It’s June! Many medical students have graduated already, and the rest will be getting their diplomas very soon. Possibly via Zoom this year. What this means is that for the vast majority of new MDs, internship year will start in the next 30 days.
If you are one of those lucky new doctors, you have a lot on your plate: licensure, ACLS, orientation, possibly moving to a new town. Figuring out a reasonable budget should also be on your list of to-dos.
If you are a traditional student who went straight through high school, college, and medical school, this may be the first time you have earned a decent salary that you had to live on.
Though many people pay attention to the big jump in salary that comes with the end of residency and the start of the attending paycheck, you are also enjoying a huge income increase this summer. You are going from no income, or negative income (borrowed money), to a positive income. How you handle this change in fortune can lay the foundation for a financially successful future, or make your finances more difficult once you finally reach the attending stage.
There are number of recommendations out in the world as far as spending your money wisely (aka, making a budget). I think of them much like a diet; you should have so many calories (or fat grams, or carbs) per day in order to lose weight. Some people do better with a low fat diet, some with low carb, and some are more successful with intermittent fasting. As with diets, most reasonable budgets will work, you just have to stick with one.
I will write about one budget plan, the 50/20/30 rule. First I will review the plan basics, then I go through it in some more detail, and lastly I offer ways in which 3 different interns might apply it to their situation.
My hope is that this may help someone step onto a good financial path as they start their medical career.
All of the interns in my examples are single, with an after tax salary of $3500 per month. That might not be you.
If you are married, or think you will make less (or more) than these doctors, I suggest you use a paycheck calculator to estimate your monthly take home pay.
Overview of the 50/20/30 rule
After writing about budgets for the first year as an attending last year, I found myself drawn more to the 50/20/30 rule, proposed by Elizabeth Warren (yes, that Elizabeth Warren) and her daughter, Amelia Warren Tyagi. They wrote a book called All Your Worth (non affiliate link), and recommend that you allocate your money in this way:
- 50% should go towards your needs: Bills you must pay every month, or else you will be in big trouble.
- 20% should go towards savings: an emergency fund, retirement savings, a down payment fund for a house, extra payments towards your loans.
- 30% should go towards your wants: nicer groceries, eating out, vacations, treats. These are things that can be cut if needed, but hopefully make your life more pleasant or fun.
If your needs, or required payments, far exceed 50%, it makes life feel pretty tight. The authors suggest that keeping a good balance of needs and wants help a person feel less stressed about their finances.
If a person finds that their needs (or fixed costs) exceed 50%, they suggest either cutting costs (move somewhere cheaper, reduce transportation costs, etc), or increasing income (get a raise, or a better paying job).
Since moonlighting generally isn’t allowed intern year, and moving is pretty disruptive, getting this balance right at the beginning is most helpful. However, if you don’t figure this out at first, intern year is just 1 year long. It is certainly possible to move over vacation, or earn extra cash moonlighting as a resident (if your program allows it).
A Sample Budget
Last year I looked at intern salaries, and found that many range from $50,000 to $60,000 a year. Taxes depend on state and city location. I played around with a few cities, and on average, monthly take home salaries for single earners was in the mid-$3000’s. I decided to pick a round number of $3500 per month for this exercise.
For a single intern whose take home salary is about $3500 per month, using the 50/20/30 rule would suggest the following for budgeting:
Necessities: $1750
$1750 per month for necessities, including rent, utilities, car costs (insurance, repairs, parking, gas, registration, hopefully no payments!), food (basic groceries), and loan payments. (*)
How you allocate this money is totally up to you. (This is putting the personal in personal finance.).
It has been a long time since I was a resident, renting an apartment, and being unsure of how many sites I am assigned to. So you should definitely take these numbers as only a rough outline of possible spending. Your situation is likely to be very different from my estimates, I am just putting them in as a starting point.
Housing
Numerous people have written about why residents should not buy a house. I didn’t listen, and I regretted it. I will take it as a given that you will be renting.
Looking in my area, I see 1 bedroom 1 bath apartments renting for about $1200 a month. It’s hard to tell from the listings, but I think this includes heat, trash, water, and possibly electricity.
