Basic finance for med students and residents

[shikimate]

I have no formal finance background, but I do have some practical experience going from undergrad to med student to resident to staff. Since this is a topic that does not get enough attention, I will write about this based on what I know. It's gonna be a long series of posts. I will be editing these posts on an ongoing basis so do not reply to any of these posts.

1) FIRST, YOU HAVE TO HAVE THE RIGHT MINDSET REGARDING FINANCES

- Finance is an inescapable aspect of your career and life. It's not a fun subject for many people, but it's a necessity to keep yourself from ruins, so take some time to seriously study it and be competent in it.

- Just like you wouldn't tell your patient to ignore a growing mass, why would you ignore growing debt? If you do not pay attention to finances, it will find you when you least want it.

- Use finance as a tool, but do not let it take over your life. Most of us would learn to drive a car, but few of us would seriously consider a career as NASCAR driver. Therefore, you should treat finance as a tool in life to achieve other things you want. 

- Finance is an ongoing aspect of your life, unless you are extremely wealthy or extremely impoverished. Therefore, just like you would periodically monitor someone's HbA1c level, you should periodically monitor your financial health.

[shikimate]

2) FINANCE IS LIKE GASTROENTEROLOGY, THERE IS AN INPUT AND THERE IS AN OUTPUT.

- My simple view of finance is that there are 3 basic components, wealth coming in, wealth you're holding, and wealth you are spending. Think gastroenterology, you eat something, you store some into adiposity, and you poop out the rest.

- Do not ignore any of the 3 above aspects. Some people earn a lot, but they spend it all. Some people are misers, but do not spend enough time increasing the wealth coming in.

3) INCOME 

- You should make a list of your income. Not only that, take note of how precarious they are. For example, if you are a resident, you have a monthly salary which is relatively stable. If you are an undergrad, you might have a lump sum student loan coming in at the beginning of the term, but it's a one time only thing.

- Once you have tallied your income, you should figure out how they change over time so you can conceptualize times of "feast" and "famine". This makes you less likely to over-spend during "feast" and pay interest to borrow during "famine".

- You should try to diversify your income stream, so if something were to happen, your eggs aren't all in the same basket. When you are undergrad, having a side job, summer job, or flexible gig can be helpful during times of "famine". As a resident, you should consider ideas such as insurance, investment, rental, or other ideas that can provide income, should you become unable to work.

- You should consider the tax implication of your income. Remember, the effort you undertake to increase your income results in pre-tax dollars, whereas spending less results in more of after-tax dollars. Therefore, when it takes an enormous amount of additional marginal effort to generate more income, it might not be actually worth it.

[shikimate]

4) SPENDING

- just like income, spending should be itemized and mapped out temporally. 

- take some time to write down fixed spending items that are relatively constant month to month (eg. rent, phone bill, car payment etc).

- make a reasonable estimate on variable/unexpected expenses and how frequent they might be required (Eg. once every 2 years a surprise dental bill of $400 etc).

- just like income, add them all up and make note of temporal relationship (eg. lump sum tuition bill in Sept etc). You should be able to make a reasonable calculation of average monthly spending using fixed and variable spending. 

- with your income and spending mapped out, you can make a reasonable cash flow that tells you if you are spending more, equal to, or less than the money in per month.

- if you find yourself spending more than what you have, again make an itemized list of what you buy and prioritize them as absolutely required to frivolous trinkets. Then it might be helpful to cross out the frivolous purchases.

- another consequence of calculating your cash flow is to budget for variable/unexpected expenses. For example, if you estimate your car might break down once every 5 years costing your 2000$, then when you have surplus money you should aim to save the $2000 for that. This makes saving purposeful, rather than aimless.

 

[shikimate]

5) WEALTH

- Wealth is the equivalent of glycogen storage in liver, it is not the same as income (which is food you eat). Make a lot of $ /= wealthy. Wealth is a function of surplus income.

- As your income increase from student to resident, you should aim for parallel increase in your wealth. Do not spend more because you earn more, that would not increase your wealth.

- Consider what wealth you already have and how you can trade them. In simple language, when you get a job, you trade your time wealth, skill wealth and energy wealth for monetary wealth. As students, you have a lot of time wealth and energy wealth, but very little monetary wealth. As a trillionaire on death bed, you have a lot of monetary wealth but very little time wealth and energy wealth.

- Therefore, when it comes to income, ask yourself what am I trading for that? Let's say you have 5 hours free this weekend. You could cut few lawns and make $100, but are you sacrificing 5 hours of potential study time and perhaps 10% increase in your exam score?

- Therefore, when it comes to spending, ask yourself what did I give up for that spending? Using the above example, when you want to spend $100 on a night out, you should consider that you spent 5 hours cutting lawn AND gave up 10% increase in your final exam score because you didn't use that time to study. Is that worth a fun night out?

[shikimate]

6) LOAN AS INCOME FOR MED STUDENTS

- You should try to smooth out your income to match your spending. You can consider government loan and LOC as income for this purpose.

- When it comes to your LOC, withdraw a monthly amount to match your spending. Do not withdraw a large sum at once, because inevitably you'll be tempted to spend more than you planned because the money was just "sitting there".

