“The first thing you should do is clear any credit card debt, because it carries such high interest rates,” Dr. Badlani advises. “Do this before investing in a Roth IRA or anything.”
As for student loans, “I recommend taking your time paying off fixed APR loans and federally subsidized loans,” Dr. Badlani says “These typically carry low interest and they are tax deductible. You’re better off investing your money in indexed mutual funds because the stock market averages an 8% to 10% return (long-term), versus loans that are maybe 6% interest, or 4% when you calculate the tax deduction.”
However, if your student loan comes from a private bank, it may carry a higher interest rate and variable APRs. In this case, says Dr. Badlani, “you need to pay off those loans first” or look into consolidating or refinancing high-interest student loans.
Build Your Savings
Once you’ve cleared or reduced any high-interest debt, it’s time to focus on saving some money—no matter how much you’re making. “Residents say they have no money to save,” Dr. Badlani says. “But you need to look at your lifestyle and look for what is called ‘the latte factor.’ If you work hard, you may feel you deserve a treat, so you buy a $4 latte every day—maybe two a day. If you work 27 days a month, this adds up to $200 a month or nearly $3,000 a year. If you put that money in your Roth IRA every year of your residency and your fellowship, that adds up to a cool $150,000—based on 8% to 9% annual return, compounded annually for 30 years and adjusted for investment fees.”
—Sameer Badlani, MD
Starting a money market account or putting money in a certificate of deposit (CD) will keep it liquid. “You should have three to six months’ expenses, in case you lose your job or get sick,” Dr. Badlani says. “But be sure to put this ‘cushion money’ in a money market account, which these days are typically returning 3.5% APR versus regular checking accounts that offer a measly .25%, to offset inflation eating into your savings.”
Invest Early for Retirement
Residents and low-income hospitalists are in an excellent position to start investing for retirement. “While you’re a resident or intern, you most likely qualify for a Roth IRA,” Dr. Badlani explains. “This is the only time you’ll be able to invest in this. It’s a good choice for people with potential for increasing their income. Roth contributions are made after taxes and the account grows tax-free; you never have to pay tax on that money in retirement. For 2008, you’re eligible to contribute to a Roth IRA if you’re single or file as head of household with a modified adjusted gross income of below $114,000, or if you file jointly with income below $166,000.”
Another smart retirement investment for just about any hospitalist is employer-matched contributions. “If your employer will match your [retirement] contribution, that’s free money,” Dr. Badlani points out. “If you’re not taking advantage of that, you’re making a big mistake. Institutions will typically match up to about 5% of an employee’s contribution to a 401(k) or 403(b). Plus, by putting money in a retirement account, you’re reducing your tax burden.”
Online calculators can help you figure out how much to save—including matching funds—for a comfortable retirement. “The $1 million retirement has been the American dream for a long time, but that’s increased now to $1.5 to $1.8 million,” Dr. Badlani says. “But for a comfortable lifestyle and accounting for spiraling healthcare costs, I would recommend aiming for $5 million. That takes a lot of discipline over a long stretch of time.” He recommends the online calculator at www.dinkytown.net, which shows that a 29-year-old earning an annual income of $150,000 can retire at 65 with $5,868,264—if he or she contributes 15% to a 403(b) retirement account with a 5% employer match. “But you have to stick to this every month for the next 36 years,” Dr. Badlani warns. “That takes discipline.”