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Top Two Ways to Live Within Your Means: For Medical Residents

Medical students, residents, physicians, and anyone looking to save money as they move up or along their prospective career ladder — it is time to heed these four words of advice: “Live like a resident.”

If you are familiar with The White Coat Investor, you’ve probably heard this sound advice repeatedly, but what does it mean? While primarily targeted at medical residents who are about to graduate from residency (and likewise move up substantially in pay scale), it is actually great advice for anyone who wishes to learn how to make a budget and live within it. If you are likely to receive a significant boost in income — whether now or in the near future — you should try to maintain a budget that falls in line with your previous — or lower — income. By learning to live modestly and well below your current earnings on a routine basis, you are more likely to have more money to spend in other ways, such as paying down student loans, paying off other debts, going on vacation, pursuing a hobby, retiring early, investing, and simply doing something just for the fun of it.

Creating a budget and reserving a portion of your earnings for future goals can help individuals, particularly medical residents, make the leap from low to high earnings in a manner that allows them to enjoy some of their hard-earned success both now and in the future.

#1 Live Modestly From the Start

Whether you are in residency or working in a short-term, lower-salary job, living modestly and within your means is an important habit to acquire. For medical residents, this means that you should not live like an attending physician when you are a resident. Do not be tempted to buy things you cannot currently afford  by spending as if you are already earning the wages associated with your future job title. Even though you know that you will likely be earning more in the near future, this style of spending is an easy way to accumulate debt, additional loans (car, home, personal), and possibly lower credit scores. Following this advice early, however, can help you set up great financial planning habits, such as paying off debts, saving for a retirement plan or investments, being able to go on vacation, and any other long-term financial goals that you may desire.

 

#2 Live a Modest Lifestyle After Climbing Your Career Ladder

Once you begin earning higher wage, whether you are now an attending physician or working in some other higher-earning profession, consider maintaining a modest lifestyle. Opting for a smaller house or a less expensive car, or simply continuing to maintain the budget that you followed in residency previous position, can help you achieve this goal. Why you should do this, however, is the best part. With a climbing income and fairly stable expenses, you will have more money coming in that going out, and therefore, more money to pay down student loans, to add to your blossoming retirement account, to invest, or to enjoy with your family. If you want to maintain your modest budget while experiencing more of what you are passionate about, consider setting aside more of your budget for this category. For example, if you want to travel the world, keep everything except travel expenses at your residency-level budget. If you have a growing family and need a bigger house in a nicer neighborhood, consider relocating to an area that is less expensive, or cut back on expenses in other categories so that your mortgage does not consume too much of your extra capital. Regardless of your situation, there is a plan that can work for you.

While you are paying down your student loans in this phase, consider this potentially money-saving strategy — refinancing for a lower rate! Refinancing student loans (and consolidating multiple loans) into one loan, ideally with a lower rate, could help you save countless, hard-earned dollars. If you want to see how much you could save, check out our loan calculator or talk to a representative at Education Loan Finance.

Live for Today. Plan for Tomorrow

Physicians are often already accustomed to experiencing delayed gratification, having trained for years longer than most to ultimately obtain a higher income. Without their early working years to obtain and save wages, physicians who are in residency or just out of residency should take precautions to save and budget their income wisely. The bottom line is, “five times the pay doesn’t equal five times the lifestyle,” and while physicians eventually do typically make more money than many other professions, they also have more professional expenses (CMEs, professional licensing, and more), often higher overhead expenses, and higher student loans. Financially planning for these factors and formulating a well-informed way to maintain a modest budget, at least for the first few years after residency, can go a long way in securing a peaceful financial future.

4 Common Credit Card Myths

Most people have mixed feelings about credit cards. For some, they are a great tool for building credit. For others, they are the first form of consumer debt that many people incur. Although the majority of Americans own at least one credit card, a surprising number of people struggle with basic information about the terms, requirements, and the multiple ways they impact personal credit profiles. According to a recent survey from NerdWallet, most credit card users are unaware of the effects that many common actions have on their credit scores. More than half of consumers do not know when they begin being charged interest on credit card purchases, and 54 percent do not know that carrying a credit card balance does not help a person’s credit score. These findings support the idea that, while credit cards are widely used, the majority of Americans are unfamiliar with all of the information necessary to use them correctly. Here are four common credit card myths and why you should know about them:

Credit Card Myth #1: Carrying a balance is good for your credit score.

As stated above, more than half of credit card users think that the simple act of carrying a balance from month to month helps build credit. This is simply untrue — at a minimum, carrying a credit card balance often costs you money, and higher balances can actually lower your score by counting against your available credit. Users who only pay the minimum payment each month end up being charged interest on the average daily balance on the card. Increases in credit scores are influenced by factors such as maintaining on-time payments and keeping balances low compared to available credit limits (credit utilization ratio), both of which can be accomplished while still paying off your entire bill each month. Responsible credit card usage can help your credit score, but spare yourself from unnecessary fees and snowballing debt by only charging what you can afford to pay in full on time every month.

Credit Card Myth #2: The amount you charge to your credit card each month is not relevant.