- medical school is not an excuse for lifestyle inflation, so pay attention to social and cognitive cues that promote spending (Eg. ads targeting doctors suggesting luxury car, watches or first class flight is more fitting of their professional image).

- You should try to map out how your LOC is used over time and try to smooth it out. For example, suppose today I had to withdraw $1000 from my LOC unexpectedly, then I should make a plan for the next 6 months to try to reduce spending and/or increase income to repay that $1000.

- Use the income that's the "cheapest" to get. For example, compare the interest rate of government loan and your LOC. Use up the one with lower interest before tapping into the other ones with higher interest. If you incurred very high interest from credit cards, it would make sense to pay it off with a lower interest loan such as LOC.

[shikimate]

7) FINANCIAL TIPS FOR RESIDENTS

- residency should be your starting point for financial health, as you will now have a steady, guaranteed income. Make a conscious commitment in your mind that you will improve your financial health during residency.

- after carefully mapping out your monthly income and spending, make repayment of high interest loan a priority. In other words, just because you don't have to start making payment on your debt from school, doesn't mean interest isn't compounding. When interest is compounding, time is your worst enemy.

- once you have make progress on paying off high interest debt, you should consider setting up some goals for accumulating wealth. It's usually a good idea to start small and safe, such as putting away 100$ a month in a saving account of GIC, to eventually something more volatile once your risk tolerance builds up (Eg. for someone with a million net worth, buying $1000 in a risky cryptocurrency is more tolerable).

- again your MD degree is not a license for lifestyle inflation. Be aware of making purchases for things that you might actually have very little time or energy to use. For example, you purchase a golf membership, but how much time will you really have in residency to go golfing?

- be aware of actions that might have short term gain but might become a neglected, high impact threat if goes wrong. Examples would include poor choice of romantic relationship, loaning large sums of money, substance misuse, unprofessionalism/hooliganism, etc. 

[shikimate]

8) WHAT IS TAX?

- the best analogy I can come up with tax is that it's akin to loss of energy when you transfer energy from A to B. For example, when energy is transferred from battery to lightbulb via a wire, inevitably some energy is lost in the process as heat.

- in other words, when there is a transaction (Eg. your employer pay you a salary, you pay the store for your purchase etc), a portion is lost during this transfer process as tax.

- therefore, tax efficiency has 3 components: choosing an efficient giver, choose an efficient vehicle for transfer, and choosing an efficient recipient. the following examples mainly concerns student/residents and are not aimed at using corporate structures.

- usually choosing efficient giver means trying to reduce the amount of your income that's subject to tax before tax is applied. For example, as a resident, if you make a 1000$ RRSP contribution, the amount of your taxable income is lowered by $1000, thereby reducing the amount of tax you immediately owe.

- tax deductions are items that reduce your taxable income. For example, the amount you pay for resident union dues is deducted against your taxable income. 

- choosing an efficient vehicle is difficult for students/residents, because your employer forces you to take a salary for remuneration, you have no control over when and how they pay you. For example, you are paid a salary every 2 weeks, even if you have enough money for your spending this month and do not necessarily require that salary. On the other hand, perhaps today you incurred an unexpected expense, but have to wait 2 weeks for your next paycheque, therefore you have to incur interest to borrow money to pay for that expense.  

- choosing an efficient recipient is also difficult for student/resident, again because you have no control over when and how you are paid. 

- therefore, as a student/resident, your best shot is to optimize the "efficient giver" aspect to reduce your taxable income as much as possible. To this end one should study what kind of tax deductions are allowed and make detailed lists of such items over the year.

- as a side note, one should make a habit of saving all receipts/stubs/proof of payment/contracts. In tax and legal world, I think a good rule of thumb is that if it's not on paper (or at least in PDF format these days), it doesn't exist.

[shikimate]

9) COMPARTMENTALIZATION OF INCOME AND SPENDING

- I think putting your income/spending items into categories can help you better take control of them because it might become apparent how rational/irrational your action is.

- for example, why does a person penny pinches to save $5 on grocery but readily lavishes $50 on a dinner date? One possible explanation is that in their mind, the "grocery" category of spending has a small budget (also you're starving yourself, so nobody else has to know) so it's worth the haggle, but the "dinner date" category of spending has a large budget (in order to impress their mating partner), or even unlimited budget. 

- clearly from a financial point of view, it becomes apparent that we assigned too large of a budget to some categories and too small of a budget to other categories. With a cool head, we can better put realistic limits on these categories.

- the reverse might also be true, why is someone very careful when spending their salary, but careless when spending their inheritance? One possibility is that they feel they had to "work" for their salary, but inheritance is completely "spurious", almost without cost, money falling from the sky etc.

- therefore, one should set the mindset to treat all income with deference and respect, and not take "spurious" income for granted, let alone taking hold of the idea that such event should be expected to occur again the future.

[shikimate]

10) TIME IS YOUR FRIEND, TIME IS YOUR ENEMY.

- Why is youth one's greatest enemy and greatest ally at the same time? Because mistakes made in youth can haunt you down the road, and shrewd moves made in youth can benefit you down the road.