A 2 bedroom 1 bath apartment in the same complex rents for just $100 more per month. That means that if you are willing to have a roommate, you could pay $650 per month. Only you can decide if you want to share an apartment with someone, who might be good company on your easy rotations (but might be killer on your tougher rotations).
I am not even going to mention seriously the party houses (5 Br 2 bath) renting for $2300 per month. I don’t want my interns showing up exhausted to the hospital because their housemates were rowdy.
In addition to rent, you still have to cover whatever utilities don’t come covered by rent, and renter’s insurance (trust me, you really do need renter’s insurance. Just get it.). I am totally guessing here, estimating it somewhere between $60-210 per month.
Transportation
There is a lot of variability here too. Maybe you already have a car that runs well enough to take you through residency (or just internship). Perhaps you only have to go to one hospital, and you found a place in walking or biking distance (good for you!). Or maybe you have no car and no savings, and had to buy or lease one in order to make it to work.
You might be paying anywhere from $0 per month to $250 to buy or lease a not too expensive car.
Then there is insurance. Depending on the car, your state and city of residence, your history, there is a lot of variability in what you will pay. Hopefully the range will be somewhere between $50 and $100 per month.
Do you need to pay for parking? You have more than one place you need to park: home and work. If this isn’t included in rent and/or paid by your residency (and if it isn’t free already), this could run you hundreds of dollars per month.
What about fuel? I have no idea what this will cost you. You probably don’t either, if you are moving to a new town. I will take a wild guess and peg it at $100, but, like an estimated due date, that is more likely to be wrong than exactly right.
Repairs? Also vary. A lot. To be honest, I pay for them out of my emergency fund.
I always forget about registration and inspection. Let us say it averages out to $20 per month, but obviously this varies from place to place.
Nutrition
Your residency may provide lunch at noon educational talks, and possibly even breakfast or dinner, depending on your rotations. Having looked at the selections where I work, I am not sure they are the best choices for health. (Of course, if you are in your 20s, and abusing your body anyway by going through internship and residency, maybe it doesn’t matter).
You will need to budget something for groceries.
If you are starting to feel the pinch in your budget right now, I would like to point out that that your estimated spending here can be for minimal nutrition: bulk cereal, eggs, inexpensive cuts of meat, frozen fruits and vegetables, beans, rice, lentils. Fancier stuff like organic grass-fed beef, wine, or ice cream, can go under your wants.
I have no real idea how much you will need to budget here. Are you a 6’4″ guy who lifts weights in your spare time? A 5’2″ woman with a small appetite? Do you feel comfortable cooking from scratch, and are you willing to spend your limited free time doing so?
I am totally guessing that this number is in the $200 to $400 range.
Loan repayments
Again, there is plenty of variability here.
If you are part of the roughly 25% of doctors without student debt, you are doing very well. Assuming you don’t have other debt, you can skip this section. You have more money to put towards your rent, transportation, and nutrition. Count your blessings!
Student loans
If you are part of the majority with student loans (the average has been quoted at $200,000), then you will need to have a plan to take care of your loan payments. I put them here, because you will have a minimum loan payment that is due every month. If you are in a position to pay extra, to reduce your principal, then you can think of the extra payments as savings (see below). However, the minimum payments are required.
It has been a year since the last time I wrote about budgeting and loan repayments, and I am still not an expert. So I will talk briefly about what I know, and refer you on to others if you have more questions.
- Don’t go into forbearance. You will accumulate interest on your loans, which you will then pay interest on once you start paying them off. If at all possible, do not do that.
- If you have federal loans, income driven payments are probably the way to go while you are a resident if you have large ($100,000+) loans. Based on your adjusted gross income (which you calculate/report on your federal tax return), this asks you to pay 10% of your discretionary income. If you did not earn any money as a medical student, your AGI last year was $0. If you are getting paid for only half of 2020 as an intern, your AGI next year will be…not very much. However, after that, you will have to make reasonable monthly payments.
I found a loan payment calculator at Student Loan Hero, I’ve linked to the one for the REPAYE program. You can put in your loan amount, your AGI, family size, etc. It is there mostly to compare REPAYE vs regular loan repayment, but it looks like someone with a take home salary around $3500 per month (corresponding to an AGI of $48,000 per year) will pay a maximum of $249 a month on their loans until they have a salary increase.
