I have noticed an uptick in people reading my prior posts on budgeting. Since Match Day was just 1 month ago, I assume people are thinking about how to arrange their finances for the upcoming start of internship.
This is an update of my post from 2 years ago. A few things have changed since then, including the student loan holiday extension and the salary offered to interns (it is nearly twice I what I earned!).
I have also stretched my prior, super-long post into two installments. This post will go over my suggestions on how to build your own budget, from figuring out your take how pay to deciding how to allocate it. The next post will give some examples of the different ways hypothetical interns might turn suggestions into plans.
This post is aimed at the graduating medical student thinking about managing their money in internship, though it is truly applicable to anyone leaving a long course of study for their first real job. While 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 will also enjoy 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.
I like to think of budgeting like a diet: you have to manage a resource (calories, money) to meet your goals. With diets, some people do better with low-fat, 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 50/30/20 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.
Overview of the 50/30/20 rule
After writing about budgets for the first year as an attending a few years ago, I found myself drawn more to the 50/30/20 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.
- 30% should go towards your wants: These are nice-to-haves: fancier groceries, restaurant meals, vacations, treats. Things that can be cut if needed, but hopefully make your life more pleasant or fun.
- 20% should go towards savings: an emergency fund, retirement savings, a down payment fund for a house, extra payments towards your loans.
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. For those whose 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
I looked again last week at intern salaries, and found that they have gone up quite a bit in the past few years. In my small sample size (including East Coast, Midwest, Mountain state, and West Coast progams), I saw a range from $59,000 to $71,000 a year. Taxes depend on state and city location. I used a paycheck calculator to estimate take home salaries at various program, and on average, a single earner without pretax deductions (no retirement fund contribution, no FSA, etc.) ranged from $3700 to $4200. I decided to pick a round number of $4000 per month for this exercise.
For a single intern whose take home salary is about $4000 per month, the 50/30/20 rule would suggest the following for budgeting:
- $2000 for needs (50% of $4000).
- $1200 for wants (30% of $4000).
- $800 for savings (20% of $4000).
[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.]
How might this apply to your budget?
Necessities: $2000
Under this plan, you should plan to spend no more than $2000 per month for necessities. This will include your rent, utilities, transportation costs (for cars: insurance, repairs, parking, gas, registration, hopefully no payments!; or else a bus pass, bike allowance, car sharing plan), food (basic groceries only for now), 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 $300 more per month. That means that if you are willing to have a roommate, you could pay $750 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).
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.). Costs here can be quite variable, I will call it $60-210 per month, though you should probably do a little research on your particular situation before setting your budget.
Transportation
Your transportation costs can vary wildly as well.
Maybe you already have a car that runs well enough to take you through residency (or just internship).
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.
And 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.
Registration, inspection, routine maintenance (assuming you aren’t super handy with cars): we can call this $50 a month, but this is a total guess.
Repairs? Also vary. A lot. To be honest, I pay for them out of my emergency fund.
To sum up: it’s not at all clear to me how much it will cost a reader to run their car. My numbers above add up to anywhere between $200 to $700 a month under different scenarios. I would suggest a little reflection on your personal situation to come up with a more accurate estimate for you.
Perhaps you only have to go to one hospital, and you found a place in walking or biking distance (good for you!). Or you live on a bus or train line, and your only need will be a monthly pass. That expense is a lot more predictable, though I note that interns usually work hours that aren’t necessarily compatible with public transit.
food
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!
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 used to have (and may yet have in the future) 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.
Public loans
I am not a loan specialist, there are plenty of people out there who want to help you manage your loan burden. I’ve linked to a number below.
However, it seems to me that if you are going to be a resident with loans of 3 times your annual (resident) salary, the best advice seems to be to enroll in income based repayment plans. They allow you to pay a lower amount while your salary is low.
Currently, you don’t have to pay anything at all, thanks to the student loan holiday. This can give you some very nice breathing room in your budget.
Of course, you will eventually have to pay back your loan, one way or another.
If you are going for PSLF, though, this is very attractive. You can knock off a few (so far, people have had about 24 months’ worth) of your 120 monthly payments for free, bringing you ever closer to loan forgiveness without shelling out money of your own.
I doubt the loan holiday will last another 10 years. The current one is set to last only until September 2022, so it’s probably a good idea to have some idea of the minimum you might have to pay on your loans, in case you suddenly find you need to cough up that money.
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 $4000 per month (corresponding to an AGI of $63,000 per year, without any deductions) will pay a maximum of $374 a month on their loans until they have a salary increase.
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: $800
I am listing this section next, as I think of savings as another necessity (if you want to manage your finances well). I find that if I don’t address them first (I use my “secret savings account“), I don’t save as much as I think I should.
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, abound $9000), 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), with a 7.2% return on your money, your money will double 4 times. 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: $1200
Now we get to the fun stuff! This budget allows $1200 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.
I hope that this is a helpful starting point, 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!