Dr. Jason Baxter (not his real name) is looking forward to earning his first paycheque as a resident in family medicine this summer. It will be a welcome change from relying on student loans and his line of credit through the four years of medical school.
Like all R1s in British Columbia, Jason’s salary will be $50,661 this year, as determined by the Collective Agreement. After income taxes and other deductions, that works out to about $3,400 a month.
Since family medicine is only a two-year residency, Jason feels that putting aside savings and other aspects of financial planning can wait until he’s in practice.
“When you’re a resident, the income is so low that I don’t think it makes sense to try to save or seriously try to pay down an enormous debt,” he says. “It will be much easier when you’re practising and billing large amounts.”
In theory, this sounds reasonable. After all, there may not be much left of Jason’s $3,400 once he has paid for accommodation, food, transportation and other expenses.
Why struggle and scrimp if all he could possibly save is $100 a month? The answer has to do with forming habits.
Shape your financial habits now
For Jason and other medical residents at this stage of their careers, it’s wise to view financial planning as a habit-forming exercise as much as an end goal. Making the tasks a habit—through practice and repetition—allows you to operate on autopilot later on.
As Charles Duhigg notes in his bestseller The Power of Habit: Why We Do What We Do in Life and Business: “Champions don’t do extraordinary things. They do ordinary things, but they do them without thinking, too fast for the other team to react. They follow the habits they’ve learned.”
Managing your finances might seem complex and time-consuming at first. But the key is to get used to doing it, regardless of how much debt you can pay off or how much money you can save or invest. Once you’re finished residency and are preparing for practice, it’s one less thing you’ll need to learn. And that will be a blessing, since there will be new financial issues to deal with as a practising physician.
Here are three areas of your finances to focus on during residency:
- Take stock of your debt. Confirm the outstanding balances of your student loans and line of credit. Student loans typically have a grace period of six months after the end of your studies before you have to start making payments. Be aware, however, that interest starts accumulating right away.
Get an estimate of your monthly loan repayment amount through CanLearn’s Loan Repayment Estimator. The calculator shows, for instance, that if you owe $100,000 and plan to repay over a 10-year period, it will mean a monthly payment of $1,197 based on a 7.7% interest rate (5% fixed plus 2.7% prime).
That’s $14,364 a year. For some residents, debt repayment can run much higher, into tens of thousands per year. These amounts obviously need to be factored into your budget.
- Understand your cash flow and deal with debt accordingly. Let’s assume you have an after-tax income of $3,400 a month. Figure out how much you need to spend on basic living costs and other expenses, and calculate what you’ll have left.
If you need to spend about $2,400 a month on rent, food, transportation and other expenses, you’ll have $1,000 remaining. Decide how much you want to set aside for debt and then set up automatic loan repayments so money comes out of your account on payday.
- Set up a savings and investment plan. Let’s say that after paying your monthly costs, including your debt, you expect to be left with $100.
Is it worthwhile to save an amount this small at this stage of your career? Yes, because the act of regular saving and investing sets the stage for good habits down the road. It may be small now, but $1,200 a year can grow significantly over the long run.
Use the compound interest calculator on md.cma.ca to see how your savings can grow over time.
By saving and investing early, you get a chance to become more comfortable with money management, riding the market’s ups and downs, and making progress toward your financial goals. Once you earn more income as a practising physician, you will be equipped to make financial decisions more easily.
This article is courtesy of MD Financial Management. As CMA members, medical residents have access to objective financial advice through MD Financial Management.
These presentations are provided for informational purposes only and should not be considered investment advice or an offer for a particular security or securities. Please consult your MD Advisor for additional information concerning your specific wealth management needs.
MD Financial Management provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies. For a detailed list of these companies, visit md.cma.ca.