I would calculate your loan payments once your AGI reflects a full year of work, and take that into consideration. You can always put that $249 into savings now and pull it out later; but it will be tough to realize your monthly costs have gone up in 2 years because you forgot about it.
Private loans
If you have private loans, you should figure out how much you have to pay each month.
You may want to look into refinancing, it’s a pretty complicated situation for medical students. I don’t feel confident to write about it, but luckily there are plenty of sites out there that do, including Student Loan Hero, Student Loan Planner, the White Coat Investor, The Physician Philosopher.
Other loans
If you have car loans, I’ve included them up top.
If you have credit card debt, now that you have an income, this is a good time to think about getting rid of it. Extra payments can come out of the Savings bucket (below), but the minimum required payments go here.
Savings: $700
Save for Emergencies or future costs
Emergencies happen.
Usually, you can rely on not losing your job. However, people do lose residency spots periodically, sometimes not even because of something they did wrong. Look at Hahnemann. Or you might have an injury or illness that keeps you from working for a while (get disability insurance!).
For the most part, residents can rely on their monthly stipend, though.
I would save here for more “regular” emergencies: needing to cover the insurance deductible after a car accident, coming home to find your fridge died and you have to replace all your groceries, rushing home for a family crisis.
To start with, $1000 can make a nice emergency fund, enough to cover most small emergencies. As you get more established, it is probably a good idea to work on saving at least 3 months of expenses (under this scenario, around $5,000-$8600), but that can take a while.
Lastly, if you are in a transitional year and will be moving next June, putting aside money now to manage the move can be an excellent use for your savings.
Save for retirement
Retirement probably seems a million years away. After all, you are just starting your career. Who wants to plan for the end of it now?
However, this is the best time to think about saving for retirement. If you plan to work until you draw Social Security, that means whatever you put away now has 40 years to grow. Using the rule of 72 (Divide 72 by your rate of return; that number is how many years it will take to double your money), if you can get a 7.2% return on your money, your money will double 4 times before you retire. Another way of saying this: the money you save now could be 16 times higher when you are ready to retire.
If your residency program matches retirement contributions, contribute to their retirement plan. You don’t want to miss out on that money.
If your residency program does not match retirement contributions, you may want instead to contribute to a Roth IRA. The money you put in is after tax, but you are never taxed on it again. Since residency is usually the last of your low earning (and thus low tax) years, this is a great time to contribute to a Roth. As of 2020, the maximum you can contribute per year is $6000, so $500 a month will max out your yearly contribution.
pay off debt
While I listed your debt payments under your necessities, that was for the minimum required payments.
If you pay down your debts ahead of schedule, you are still working towards building wealth and getting ahead. An extra payment each month can accelerate your debt payoff date, sometimes by years. Which means the money you were sending towards the minimum payments can then be freed up, and used either for savings, or for a little more freedom in your budget.
If you have credit card debt, sending in extra money to pay it off can be an excellent use of your savings funds (assuming you don’t accrue any more debt). Similarly, if you have a smaller private loan for school, you may be able to pay it off and thus reduce your monthly minimum payments going forward.
Wants: $1050
This budget allows $1050 per month for wants.
Wants can be: going out to restaurants, buying steak at the grocery store, sprucing up your wardrobe or home with new items, going to shows or sports events, travel, cable/ESPN, Netflix, gifts for family and friends, charitable giving, etc.
This may be the place in your budget with the most wiggle room. You want to order take out pizza after a tough night on call? Great, that’s what this fund is for. Your best friend just got engaged and wants to have a celebration over Christmas break (which you have off)? That’s fine. You forgot to renew your driver’s license and are out of money in your “necessities” money? You can certainly pull the money from here. You just want to knock off that one credit card debt, and choose to use a little of this money to get rid of it sooner? Awesome.
But ideally, each month, you should keep these expenditures within your budget, and make sure these are things you feel happy about spending on. If you use this all for your minimum living needs or savings, you will feel pinched. This money is to feed some of your dreams, not just get you through the month.
