Personal Finance for Students & Residents

1. 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

2. 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

3. 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

4. Introduction Insurances: Emergency fund Health Disability Auto Life Homeowners Umbrella Malpractice Outline:

5. Outline (continued) • Retirement • College • Educational loans • Other suggestions • Summary

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

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

9. 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

10. 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

11. 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…

12. 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!

13. 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…

14. 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)

15. 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)

16. 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

17. 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

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

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

20. “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...)

21. Retirement – Basic Principles • Take maximum advantage of matching programs • Take maximum advantage of tax-advantaged programs (401-k’s, 403-b’s, IRA’s, Roths, etc.) • Don’t count on Social Security • 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

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

23. 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

24. 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)

25. 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

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

27. #2 – “Must Do”

28. 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:

29. 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

30. 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

31. 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

32. Probably Best - 529 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 • www.savingforcollege.com

33. Children’s College Education - Summary #1 - 529 plans #2 - Pre-paid State Plans (ie, MET) #3 - Save in parents’ name #4 - UGMA

34. 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…

35. 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

36. 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: • www.aamc.org/students/financing/

37. 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”!

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

39. 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

40. 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

41. 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

42. 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

43. 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?)

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

45. 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.

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

47. 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:

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

49. 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

50. Learn More: • Personal finance magazines / books • Magazine worksheets • Computer programs • Web: • www.quicken.com • www.smartmoney.com • www.kiplinger.com • Financial planners • but beware – how do they make their money?