Should You Invest During Residency?

One of the most important things you can do to build wealth over time is to invest. During residency, though, it can feel like you don’t have enough money to invest. 

The good news, though, is that you might be able to invest more than you think, even as a medical student. Here’s what you need to know about investing while in medical school and during your residency.

Investing while in medical school and residency

The average medical resident salary is $64,000 a year, according to a 2021 Medscape report. However, residents in years six through eight make more than that — $70,300 on average.

Considering these numbers, it might become more feasible to begin investing as a medical student, especially during residency. Setting an achievable goal for investing during medical school and residency, taking into account your medical school debt as well as your income, can help you decide to set aside some money each month to begin building wealth.

Remember: even though you might think that you’ll be better able to set aside money later, when you’re an attending physician or in your own private practice, the reality is that there’s no way to replace time in the market. If you skip investing during medical school and residency, you can’t truly make up for the missed opportunity cost — at least not very easily.

The good news is that there are plenty of ideas for investing while in medical school and during your residency.

How to start investing as a medical student and during residency

When you’re investing as a medical student and during residency, you don’t need to set aside a ton of money. In fact, starting small can make a lot of sense. The important thing is simply to get started. You can increase your investment contributions later. Here are some ideas for investing while in medical school and during your residency.

Use an IRA

An individual retirement account (IRA) can help you set aside tax-advantaged dollars for later. There are two main types that you can access, depending on your situation and tax interests:

• Traditional: Receive a tax deduction now for your contributions. Lower your tax liability today while also saving for retirement.

• Roth: Contribute after-tax dollars, but your earnings grow tax-free over time, and you don’t have to pay taxes when you withdraw from the account later. 

Because of income limitations on contributions, investing as a medical student using a Roth IRA can make sense. You might not qualify to make Roth IRA contributions later when your income improves. In 2021, you can contribute up to $6,000 a year to an IRA. 

Consider this: during your four years of residency, you will have invested $24,000 but have about $26,640 in your account, thanks to compounding returns of 7% annually. Now, if you just let that money sit there for 50 years, deciding to access it last during retirement, that $26,640 could potentially grow almost $785,000. And that’s just for setting aside $6,000 a year for four years during residency.

When you realize that $6,000 a year is less than 10% of the average income as a resident, it may feel more doable than you initially thought.

And, of course, you’ll be taking advantage of other retirement savings after you finish your residency, continuing to invest and build wealth.

Use your employer’s retirement plan

If your employer offers a tax-advantaged retirement plan, you can invest that way. Investing during medical school and residency becomes more manageable when the money is just coming out of your paycheck. If your employer offers a match, you can do even better. When your employer matches your contributions, that’s free money that can grow over time in a tax-efficient manner.

When you have access to an employer retirement plan, be sure to set aside some money if you can – even if it’s only a few dollars each paycheck.

Open a taxable investment account

Alternatively, you can also consider a taxable investment account. If you’ve crunched the numbers and you think investing enough to max out an IRA just isn’t feasible while you’re a resident, you can use a different account to get started.

Consider using a taxable investment account, like Stash or Acorns, to help you start investing your pocket change. Apps like Robinhood can help you invest with as little as a dollar. It might not seem like much, but it’s a start. Any compound returns, especially when used with other savings habits and a debt repayment plan, can be beneficial over time.

Build good habits by investing during medical school and residency

Even if it doesn’t seem like you’re accomplishing much by investing during medical school and residency, you’re building good habits. Building long-term habits that will benefit you down the road can be huge. Getting in the habit of investing a portion of your income now will make it easier to keep investing — and increasing your contributions — later.

Developing the right mindset around investing starts early on. Rather than telling yourself that you can invest now, look for ways to free up a little extra money to invest. Then, when that’s comfortable, consider increasing how much you invest each month. Over time, you’ll get in the habit of identifying extra money that can go toward investing, and you’ll be used to it.

Building good financial habits now can be a big step toward economic success later in life. And all it takes is a few dollars to get started.