Some Sample Budgets
I like clinical scenarios, much better than memorizing trivia or even general principles. So I think putting a few examples out here might be helpful.
Dr. L. K. Duck
L.K. graduated from medical school debt free, and has an old car that is paid off. He even has $400 in graduation money he was given by his grandparents. He knows he will be rotating at several different hospitals, and will need a car to manage.
He knows he can afford $1750 monthly for necessities.
He allocates $1200 for rent and $120 for utilities and insurance. His car is going to cost him $100 for gas, $75 for insurance and $50 for parking. He knows from med school he can manage on $200 a month for groceries. His parents helped him with registration for the year, so he isn’t counting it as a cost. His monthly totals for necessities comes in just under goal at $1745. Good thing he already owns his car.
As for savings, he knows he should allocate $700 a month.
He would like to have 2 months of savings for emergencies before he starts saving for other things. That means he will need 2 x $2800 ($3500 after tax minus savings), or $5600 saved. He prefers to put all of his money aside for 7 to 8 months, and then will start saving for other things. He plans then to put aside the$500 each month for a Roth IRA, and the rest ($200) to get a new car in case his old one breaks down.
He also has $1050 per month for wants.
He wants to have cell phone coverage ($60), home internet ($60), a streaming service for his time off ($15), beers with his co-interns once a week ($60) and dinner out too ($100) . Two of his college friends are getting married this year, and he wants to send presents ($10 over the year), even if he isn’t sure he can get time off to attend. If he can get the time off, that will likely run him $1200, or $100 per month. He is definitely flying home for the holidays to see family ($450 or roughtly $40 per month).
Even with those estimated costs, he still has about $600 a month for things he forgot to budget for (Boards?, a winter coat?) and things he might like to purchase: new shoes, a vacation, take out.
There is no problem finding things to spend this money on, but he knows he needs to watch the total, so he doesn’t spend more each month than he can afford.
Dr. Tiffany Spott
Dr. Spott did not have the advantages that Dr. Duck did.
She has a significant amount of loans: $230,000 in federal loans for school, and she also took out $10,000 for interviews (clothes, travel), boards, and moving costs. This loan is on a 5 year pay off schedule, and her interest rate is 8%. She does have a hand-me-down car from her cousin with no car payments.
She knows she is supposed to allocate $1750 a month for necessities.
Her private loan is going to cost her $275 a month, and, if she goes into REPAYE, she knows she should set aside $249 per month (though she won’t have to pay this amount for at least her first 6 months of residency).
Living in an apartment on her own is going to push her budget for necessities well over her comfort zone, and she is tired of feeling like there isn’t enough money to go around.
Luckily, one of her med school classmates is going to be starting at the same institution. They aren’t best friends, but she thinks they can get along as roommates for at least the first year.
Splitting rent and utilities, Tiff’s share will be $725 a month, including renter’s insurance (she still needs that).
Her car will cost about $225 a month, though if she can carpool with her roommate, she might save a little on gas.
Putting aside $275 plus $250 a month for her loans still leaves her $275 for groceries and toiletries.
Savings
Tiff has $700 to put aside for savings.
She would like an emergency fund, and she has a feeling her very old car may not make it until she finishes residency.
She would very much like to pay off her personal loan. If she could, that would free up a lot of money from her monthly budget.
And she knows how important it is to put money aside for retirement. She is still young, but she is already behind on her savings compared to her friends who went to work right after college.
She has multiple competing goals, and not enough money to meet all of them at once.
After careful consideration, she decides to put aside $250 per month, every month, to a Roth IRA. She decides to split the rest: $100 each month to build her emergency fund, and the rest–$350 per month–towards the principal of her personal loan. Using a payoff calculator, this should shorten her payoff term for 5 years to just over 1 and 1/2.
She does have 6 months of REPAYE payments of $0, and decides she should use the estimated payments of $249 to bolster her emergency fund, so that by January of her intern year she has an extra $3000 put away.