Most credit cards come with a monthly limit. Many credit card users, especially first-time users, see that limit as the maximum amount they are able to spend that month and simply spending less the maximum is acceptable. While staying within your limit is important, the amount you charge to your card each month actually matters. When determining your FICO credit score,  MyFico.com highlights how several factors are taken into consideration:

  • Payment History (35%)
  • Amounts Owed (30%)
  • Length of Credit History (15%)
  • New Credit (10%)
  • Types of Credit Used (10%)

Amounts owed, which accounts for 30 percent of your credit score, is also known as your credit utilization. Your credit utilization is essentially the amount of your credit limit you use — the percentage of the amount you owe relative to the amount you have available. The lower the utilization percentage, the better — the higher the percentage, the worse effect it has on your credit score. For example, say you own a credit card with a $1,000 limit. If you charge $300 a month to your card, and pay it off, you will have a 30 percent utilization ratio, which will be good for your credit score. For a general rule of thumb, you want to stay at 30 percent or less of your overall credit limit.

Credit Card Myth #3: You should not accept a credit limit increase.

This one goes hand-in-hand with Myth #2. Many people believe that a credit limit increase is a way to get them to spend more money. While this could be true, accepting the increase can be advantageous as long as you are disciplined enough to maintain responsible spending habits. Suppose your bank offers you a $500 limit increase from your original $1,000, giving you a new limit of $1,500. If you keep your card usage the same by continuing to charge $300 a month, your credit utilization percentage will decrease from 30 percent to 20 percent. Therefore, accepting the credit limit increase can work in your favor and may help your credit score. On the other hand, if you tend to overspend and think you may be tempted to charge more to your card, declining the increase might be a better idea.

Credit Card Myth #4: Applying for a new credit card will damage your credit score for a long time.

When you apply for a new card, the bank will pull a “hard inquiry” in order to check your credit score before making a decision. Typically, these hard inquiries will result in a temporary dip in your credit score; however, they will only stay on your credit report for around two years. As long as you use the credit card responsibly and stay on top of payments, your new card can actually increase your credit score over time by adding to your credit history. However, try to stay away from applying for new cards too often (or within a short period), as this can have a negative effect on your credit score.

The Bottom Line

People have differing opinions on credit cards, and the abundance of misinformation surrounding them makes finding the right balance challenging. If you know all the facts, and how to use your card correctly and responsibly, they can be an effective tool for building good credit and help you be more likely to get the best rates on home loans, auto loans, education loans, and more.

Tips for Prioritizing Education Loan Repayment

Graduating with student loan debt has become the norm for college graduates. With the cost of attending a university rising each year, the average Class of 2016 graduate has accumulated almost $40,000 in student loan debt. As a young professional making a full-time income for the first time, finding the motivation to pay off debt can be difficult. Some people struggle to make repayment a priority because of existing credit card debt or options such as deferment or forbearance. However, one of the first steps to a solid financial future is eliminating debt as quickly as possible — so making education loan repayment a priority is crucial. Education loan debt is part of your debt portfolio, so like your credit cards, you should have a plan in place to pay it off as quickly as possible. If you are trying to change your mindset when it comes to paying down your student loan debt, here are a few tips to get you started:

Get Motivated

It is easy to let your student loans slip your mind and not think about them except for once a month when you send in your payment, but this mindset is not going to get you out of debt faster. Consider what will motivate you to pay off your loans and become debt-free. Calculate the amount of interest you will end up paying if you wait until the end of your loan term to pay it off. Then, calculate the amount you would pay in interest if you paid down your loan a few years earlier. What could you do with the extra money? Find something that inspires you to eliminate your debt faster.

Set Goals

In addition to getting motivated, another tactic you can use to help you stay on track is goal setting. Determine when you would like to have your loans paid off and set a goal to become debt-free by that point. You can also create more short-term goals such as paying off a certain amount per year. Consider using Dave Ramsey’s snowball or avalanche methods to chip away at your debt, one loan at a time. While you are doing that, do not forget to explore whether or not refinancing your student loans could potentially lower the amount of interest that you owe over the life of your loan significantly.  Setting goals and coming up with a repayment plan will make you more accountable and disciplined for eliminating your debt.

Develop Your Action Plan

To reach your goals and pay off your debt faster, you will need to go above and beyond the minimum loan payment each month. In order to allocate more money to your student loans, you may need to start budgeting or rewrite your budget to account for a larger monthly loan payment. Try to cut costs where you can, such as consolidating or eliminating services (phone, cable, cell, etc.), cooking more meals at home, or spending less money on clothing and entertainment. If your budget is already tight and you are struggling to find areas to cut back, consider an alternative source of side income to make money in addition to your primary job. You can do freelance work, open an Etsy shop, or even walk dogs in your free time for extra cash to put toward your student loans. If you are interested in the potential for a lower monthly payment or lower interest rates, find out if refinancing or consolidating your student loans through a private lender is a good fit for you. Either way, paying off your student loans should be a priority in every financial decision you make. If you have any excess money after savings and monthly expenses, put it toward paying off your debt — a little goes a long way.

Put Your Education Loans First

To pay off your student loans and pay off your debt as fast as possible, you need to make it a top priority in your life. Instead of ignoring your loans and only paying the minimum each month, refinancing and paying your loans off early will save you money in the long-run. Although it may seem difficult and overwhelming at first, with a lot of motivation, goal setting, and a plan, you can make it happen.