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Personal Finance for Students & Residents David T. Overton MD, MBA, FACEP Professor & Chairman of Emergency Medicine Michigan State University College.

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Presentation on theme: "Personal Finance for Students & Residents David T. Overton MD, MBA, FACEP Professor & Chairman of Emergency Medicine Michigan State University College."— Presentation transcript:

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2 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

3 Introduction  Why? We physicians have little business training We tend to be easy marks & bad managers And if we screw it up, nobody’s going to feel sorry for us

4 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

5 Outline:  Introduction  Insurances:  Emergency fund  Health  Disability  Auto  Life  Homeowners  Umbrella  Malpractice

6 Outline (continued)  Retirement  College  Educational loans  Other suggestions  Summary

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8 Absolutely Necessary (Survival) Insure Against “What If” Insurance Protection Emergency Cash Fund Debt Management Retirement Planning Estate Planning Life Plan #1 - Absolutely Necessary

9 Insurance:  Definition: “Insurance = Covering your rear”  Overriding principle: When in doubt… Insure for the big stuff Self-insure the small stuff

10 Insurance  Original Purpose: pool rare, non-with- standable risks, not first dollar coverage  Common Now: a vehicle for benefits & entitlements  Differing Motivations: if you’re an employee vs. an independent purchaser

11 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

12 Health Insurance  Usually provided by employers But make sure you’re covered now as a student!  Use Flexible Spending Accounts (when employed)  Do NOT count on professional courtesy! Has gone the way of the dodo…

13 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!

14 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…

15 Disability Insurance  Frequently neglected  Remember - dying is cheap (living is expensive)  Issues: How much? (as much as they’ll 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)

16 Homeowners Insurance:  Including “renter’s 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)

17 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

18 Personal Liability Umbrella:  Personal, not professional, liability  Highly recommended for physicians litigious society & we’re the targets  Needs to dovetail with homeowner and auto limits  How much? $1-3M+  Cheap

19 Retirement? Why now?  You can’t afford not to!  You have something very valuable: Time  Time = the magic of compound interest

20 “Compound interest is the 8 th wonder of the world” -- Albert Einstein -

21 “Rich”? - It depends….  In order to retire at 65, and support the average physician’s lifestyle, you will need a LOT of money  A million isn’t was it used to be  You will all be millionaires (big deal...)

22 Retirement – Basic Principles 1)Take maximum advantage of matching programs 2)Take maximum advantage of tax-advantaged programs (401-k’s, 403-b’s, IRA’s, Roths, etc.) 3)Don’t count on Social Security 4)If you’re planning early retirement, budget a flexible cushion (to avoid early W/D penalties prior to age 59). Better budget for health care, too

23 Three Basic Kinds of Retirement Investments DEPOSITACCUMULATIONDISTRIBUTION Tax Deductible (Before Tax $’s) Tax Deferred (Funds not Available) Taxable (Income & Estate) Not Deductible (After Tax $’s) Tax Deferred (Funds Available with Municipal Bonds) Can be Tax Free or Taxable… You Choose Possible IRS penalties for withdrawals prior to age 59 ½! Not Deductible (After Tax $’s) Partially Tax Deferred and Partially Tax Free Partially Taxable And Partially Tax Free IRS penalties for retirement withdrawals prior to age 59 ½ ! #1 401(k)s & 403(b)s TRADITIONAL IRAs SEP & SIMPLE IRAs KEOGH, PSP & MPP ESOPs #2 LIFE INSURANCE ANNUITIES MUNICIPAL BONDS ROTH IRAs 529/COVERDALE IRAs #3 CDs, SAVINGS, STOCKS, BONDS MUTUAL FUNDS PARTNERSHIPS

24 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

25 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)

26 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

27 SEP IRA  Good choice if you have additional “moonlighting” type income: Moonlighting Consulting Honoraria Royalties Etc.

28 #2 – “Must Do”

29 Children’s 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:

30 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

31 College Expenses – Another option  Uniform Gift To Minors (“UGMA”) Give after-tax $ to child Saved in special joint account Proceeds taxed at child’s rate, within limits But, child gets control at age of majority  (“…a Porsche and a trip to Europe…”)  Verdict: there are better options now

32 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 don’t 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

33 Probably Best Savings Plans  Like Roths for college  All public/private university/college/professional schools  Tuition, fees, room, books, supplies  Can choose any state’s program but, tax advantages often best in own state  Verdict: This is what I’d do 

34 Children’s College Education - Summary # plans #2- Pre-paid State Plans (ie, MET) #3 - Save in parents’ name #4 - UGMA

35 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…

36 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

37 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:

38 Buy a House:  Real estate may not always be a great investment, but: Mortgage interest is still a good tax shelter And you’ve got to live somewhere  Both pros & cons of buying during residency  Regardless, don’t become “House Poor”!

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

40 Buying Cars – Overton’s 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 else’s lease

41 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 can’t afford it otherwise Or you get a rare, really good deal

42 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

43 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

44 Credit & Credit Cards  Be careful – everyone wants to give you credit! But they don’t 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?)

45 Credit Report  Obtain, study & correct every year (for free) & in advance of major loan applications: * Lots of errors & old accounts  Too much available credit hurts your credit score

46 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.

47 More Suggestions:  Stash away 10% of each paycheck, for: rainy day fund --down payment retirement --whatever  Automatic investment plans  Make a budget…

48 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:

49 Over the residency years, you want to: 1.Pay off the credit cards, etc. 2.Accumulate a Rainy Day Fund 3.Save up a down payment 4.Start saving for retirement 5.Start repaying loans? 6.Start saving for the kids’ education? Financial Objectives During Residency:

50 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

51 Learn More:  Personal finance magazines / books  Magazine worksheets  Computer programs  Web:  Financial planners but beware – how do they make their money?

52 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

53 Some Victorian Financial Advice:  The moral of the story: marry very, very carefully work hard to stay married

54 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

55 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

56 Further Advice  Err on the side of living modestly: Avoid conspicuous consumption  THE CLASSIC physician pitfall!!  don’t feel entitled, or allow your significant other to do so Don’t become “house poor”, “car poor”, etc. Avoid having to work longer and harder to keep up with your lifestyle:  Alice in Wonderland – you’re running as fast as you can just in order to stay in one place!

57 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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59 Questions? Advice for Emergency Medicine Applicants:


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