For many medical students, debt is a fact of life. Most students will accumulate debt during medical school — whether it’s student loans or lines of credit, or both.
When you start residency, getting that first paycheque will be a welcome change.
How much you earn as a resident physician is set out by collective agreements between provincial resident associations and academic health organizations. Therefore, same-year, same-province residents will all be paid the same. In Saskatchewan, for instance, all PGY-1s currently earn $60,724 a year (as of January 1, 2021). After income tax and other deductions, that works out to about $3,683 a month.
While you might be fortunate enough to have a spouse or common-law partner contributing a second income to the household, after paying for your monthly expenses — accommodations, food, transportation, phone/internet and so on — there may not be much left, depending on the cost of living in your location.
The question is whether this is the time to try to save and/or pay down an enormous debt. Wouldn’t it be much easier to wait until you’re in practice and earning more? In theory, this sounds reasonable.
Why struggle and scrimp if all you could possibly save is $150 a month, for example? But the answer has to do with your personal circumstances, and whether there’s a second income in your household.
Shaping good financial habits now
For resident physicians at this stage of their career, 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 in your career.
And that will be a blessing since there will be new financial complexities to deal with once you’re in practice.
Here are three areas of your finances to focus on during residency.
1. Take stock of the household debt
Confirm the outstanding balances of your student loans, lines of credit and any other source of debt you may have. Remember that, because of the COVID-19 pandemic, the federal government is making student loans interest-free until March 31, 2023.
Not all debt is created equal. The interest payments on some forms of household debt may be tax-deductible, thereby lowering the after-tax interest you pay. Rank your debts in order of the highest-after-tax interest rate to the lowest, and focus on paying off the highest rate debt first.
If you have a student line of credit, interest accrues every day and is charged monthly. Some financial institutions give you the option of “capitalizing interest,” which means you don’t have to make interest payments while you are training and for 24 months after your residency program ends (called the “grace period”). Some lenders even allow you to extend the “24 months after” until after you’ve completed a fellowship. Remember, though, that interest continues to accrue on the funds you borrow, and that increases the amount you have to pay back later!
Even if you or your spouse have cash available, it might not make sense to pay off debt at all if it is interest-free or the after-tax rate is lower than what you could earn on investing the funds instead.
2. Understand your household cash flow and deal with debt accordingly
Let’s assume you have an after-tax income of $3,660 a month. Figure out how much you need to spend on basic living costs and other expenses, and then calculate what you’ll have left. If you’re in a dual-income household, calculate all resources and expenses to get an accurate figure.
For example, if you spend about $2,800 a month on accommodations, food, transportation and other expenses, you’ll have $860 remaining. Decide how much you want to set aside for debt reduction and then set up automatic loan repayments so that money comes out of your account automatically on payday.
Tip: Try the cash flow calculator to see the results of your household income versus expenses exercise.
3. 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 just $150. Is it worthwhile to save an amount this small at this stage of your career?
Yes, because the act of saving and investing regularly sets the stage for good financial habits down the road. It may be a small amount now, but $1,800 a year can grow significantly over the long run.
Setting up a pre-authorized contribution plan (PAC) can help you do this. Essentially, the PAC turns this $150 leftover amount into a commitment to paying your future self each month. This is an effective and beneficial way to save and invest regularly.
Tip: Take the guesswork out of investing. Use the approach known as dollar-cost averaging: put a fixed amount of money into the same investment at regular intervals over a period of time.
The importance of starting your financial planning early
Use our compound growth calculator to see how your savings can grow over time. The results may surprise you!
By understanding your household finances, and making plans to save and invest early, you’ll become more comfortable with money management and with weathering changes in the markets. You’ll also be making progress toward your financial goals. When you earn more income in the future, you’ll be equipped to make financial decisions more easily.
For more information about getting started, please contact your MD Advisor*.
*MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
Banking and credit products and services are offered by The Bank of Nova Scotia “Scotiabank.” Credit and lending products are subject to credit approval by Scotiabank.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.