The past few days have my family filled with joy as my brother “matched” with a residency program in a competitive specialization. For those unfamiliar with the process, following medical school graduation this spring, he will begin the apprenticeship phase of doctor training.
With that, he will begin to earn a salary, and of course, pay taxes. He will now be spending out of earned income and not living off student loans. Additionally, he is considering saving for the purchase of a house and beginning his investing journey in the financial markets.
Clearly, this is a big transition for him, and for other soon-to-be doctors.
In thinking through how I could help, I pondered what I would do if I were in his situation and came up with a basic framework. Ultimately, he can tailor it to suit his needs, and so can you.
Establishing a Baseline
Estimate monthly post-tax income
The first piece of planning requires knowing what take-home pay will be. How much money will be deposited in the bank each month after federal income, Social Security, and Medicare taxes are withheld?
Deciding where to live
Thankfully for him, he will have the ability to stay with family for the early part of his residency. His commuting costs and other fixed expenses will also be quite low. For most, this will not be an option and deciding where to live will have a big impact on how much disposable income is available.
Student loan payments
Many medical school graduates entering residency will opt for an income-based repayment plan for making their student loan payments, essentially capping their payment amount to a percentage of their income. This is beneficial given that salaries during residency will be low compared to their student loan balance, and it would be difficult to make standard payments. Ordinarily, I am a proponent of paying down student loans quickly but given that his income will ramp up substantially in a few years, there is no need to hurt cash flow in the present.
Managing Disposable Income
With post-tax income and fixed costs identified, he can now think ahead and determine where he wants to allocate his disposable income.
Emergency fund
When graduating college – medical school or not – the easiest and most straightforward thing to do with extra income is to start saving. Building a financial cushion early is foundational for everything yet to come and stashing a few months’ worth of expenses in a high-yield savings account to cover an emergency is the first step.
Saving for a house & investing
With the emergency fund established, the real fun begins. Most of the recommendations to this point are self-explanatory. This is also the point where personal goals come into focus.
Since he plans to purchase a home in the next few years, he will want to save more cash relative to investing in the market.
The goal = save as much cash as possible in order to afford a down payment, with some leftover for housing maintenance. It would not be wise to invest the down payment fund in stocks. However, he does plan to start investing at the same time. My recommended allocation to him is as follows:
As far as investing goes, low-cost ETFs or mutual funds that track an index will be his best bet.
Leave a comment or reach out on social media with anything you would add.
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