- Study the graph of what happens with compounding (aka interest on interest). Study the exponential growth of debt over time, especially how it grows faster and faster as time goes on. 

- In the same vein, study how compounding grows your wealth over time, and how rapid it gets towards the end. This makes the case that when a beneficial action is taken early in life (reduce debt, increase investment), the benefits are not always apparent in the early stages (slow stage of compounding), but the benefits become enormous over time.

- Whenever you consider the "cost" of an action, always consider how the "cost" is futurized as well. For example, if you foolishly lose 100 dollars today, that 100$ you could've invested in something, and in 20 years it would be a substantial amount much more than 100$.

- Sometimes amortizing a debt over time at a low interest rate can be helpful in managing cashflow. For example, some merchants will offer the option to amortize a purchase at <2% interest over 24 months. But on the other hand, this is not a license to make frivolous purchases, because these consumer items often depreciate in value, so by months #24, you are still paying for a new item, but using a 24 months old item which have depreciated in value, performance, etc.

[shikimate]

11) UNDERSTANDING THE POLITICO-ECONOMIC MODELS OF PHYCIANS

- To make sound economic decisions, one must understand his/her fundamental means of production and relationship and interactions to various societal entities.

- At the most fundamental level, physicians trade units of service (fee for service model) or time (salary/AFP model) for remuneration.

- For those on FFS, fundamentally they operate like "petty bourgeoisie (PB)". Traditionally, the allegiance of PB physicians has been on the proletariat side, but as inflation becomes rampant and remuneration is squeezed, not unexpectedly, their allegiance has slowly shifted.

- While PB/FFS model is still valorized as an example of "independence", more and more graduates are been absorbed into the salary/employee model, which in itself  has its pluses and minuses. The emphasis has shifted from "independence" to "teamwork", "work life balance" and "stability".

- Another force within the physician model is the rise of "FIRE" movement, which sees some rush to capitalize on the currently available resources to physicians in an attempt to transition from labor oriented PB to capital oriented PB (eg. those with stocks, rental property etc, but still on a small scale). This is a natural progression, if one is to believe the return of labour is diminishing over time relative to return on capital.

- All in all, whether the politico-economic ecosystem for physicians is deteriorating or improving will depend on the attitude and actions of the next generation of physicians: their expectations, their outlooks and the trade-offs they make. Juniors in the system (med students, residents) should make a shrewd study of the politico-economic ecosystem their priority.

[Snowden]

This entire thread is incredible and so easy to digest/understand yet filled with so many high-yield takeaway points. Thanks for taking the time to write this out @shikimate!

[shikimate]

12) INFLATION AND HIGH INTEREST

- At the most basic level, money is a commodity, and follows the basic rules of supply and demand. The price of money is interest rate. 

- Inflation is a cruel knife because it indiscriminately shaves off wealth and purchasing power of every person, entity and government. When you start in worse financial health, you will be more affected by inflation, because there are certain items that you must absolutely buy (eg. food, heating, drinking water, medication etc).

- at a practical level, inflation dampens the demand on most goods and services. Most people adjust to inflation by 2 methods: reduced savings and adjusting spending.

- adjusting spending means resetting your expectation regarding the value of certain goods. A need becomes a want, a want becomes a luxury. 

- inflation also means profit generating assets are likely to depress in value as their ability to outperform inflation is in jeopardy. Some see this as an opportunity to buy the dip and bottom fish.

- when in doubt, paying down debt that charges more than the inflation is always a safe bet for any spare cash you have.

 

[shikimate]

13) BUY A HOUSE

- Why do I say buying a house is like sports betting? Because for some people it's an emotional purchase, just like betting on your favorite team. While for others, it's totally a business transaction, a numbers game (read about Bill Benter).

- Let's discuss buying a house from a purely transactional and pragmatic perspective. At the core, a house is not an investment, but it is a decision to amortize a large debt to provide a certain quality of life.

- Do not underestimate the hidden value of a house close to amenities and work. If you buy a "nice" house 1 hour from work, then each day you spend 2 hours commuting, which means in a 48 week work year you spend 480 hours (20 days) commuting. If a physician is paid 200$ per hour, this is equivalent to a lost income of $96 000 per year. This does not even taken into consideration costs of fuel, car payments, etc. For 30 years, 96 000 a year invested will result in excess of 3 million dollars.

- Do not underestimate the carrying cost of a house. In many instances a transaction may trigger a re-assessment of the property value which could result in a nasty sudden spike in property tax for the new owner. The new property value is unlikely to fall in subsequent assessments. Remote events such as fire, flooding, infestations are unlikely to happen in a particular year, but statistically one's bound to encounter one of them during the lifespan which they reside in the same house. Lastly, time you spent mowing lawn, fixing the gutter, salting the driveway all have opportunity costs attached as well.

- Remember that the house itself is a depreciating asset because it is getting worn down every day. But the land which the house sits on may depreciate, stays the same, or appreciate in value.  Therefore when there is the expectation that a "house" is an "investment", what one's really saying is that either one wishes to rent out the house or use it as a business, or one's hoping there is kapital appreciation of the land underneath the house.