Hospitalists setting out on their careers are used to life as struggling students. Once they start earning a sizeable salary, they’re hit with some tough choices: How fast should they pay off medical school loans? Can they afford to give in to the temptation of an expensive reward? How much savings do they really need?

“It is a bit of a shock to start your first job as an attending physician,” says Margaret C. Fang, MD, MPH, assistant adjunct professor of medicine at the University of California Hospital Medicine Group. “Your bank account seems to grow so much faster!” No matter how big that account may seem, it can dwindle away every month if you don’t practice good money management skills.

Sameer Badlani, MD, hospitalist and instructor at the University of Chicago, is faculty advisor to a medical student interest group at his university called Money and Medicine. “It’s all about delayed gratification,” he says of the effect a physician’s salary has on a new hospitalist. “I say, just wait one year in your new job to see what your expenses are before you buy that big house or that expensive convertible.”

Lending a Hand with Medical School Loans

Today’s average medical school student graduates with approximately $140,000 in loan balances. The good news for these graduates is that there are some possible sources of relief: Some hospital medicine programs may agree to help pay off your loans, either as part of a set recruitment bonus or through negotiation with new hires.

Dr. Fang recommends some possible help for academic hospitalists with medical school loans: They may be eligible for help with their loans from the National Institutes of Health (NIH). The NIH Loan Repayment Program provides clinical researchers with up to $35,000 per year of qualified educational debt, as well as federal and state taxes.

“I applied for this and it paid off a significant portion of my loan,” Dr. Fang says. To qualify, you must conduct clinical research for at least 50% of your total level of effort for an average of at least 20 hours per week during each quarterly service period. For details, visit www.lrp.nih.gov.

Do Your Research

Residents and early career hospitalists—and anyone who is having trouble saving some salary—would do well to tackle the subject of money management as if it were a clinical course. “What you do with your money deserves a lot of attention,” Dr. Fang says. “Vigilance about finances is important, but many physicians are not as prepared to deal with money management as they are to care for patients.”

When you’re about to start a job, find out the financial options before you’re faced with a mountain of forms and a heap of decisions. “When I started here, I had all this paperwork: I had to sign up for health insurance, disability, long-term disability, 401(k) and 403(b) plans, and more. It’s really daunting,” Dr. Fang says. “A little upfront research is important, so you can make good decisions about these things.”

When it comes to figuring out how much to contribute to retirement accounts, savings accounts and investments, consider enlisting some outside help. “Many institutions that hire young hospitalists offer financial counseling,” Dr. Fang points out. “I’ve done a lot of independent reading. But if your finances are more challenging—say you’re carrying a lot of debt—it’s reasonable to work with a financial consultant.”

Deal with Debt

Before you start investing your money, take a look at your debt. What to do with it—for instance, should you pay off all of your loans and bills—will be one of the most important decisions a new hospitalist will make.

“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.”

While you’re a resident or intern, you most likely qualify for a Roth IRA. 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.

—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.”

Regardless of how old you are or how much income you currently have, it’s wise to start practicing smart habits with spending, saving and investing your money. As Dr. Badlani says, “Good money habits last forever.” TH

Jane Jerrard also writes “Public Policy” for The Hospitalist.

First Paycheck Equals Investment Decisions