numbers don’t quite line up with yearly adjustments for retirement contributions, so $878 a month is much less than the maximum one can contribute now ($19000 a year for people under 50, or $1583 a month).
- With the remaining $1950 a month in savings, pay off the student loans after refinancing for 10 years. I couldn’t have afforded the 5 year plan, nor paying them off in 10 years at the government-offered rate. The extra $94 a month could go into an IRA, or beef up an emergency fund.
- Or, if you think you will qualify for PSLF (Public Service Loan Forgiveness), you could pay the required amount, which looks like $1024 per month under PAYE/REPAYE. You then have another $926 per month, which should probably be invested as a side fund. If PLSF goes away, that money can be used to pay down or pay off those loans.
I also have been ignoring my “extra” 2 paychecks a year, as at that job I was paid every 2 weeks. Those totaled $7158, so I could take $715 for fun, and put the remaining $6443 towards savings or debt repayment.
Going through the numbers, I think this ties with the 50/20/30 rule as one of my favorite guidelines to deciding on a budget as you make the leap from resident to attending.
Assuming that you have been living within your means as a resident (which I hope is true!), this gives you permission to indulge a little with your new income, while encouraging you to put aside a lot of money towards retirement and/or debt repayment. I would have welcomed a reasonable budget rule of thumb like this when I was first starting out .
This is a rule that can work for everyone, as long as that initial assumption (of not outspending your resident salary) is true. It also gives a nice framework for how to deal with bonuses and pay raises, which should be forthcoming as a PCP becomes more experienced and efficient.
What do you think about this rule? Would you want to have someone else give you a guideline for your budget for the first year out of training?