Wants
Dr. Spott still has $1050 a month to take care of her wants: a cell phone ($60), home internet service (which she can split with her roommate, $30), some new clothes ($75 per month, on average), regular hair cuts ($50, if she can find the time on her days off), charitable donations ($50 a month), even a winter trip to somewhere warm (if travel is safe and allowed by the time she has the time off, $150 per month).
Even with those estimated expenses, she still has $635 a month to pay for things she forgot to budget for, extra splurges, or even paying off her personal loan early. She has a good budget to allow for fun, because she has kept the cost of her necessities to 50% of her take home pay.
Dr. Prudence Averr
Dr. Averr has always been careful with money. She attended her state university and medical college, and left with lower than average loans, thanks to money her parents put away and several merit scholarships.
She is staying at her home institution for her intern year, before moving to a prestigious Dermatology residency in a higher cost of living city.
She has been splitting the rent on the 3 bedroom apartment with 2 other students, one of whom is staying on for her residency, and another who is an MD/PhD student who won’t finish for a few years. They are excellent tenants, and their rent hasn’t increased much since they moved in 4 years ago. The total rent is $1500 a month for all three of them.
Luckily (or maybe it’s not luck, maybe it’s good planning), the apartment is in easy walking distance of 2 of her 3 clinical sites. The third site is only a few miles away, a relatively cheap drive share ride away, if she can’t get a ride with someone.
Necessities: $1750
Pru will have to pay $500 per month for rent, and $45 per month for her share of the utilities and insurance. She estimates she will spend $50 per month (more some months, much less on others) on ride shares. She has some allergy issues, and knows she spends $400 a month of food already; she is a little worried she may have to pay more for convenience, and increases her budget to $450 per month for food.
Using the REPAYE calculator, she sees that next year she will have to pay $249 per month on her $80,000 of loans. For now, she is putting that money into savings, but knows that in January she will have to send it to her loan servicer.
She has a little more than $450 still to spare out of this budget (mostly because of avoiding the expenses related to owning a car). She plans to put another $200 aside for unexpected costs, and save the rest for a deposit on her next place when she moves.
Savings: $700
Pru knows all about retirement funds, and she actually qualifies for a match in her residency 401(k). She will be matched 50 cents on each dollar she saves, up to 6% of her salary. Even better, she is allowed to contribute to a Roth 401(k), which means her contributions are after tax, but they grow tax free and won’t be taxed when she withdraws them in 30 to 40 years, when she expects to be in a higher tax bracket.
Therefore, she contributes 6% of her gross salary (about $300 per month) in her Roth 401(k), and puts another $300 per month into a Roth IRA.
She uses the remaining $100 per month to save for her move next June.
Wants: $1050
Pru has been very careful with her spending during medical school. She knows she should still be frugal, but would like to loosen up a little.
She uses a MVNO for cell service ($30 per month), and splits the internet bill with her roommates (another $30 per month).
She already spends a decent amount on groceries, but hopes to socialize with her co-interns. She puts aside $100 per month for that.
Now that she is making money, she thinks putting aside a little money for charitable giving is in order. She isn’t sure about giving 10%, but would like to start with $100 per month. She knows the student run free clinic she volunteers with could really make use of it.
She has been putting off some spending while she was a student living on loans, and wants to replace some things.
Her clothes are more suitable to a scruffy student than a professional woman, and she plans to go on a shopping spree when she gets her July paycheck, to replenish her wardrobe with new (to her) clothes to carry her through the summer and fall. She will do that again in late fall for winter clothes.
In August, she plans to get a new phone (unless there are sales in September).
She isn’t sure what to do with her extra money in those other months. She may buy a few fun things, save for a vacation, or even start investing it for the future.
What’s Your Plan?
If you made it all the way here, you must have some interest in budgeting well.
You may look at that distribution of needs, wants, and savings, and feel that it’s not a good match for you. That’s fine.
If you want to put more to savings and less to your wants, you will come out ahead. If your wants and needs together total about 80% of your salary, you’ll probably be OK. But if you decide to spend a significantly higher proportion of your salary on your needs (rent, car, utilities) you may find yourself feeling stretched that first year.
I hope that this is a helpful starting point for you. Please let me know if you think I have forgotten something huge. And best of luck getting settled in your new home for the next 3-7 years.