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 from living on debt.
How much you earn as a resident is set out by collective agreements between provincial resident associations and academic health organizations, and so among the same-year, same-province residents, you’ll all be paid the same.
In British Columbia, for instance, all R1s earn $55,849 a year (as of April 1, 2020). After income taxes and other deductions, that works out to about $3,660 a month.
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 it makes any sense to try to save or seriously try to pay down an enormous debt. Wouldn’t it be much easier to wait until you’re practising and earning more? In theory, this sounds reasonable.
Why struggle and scrimp if all you could possibly save is $150 a month? But the answer has to do with forming habits.
Shape your financial habits now
For 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 2012 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 complexities to deal with as a practising physician.
Here are three areas of your finances to focus on during residency.
1. 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 student loan repayment amount through CanLearn’s Loan Repayment Estimator. The calculator shows, for instance, that if you owe $50,000 and plan to repay over a 10-year period starting immediately after finishing school, it will mean a monthly payment of $465 based on a 2.45% interest rate.1
That’s $5,580 a year. For some residents, debt repayment can run much higher, into tens of thousands a year once lines of credit are included. These amounts obviously need to be factored into your budget.
2. Understand your 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 calculate what you’ll have left.
If you need to spend about $2,800 a month on rent, food, transportation and other expenses, you’ll have $860 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. Use the cash flow calculator to help with budgeting.
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 $150.
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 $1,800 a year can grow significantly over the long run. A pre-authorized contribution plan can help you do this, it’s an easy and effective way to save and invest regularly and automatically.
Use our compound growth calculator 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.
For more information about getting started, please contact your MD Advisor.2
1 The prime rate is the interest rate that major banks and financial institutions charge their best customers. At the time of this writing, the prime rate was 2.45%. You have two interest rate options to choose from for your Canada Student Loan: a floating interest rate equal to prime, or a fixed interest rate of prime + 2.0%. Note if the floating interest rate option is selected, your payments and total interest payable may fluctuate with changes in the prime rate.
2 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.